May 30, 2014
President, Tenth National Bank
Subject: Removal of Asbestos and purchase of office building
This is in regards to the removal of asbestos from the buildings owned by Tenth National Bank and the cost for the eradication of the project. The buildings are property, and are considered important components of a company’s assets. I researched assets in accordance to FASB Statements of Financial Accounting Concept No. 6, par. 25 states that assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Also, Concept No. 6, par. 26 states does the asset have the essential characteristic ...view middle of the document...
In regarding these options, I recommend that the $1 million be expensed.
There are ethical issues to take into consideration on classifying the $1 million expense:
In accordance with FASB ASC 410-30-45-6: 45-6 Asbestos treatment costs that are charged to expense are not extraordinary items under Subtopic 225-20 Extraordinary and Unusual Items.
The expense could be reported as an unusual or infrequent item on income statement, and disclosed appropriately in the notes.
The $1 million could also be reported as an operating expense on the income statement.
I recommend that the $1 million be classified as an operating expense on the income statement with no disclosure, due to the fact that Tenth National Bank was unaware of the asbestos and subsequently is was not reported to Tenth National Bank by the previous owners of the shopping mall. However, there is the need for Due Diligence.
If a company fails to properly report environmental liabilities, the responsible parties expose themselves to future claims that the financial statements did not have adequate disclosure of all material information.
Conversely, though, if the financial statements do contain specific presentation of the exposure for environmental cleanup, it is possible that outsider parties who might not have been aware of these problems may be able to more readily press claims for the cost of cleanup plus additional damages.
Given this dilemma, it appears that due diligence is the operative word. Management must apply appropriate due diligence when...