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(ii) Colat Co has, in the past, put right minor environmental damage which it has caused but it has never been involved in a
natural disaster on this scale and there is no legal obligation. A constructive obligation for the environmental costs will only
result in the recognition of a provision if there is an established pattern of past practice, published policies or a specific
current statement that Colat Co will pay for the damage. In this case, the entity has not indicated to other parties that it
will accept certain responsibilities and as a result, it has not created a valid expectation. IAS 37 states that a provision
should be recognised only when there is a present obligation resulting from past events. The future expected costs would
not meet the definition of a provision as there is no legal obligation nor a constructive obligation. In the case of the natural
disaster, Colat Co is not at fault and therefore there will be no obligation to correct the environmental damage which may
be put right by the government.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance states that a government grant is
recognised only when there is reasonable assurance that the entity will comply with any conditions attached to the grant
and the grant will be received. A grant receivable as financial support should be recognised as income in the period in
which it is receivable. In this case, Colat Co has only received acknowledgement of its application for a grant on 1 March
20X8 and, therefore, there is no reasonable assurance that the grant will be received. Further, it is not probable that the
grant will be received and it should not be disclosed in the financial statements.
(iii) Prior to the disaster, Colat Co hedges commodity price risk in aluminium and such transactions constituted ‘highly
probable’ hedged transactions in cash flow hedges under IFRS 9 Financial Instruments. However, the purchases which
were considered highly probable prior to the natural disaster are now not expected to occur. Colat Co should follow hedge
accounting principles up until the date of the natural disaster and then should cease hedge accounting. As the forecast
transaction is no longer expected to occur, Colat Co should reclassify the accumulated gains or losses on the hedging
instrument from other comprehensive income into profit or loss as a reclassification adjustment.
(iv) IAS 37 does not permit the recognition of contingent assets. Accordingly, an insurance recovery asset can only be
recognised if it is determined that the entity has a valid insurance policy which includes cover for the incident and a claim
will be settled by the insurer. The recognition of the insurance recovery will only be appropriate when its realisation is
virtually certain, in which case the insurance recovery is no longer a contingent asset. Decisions about the recognition
and measurement of losses are made independently of those relating to the recognition of any compensation which
might be receivable. It is not appropriate to take potential proceeds into account when accounting for the losses. The
potential receipt of compensation should be assessed continually to ensure that it is appropriately reflected in the financial
statements. The asset and the related income are recognised in the period in which it is determined that a compensation
will be received which means reviewing the situation after the end of the reporting period and before the date of approval
of the financial statements.
In this case, as it appears probable that the insurance claim for the loss of the non-current assets would be paid and
as this information was received before the financial statements were approved, the potential proceeds ($280 million)
should be disclosed in the financial statements for the year ended 31 December 20X7. There would be no disclosure
of the insurance recovery related to the relocation costs or the lost revenue as the recovery is not virtually certain. The
insurance policy does not cover environmental damage which is the responsibility of the government