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Energy Inc Essay

1306 words - 6 pages

Energy Inc.
Date: February 15, 2013
Prepared by: Christiana Egwakhe
Reviewed by: Professor Robert Elya

ISSUE: Accounting for loss provisions under the different fact patterns.

BRIEF BACKGROUND
Energy Inc. (Energy), a Public Company, operates in the oil industry.  Energy’s operations sometimes result in soil contamination. Energy cleans up this contamination when required to do so under the laws of the particular country in which it operates. Energy Inc. has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. Energy, Inc. has a record of honoring this published policy. 
Energy is currently evaluating certain fact patterns to ...view middle of the document...

Therefore, Energy will not have to perform or incur any cleanup costs now or in the future.
3. Even though the contingent loss in this scenario is probable, Energy can only record loss provision after the loss has been incurred. Energy will not be able to record the loss provision in the current period but during a future period.
4. In this scenario, Energy can record the loss provision if the cost to install the smoke filters was incurred before the year-end financial statements. However, based on the information provided, Energy had not installed the smoke detectors as of December 31, 2012.
AUTHORITATIVE AND INTERPRETIVE GUIDANCE

Refer to ASC 450-20-25-2 (Recognition requirements for accrued loss contingency)
Refer to ASC 450-20-55-7(Risk of loss from future Events)
Refer to ASC 450-20-25-6 (Events After the date of financial statements)
Refer to ASC 740-10-25-47 through 25-48 (Changes in income tax laws or rates)
Refer to ASC 275-10-50-8 (Disclosures)
Refer to ASC 450-20-50-3 through 50-4 (Disclosures)

DETAILED DICUSSION, ANALYSIS & REASONS FOR CONCLUSION

ISSUE 1

Is Energy required to record a loss provision for a legislation-required cleanup enactment, for old and new contamination, that takes effect soon after the year end, December 31, 2011?
According to ASC 450-20-25-2, a loss provision can be recorded only if it meets two requirements; (1) the contingent loss is probable, (2) the amount of the loss can be reasonably estimated. In this scenario, Energy is virtually certain of the incurrence of loss, which satisfies the first requirement. Unfortunately, additional information will be needed on the amount of loss that can be reasonable estimated; therefore we can’t satisfy the second requirement. We can only assume that because the contingent loss is probable that a reasonable amount estimate is sure. However, under the advisement of ASC 450-20-55-7, it states that a loss provision cannot be recorded in a period in which it did not occur and Energy only performed cleanups when required by law. As of December 31, 2011, Energy performed no cleanups and incurred no losses but after year-end and the enactment of the new legislation, Energy will have to perform cleanups and incurred future losses. For this reason, Energy cannot record a loss provision in the financial statements for the current period 2011, but in the period in which the losses are related to. Future loss will most likely occur during periods after the law has been enacted and Energy is required to perform cleanups on lands they contaminate.

ISSUE 2

Is Energy required to record a loss provision in a country in which it operates even though there is no environmental legislation in this country?
As mentioned in the brief background, Energy performs cleanups only when required...

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