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Dec 2008 Bluebell Company Question 1

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › Dec 2008 Bluebell Company Question 1

  • This topic has 1 reply, 2 voices, and was last updated 10 years ago by MikeLittle.
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  • April 3, 2015 at 2:38 pm #240025
    Gabriel
    Member
    • Topics: 135
    • Replies: 591
    • ☆☆☆☆

    There was a note that read in the above mentioned question, relating to identifying and explaining risk of material misstatement as follows:

    “In September 2008, three hotels situated near a major river were severely damaged by a flood. All of the hotels,which were constructed by Bluebell Co only two years ago, need extensive repairs and refurbishment at an estimated cost of $100 million, which has been provided in full. All of the buildings are insured for damage caused by flooding.”

    The examiner’s answer to this was:

    “In addition, it is important to consider that the buildings are covered by an insurance policy, which will pay out for repair and refurbishment costs to the assets. The fact that Bluebell Co has recognized a repair expense of $100 million indicates that either the buildings were not covered by adequate insurance (a business risk), or that the accounting implication of the reimbursement has been ignored”

    My question is the doubt that I don’t understand what the examiner is saying here. I thought the correct accounting treatment was not to recognize the expense as it’s covered by insurance so it’s not really an expense and why is the examiner explaining business risk when she has clearly asked for risks of material misstatement? Also when she says ” that the accounting implication of the reimbursement has been ignored” I don’t quite get her here. What is she trying to get at and saying? What is the accounting implication of the reimbursement? The note states ” need extensive repairs and refurbishment at an estimated cost of $100 million, which has been provided in full. ” So how is the accounting implication of the reimbursement ignored?

    April 3, 2015 at 4:01 pm #240043
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23311
    • ☆☆☆☆☆

    If the damage is adequately insured, then there should be no need for a provision to be created.

    (If it isn’t adequately insured, that that’s a business risk)

    The question tells us that insurance does cover the cost of the damage and therefore the financial statements are incorrect because of the inappropriate creation of the $100,000 provision – hence the risk of material misstatement

    Ok?

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