Free Essay

Energy

In: Business and Management

Submitted By meimeigogo
Words 1277
Pages 6
Energy Inc.

Date: October 19, 2013

Prepared by: Yuehan Zhang (Stefanie)

Reviewed by: Professor Robert Elya

ISSUE: Accounting for Energy Inc.’s environmental obligations, income tax and install smoke filters.

BRIEF BACKGROUND OF COMPANY

Energy Inc. (Energy) is a public company that operates in the oil industry. As of December 31, 2011, Energy recognized $ billion in revenue for the sale. Sometimes, Energy’s operations result in soil contamination and Energy should clean up this contamination when legislation requiring under the laws of the particular country. In addition, Energy has a widely published environmental policy in which it undertakes clean up all contamination that it causes. Energy is currently involved in environmental obligations, such as clean up the lands.

ACCOUNTING QUESTIONS

1. Does Energy recognizes and accrues the liability of clean up costs in this year? What is the accounting treatment? 2. Is Energy has the obligations to undertake soil remediation in Dirty country? What is the accounting treatment for this operation in Dirty country? 3. What is the accounting treatment for new income tax? What is the accounting treatment for training employees? 4. Does Energy have obligations to install smoke filters this year? What is the accounting treatment for installing smoke filters in Energy’s factories next year?

SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS

1. Energy should recognize and accrue the liability of clean up lands in this year. Energy should charge clean up costs to expenses. 2. Energy has no obligations to undertake the soil remediation in Dirty country. 3. Energy should recognize the retraining costs to compensation expenses. 4. Energy should recognize install smoke filters to expense.

AUTHORITATIVE AND INTERPRETIVE GUIDANCE CONSIDERED

Refer to ASC 410-20-25-1 (Background for recognition)
Refer to ASC 450-20-25-2 (Background for recognition)
Refer to ASC 410-30-05-2 (Overview and Background for environmental obligations)
Refer to ASC 410-30-05-3 (Overview and Background for environmental obligations)
Refer to ASC 410-30-25-1 (Overall approach for recognition of environmental obligations)
Refer to ASC 410-30-25-2 (Overall approach for recognition of environmental obligations)
Refer to ASC 410-30-25-4 (Probability that a liability has been incurred)
Refer to ASC 410-30-25-16 (Criteria to capitalize environmental treatment costs)
Refer to ASC 410-30-25-17 (Criteria to capitalize environmental treatment costs)
Refer to ASC 410-30-25-18 (Criteria to capitalize environmental treatment costs)
Refer to ASC 932-740 (Income taxes under extractive activities – Oil and Gas)
Refer to ASC 712-10-05-5 (Other postemployment benefits)
Refer to ASC 932-360-25-6 (Accounting at the time costs are incurred)
Refer to ASC 932-720-25-1 (Recognition of other expenses under extractive activities – Oil and Gas)
Refer to ASC 932-235-50-25 (Disclose income taxes of notes to financial statements)

DETAILED DISCUSSION, ANALYSIS, EVALUATION OF ALTERNATIVES & REASONS FOR CONCLUSION

QUESTION 1

Step 1: Dose the Energy recognizes and accrues the liability of clean up costs in this year?
According to ASC 410-30-05-2, Energy must evaluate the current laws, rules, and regulations to determine whether they have obligations or not. Energy may have no obligations to clean up lands in this year because the draft law will be enacted after the year-end. However, ASC 410-20-25-1 requires the accrual of a liability if both of the conditions are met; a. Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements; b. The amount of the loss can be reasonably estimated. Therefore, Energy should recognize the liability of clean up lands in this year.

Additional information, ASC 410-30-25-2 and ASC 410-30-25-4 states that environmental remediation liabilities, the probability criterion consists of two elements; the criterion is met if both of the following elements are met on or before the date the financial statements are issued or are available to be issued: a. Litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or an assessment is probable. In other words, it has been asserted (or it is probable that it will be asserted) that the entity is responsible for participating in a remediation process because of a past event; b. Based on available information, it is probable that the outcome of such litigation, claim, or assessment will be unfavorable. In other words, an entity will be held responsible for participating in a remediation process because of the past event. Therefore, Energy should accrue the liability of clean up costs in this year.

Step 2: What is the accounting treatment?
According to ASC 410-30-25-16 In general, environmental contamination treatment costs shall be charged to expense. However, it may be appropriate to capitalize environmental remediation costs in certain situations stated by ASC 410-30-25-17/18. It is the general situation to clean up the contaminated lands, so Energy should charge clean up costs to expenses.

QUESTION 2

According to ASC 410-30-05-2 and ASC 410-30-05-3, Energy must evaluate the current laws, rules, and regulations to determine whether they have the obligations for contaminated soil in Dirty country or not. Energy has no obligations to undertake the soil remediation in Dirty country because there is no environmental legislation.

QUESTION 3

As of the balance sheet date, staff cannot deal with the new income tax since lack of retraining. Energy staffs should study ASC 932-740 Extractive Activities - Oil and Gas – Income Taxes. In addition, Energy should retrain a proportion of its administrative and sales workforce next year to ensure compliance with the new regulations. According to ASC 712-10-05-5 e - Other postemployment benefits – Job training and counseling, Energy should recognize the retraining costs to compensation expenses.

QUESTION 4

Step 1: Does Energy have obligations to install smoke filters this year?
Under new legislation, Energy should install smoke filters in its factories by June 30, 2012. Therefore, there is no obligations to install smoke filters this year.

Step 2: What is the accounting treatment for installing smoke filters in Energy’s factories next year?
Judgment must be made to determine whether or not the costs of installing smoke filters are capitalize or expenses. According to ASC 932-360-25-6 d. Support equipment and facilities used in oil- and gas- producing activities. Energy should deal with accounting at the time costs are incurred. According to ASC 932-720-25-1 Some costs incurred in an entity's oil- and gas-producing activities do not result in acquisition of an asset and, therefore, shall be charged to expense. Examples include: a. Geological and geophysical costs; b. The costs of carrying and retaining undeveloped properties; c. The costs of drilling those exploratory wells and exploratory-type stratigraphic test wells that do not find proved reserves. Therefore, Energy should recognize install smoke filters to expense.

REQUIRED FINANCIAL STATEMENT DISCLOSURE

In accordance with ASC 932-235-50-25 the following information should be disclosed in Energy’s financial statements relative to the transaction: Income Taxes.

ASC 932-235-50-25 Income taxes shall be computed using the statutory tax rate for the period, applied to revenues less production (lifting) costs; exploration expenses; depreciation, depletion, and amortization; and valuation provisions. Calculation of income tax expenses shall reflect tax deductions and tax credits and allowances relating to the oil- and gas-producing activities that are reflected in the entity's consolidated income tax expense for the period.

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