Part 1 : Accounting for Provision and Contingent Liability ChemX Inc, a chemical company, found out one
Question:
Part 1: Accounting for Provision and Contingent Liability
ChemX Inc, a chemical company, found out one week before its fiscal year end 12/31/X1 that its branch leaked significant amount of mercury (above safety level) at a plant site in Country A that requires a chemical company to buy and install specialized equipment (costing $500,000) to prevent mercury leakage. Country A also has legislation that requires a company to clean up mercury contamination.
As of 12/31/X1, ChemX has not bought and installed the specialized equipment, and there has been no allegation against ChemX regarding the mercury leakage. ChemX estimated that there is about 70% probability that it will be subject to an enforcement action by Country A’s environmental authority regarding the contamination. ChemX incurred $1 million last year to clean up a similar mercury contamination at its plant site in another nearby country that has a legislation requiring the clean-up.
Required for each of the four questions:
- Use IFRSto answer each question below.
- Use U.S. GAAPto answer each question below.
- Should ChemX provide footnote disclosure under IFRS and under U.S. GAAP? Why or why not? If it should, discuss information that should be disclosed
Answer the part A
- As of 12/31/X1, is ChemX required to recognize a liability relating to the purchase and installation costs of the specialized equipment? Why?
Tip: By law, a motorist should not drive a car with a broken windshield. If your car has a broken windshield and you have not yet replaced it, when will you incur an obligation to pay for material and labor costs of windshield replacement?
Financial Accounting and Reporting a Global Perspective
ISBN: 978-1408076866
4th edition
Authors: Michel Lebas, Herve Stolowy, Yuan Ding