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Question:
On 28 December 20X1 Gunge Co has been fined $10,000 for causing unlawful environmental damage. A new law is also highly likely to be passed which will make companies like Gunge responsible for cleaning up any damage they have caused and would make it necessary for Gunge to alter its machines in order to be permitted to carry on using them lawfully. The expected cost of the clean-up is $1,000,000 and of the machines $50,000.
Required:
At the year ended 31 December 20X1 how would you account for the following costs?
(a) FineAnswer:
Dr Expense $10,000
Cr Accrual $10,000My problem:
I cannot understand why it is an accrual. For me it is a provision. Can you explain please?
Many thanks!
Christa
According to IAS 37 a provision is a liability of uncertain timing or amount.
The $10,000 fine has already happened – it’s not uncertain neither in timing nor in amount
It’s an actual liability that, at the year end, has not yet been paid and must therefore be accrued
The $1 million clean up costs and the $50,000 machine alteration costs are dependent upon an event that has not yet arisen – the law is as yet only “highly likely” to be passed
And, even when it IS passed, Gunge Co can avoid both of these costs by “simply” closing down its operations so, for example, if the question had said that the law had recently been passed but does not become effective until the next calendar year, Gunge Co could take the decision to cease operating in that country and leave
OK?
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