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Energy Inc.

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Submitted By tiana246
Words 1289
Pages 6
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 determine the appropriate accounting treatment required under U.S. GAAP.

ISSUES 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? 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? 3. Is Energy required to record a loss provision to retrain a large proportion of its administrative and sales workforce in order to comply with changes in the income tax system brought about by the government? 4. Is Energy required to record a loss provision due to new legislation that requires the installment of smoke filters in its factories by June 30, 2012, thou no installation occurred at year end December 31, 2011?

SUMMARY CONCLUSION ON ISSUES

1. Energy cannot record a loss provision for this event because it fails to meet the two requirements that determine the basis for a loss contingency to be accrued. This is because a contingent loss does not exist until the legislation-required cleanup is enacted. 2. The possibility of a contingency does not

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