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(a) The definition of a liability forms an important element of the International Accounting Standards Board’s Framework for the Preparation and Presentation of Financial Statements which, in turn, forms the basis for IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Required:

Define a liability and describe the circumstances under which provisions should be recognised. Give two examples of how the definition of liabilities enhances the reliability of financial statements. (5 marks)

(b) On 1 October 2007, Promoil acquired a newly constructed oil platform at a cost of $30 million together with the right to extract oil from an offshore oilfield under a government licence. The terms of the licence are that Promoil will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally satisfactory condition in 10 years’ time when the oil reserves have been exhausted. The estimated cost of this on 30 September 2017 will be $15 million. The present value of $1 receivable in 10 years at the appropriate discount rate for Promoil of 8% is $0·46.

Required:

(i) Explain and quantify how the oil platform should be treated in the financial statements of Promoil for the year ended 30 September 2008; (7 marks)

(ii) Describe how your answer to (b)(i) would change if the government licence did not require an environmental clean up. (3 marks)