Page 433 - SBR Integrated Workbook STUDENT S18-J19

Answers

Example 3

Environmental issues

Obligation to repair damage

Bringing the machinery into use and operating it for the first year are past
events that have caused damage to the local land.

There is no legal obligation for Alias to repair the damage caused to the local
land. However, Alias has a constructive obligation to repair the damage
because it publishes its environmental policies in its <IR> and it is known for
honouring these policies.

The initial damage

A provision for the initial damage created by the machine should have been
recognised at 1 October 20X5.

The provision should have been initially recognised at $1.47 million ($2m ×
4
1/1.08 ). PPE will also be increased by $1.47 million.
The provision will be unwound over the year. This increases its carrying
amount and gives rise to a finance cost of $0.12 million ($1.47m× 8%) in profit
or loss.

The PPE will be depreciated over 4 years. A charge of $2.87 million (($10m +
$1.47m) / 4 years) is recorded in profit or loss.

The subsequent damage

As at 30 September 20X6, Alias has operated the machine for a year so has a
constructive obligation to pay $0.5 million to repair the additional damage
caused.

Alias cannot provide for the damage that would be caused in years 2, 3 and 4
of the machine’s life because this is avoidable (the machine could be
disassembled early).

The provision that should be recognised in respect of this additional damage
3
at 30 September 20X6 is $0.40 million ($0.5m × 1/1.08 ).

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