Question 1: Greenie

(a) Greenie, a public limited company, builds, develops and operates airports. During the
financial year to 30 November 20X0, a section of an airport collapsed and as a result
several people were hurt. The accident resulted in the closure of the terminal and legal
action against Greenie. When the financial statements for the year ended 30 November
20X0 were being prepared, the investigation into the accident and the reconstruction of
the section of the airport damaged were still in progress and no legal action had yet been
brought in connection with the accident. The expert report that was to be presented to the
civil courts in order to determine the cause of the accident and to assess the respective
responsibilities of the various parties involved, was expected in 20X1.
Financial damages arising related to the additional costs and operating losses relating to
the unavailability of the building. The nature and extent of the damages, and the details of
any compensation payments had yet to be established. The directors of Greenie felt that
at present, there was no requirement to record the impact of the accident in the financial
statements. Compensation agreements had been arranged with the victims, and these
claims were all covered by Greenie's insurance policy. In each case, compensation paid by
the insurance company was subject to a waiver of any judicial proceedings against
Greenie and its insurers. If any compensation is eventually payable to third parties, this is
expected to be covered by the insurance policies. The directors of Greenie felt that the
conditions for recognising a provision or disclosing a contingent liability had not been met.
Therefore, Greenie did not recognise a provision in respect of the accident nor did it
disclose any related contingent liability or a note setting out the nature of the accident
and potential claims in its financial statements for the year ended 30 November 20X0.
(6 marks)
Question 2: Ryder
Ryder, a public limited company, is reviewing certain events which have occurred since its
year end of 31 October 20X5. The financial statements were authorised on 12 December
20X5. The following events are relevant to the financial statements for the year ended 31
October 20X5:
(a) Ryder disposed of a wholly owned subsidiary, Krup, a public limited company, on 10
December 20X5 and made a loss of $9 million on the transaction in the group financial
statements. As at 31 October 20X5, Ryder had no intention of selling the subsidiary which
was material to the group. The directors of Ryder have stated that there were no
significant events which have occurred since 31 October 20X5 which could have resulted
in a reduction in the value of Krup. The carrying value of the net assets and purchased
goodwill of Krup at 31 October 20X5 were $20 million and $12 million respectively. Krup
had made a loss of $2 million in the period 1 November 20X5 to 10 December 20X5.
(6 marks)
Question 3: Royan
(a) The existing standard dealing with provisions, IAS 37 Provisions, contingent liabilities
and contingent assets, has been in place for many years and is sufficiently well
understood and consistently applied in most areas. The IASB feels it is time for a

fundamental change in the underlying principles for the recognition and measurement of
non-financial liabilities. To this end, the Board has issued an Exposure Draft Measurement
of liabilities in IAS 37 Proposed amendments to IAS 37.
Required
(i) Discuss the existing guidance in IAS 37 as regards the recognition and measurement
of provisions and why the IASB feels the need to replace this guidance.
(9 marks)
(b) Royan, a public limited company, extracts oil and has a present obligation to
dismantle an oil platform at the end of the platform's life, which is ten years. Royan cannot
cancel this obligation or transfer it. Royan intends to carry out the dismantling work itself
and estimates the cost of the work to be $150 million in ten years' time. The present value
of the work is $105 million.
A market exists for the dismantling of an oil platform and Royan could hire a third party
contractor to carry out the work. The entity feels that if no risk or probability adjustment
were needed then the cost of the external contractor would be $180 million in ten years'
time. The present value of this cost is $129 million. If risk and probability are taken into
account, then there is a probability of 40% that the present value will be $129 million and
60% probability that it would be $140 million, and there is a risk that the costs may
increase by $5 million.
Required
Describe the accounting treatment of the above events under IAS 37.
(7 marks)

Question 4: Electron
Electron, a public limited company, operates in the energy sector. The company has grown
significantly over the last few years and is currently preparing its financial statements for
the year ended 30 June 20X6.
Electron has recently constructed an ecologically efficient power station. A condition of
being granted the operating licence by the government is that the power station be
dismantled at the end of its life which is estimated to be 20 years. The power station cost
$100 million and began production on 1 July 20X5. Depreciation is charged on the power
station using the straight line method. Electron has estimated at 30 June 20X6 that it will
cost $15 million (net present value) to restore the site to its original condition using a
discount rate of five per cent. Ninety-five percent of these costs relate to the removal of
the power station and five per cent relates to the damage caused through generating
energy.
(7 marks)
Question 5: William
William is a public limited company and would like advice in relation to the following
transactions.
a) William operates a defined benefit pension plan for its employees. Shortly before the year
end of 31 May 20X3, William decided to relocate a division from one country to another,
where labour and raw material costs are cheaper. The relocation is due to take place in

December 20X3. On 13 May 20X3, a detailed formal plan was approved by the board of
directors. Half of the affected division's employees will be made redundant in July 20X3,
and will accrue no further benefits under William's defined benefit pension plan. The
affected employees were informed of this decision on 14 May 20X3. The resulting
reduction in the net pension liability due the relocation is estimated to have a present
value of $15 million as at 31 May 20X3. Total relocation costs (excluding the impact on
the pension plan) are estimated at $50 million.
William requires advice on how to account for the relocation costs and the reduction in the
net pension liability for the year ended 31 May 20X3.
(7 marks)
b) William acquired another entity, Chrissy, on 1 May 20X3. At the time of the acquisition,
Chrissy was being sued as there is an alleged mis-selling case potentially implicating the
entity. The claimants are suing for damages of $10 million. William estimates that the fair
value of any contingent liability is $4 million and feels that it is more likely than not that no
outflow of funds will occur.
William wishes to know how to account for this potential liability in Chrissy's entity
financial statements and whether the treatment would be the same in the consolidated
financial statements.
(4 marks)
Question 6: Lockfine
Lockfine, a public limited company, operates in the fishing industry and has recently made
the transition to International Financial Reporting Standards (IFRS). Lockfine's reporting
date is 30 April 20X9.
The Lockfine board has agreed two restructuring projects during the year to 30 April 20X9:
Plan A involves selling 50% of its off-shore fleet in one year's time. Additionally, the plan is
to make 40% of its seamen redundant. Lockfine will carry out further analysis before
deciding which of its fleets and related employees will be affected. In previous
announcements to the public, Lockfine has suggested that it may restructure the off-shore
fleet in the future.
Plan B involves the reorganisation of the headquarters in 18 months time, and includes the
redundancy of 20% of the headquarters' workforce. The company has made
announcements before the year end but there was a three month consultation period
which ended just after the year end, whereby Lockfine was negotiating with employee
representatives. Thus individual employees had not been notified by the year end.
Lockfine proposes recognising a provision in respect of Plan A but not Plan B.
Required
Discuss the principles and practices to be used by Lockfine in accounting for the above
valuation and recognition issues.
(5 marks)
Question 7: Blackcutt
Blackcutt is a local government organisation whose financial statements are prepared
using International Financial Reporting Standards.
(a) Blackcutt wishes to create a credible investment property portfolio with a view to
determining if any property may be considered surplus to the functional objectives and

requirements of the local government organisation. The following portfolio of property is

owned by Blackcutt. Blackcutt owns several plots of land. Some of the land is owned by
Blackcutt for capital appreciation and this may be sold at any time in the future. Other
plots of land have no current purpose as Blackcutt has not determined whether it will use
the land to provide services such as those provided by national parks or for short-term
sale in the ordinary course of operations. The local government organisation supplements
its income by buying and selling property. The housing department regularly sells part of
its housing inventory in the ordinary course of its operations as a result of changing
demographics. Part of the inventory, which is not held for sale, is to provide housing to
low-income employees at below market rental. The rent paid by employees covers the
cost of maintenance of the property.
(7 marks)
(b) Blackcutt owns a warehouse. Chemco has leased the warehouse from Blackcutt and is
using it as a storage facility for chemicals. The national government has announced its
intention to enact environmental legislation requiring property owners to accept liability
for environmental pollution. As a result, Blackcutt has introduced a hazardous chemical
policy and has begun to apply the policy to its properties. Blackcutt has had a report that
the chemicals have contaminated the land surrounding the warehouse. Blackcutt has no
recourse against Chemco or its insurance company for the clean-up costs of the pollution.
At 30 November 20X6, it is virtually certain that draft legislation requiring a clean up of
land already contaminated will be enacted shortly after the year end.
(4 marks)
(c)
On 1 December 20X0, Blackcutt opened a school at a cost of $5 million. The
estimated useful life of the school was 25 years. On 30 November 20X6, the school was
closed because numbers using the school declined unexpectedly due to a population shift
caused by the closure of a major employer in the area. The school is to be converted for
use as a library, and there is no expectation that numbers using the school will increase in
the future and thus the building will not be reopened for use as a school. The current
replacement cost for a library of equivalent size to the school is $2.1 million. Because of
the nature of the non-current asset, value-in-use and net selling price are unrealistic
estimates of the value of the school. The change in use would have no effect on the
estimated life of the building.
(6 marks)
Required
Discuss how the above events should be accounted for in the financial statements of
Blackcutt.