You are finalising the 2022 financial statements of Petrol Ltd, a company involved in the mining, refining and retail distribution of petroleum products. As part of your final review, you have asked the chief executive officer if there are any events that have arisen since the end of the financial year of which you should be made aware. The financial period ends on 30 June 2022. He has advised you of the following events:

a. On 30 August 2022 an international convention agreed to increase the Saudi Arabian oil quota by 17 million barrels in 2022–2023. The immediate impact of this decision was to reduce the price of crude oil by $13 a barrel to $56 a barrel. As at 30 June 2022 Petrol Ltd had one million barrels of crude oil in stock at an average cost of $60 per barrel. The price fluctuation is expected to be permanent.

b. On 5 July 2022 an oil tanker owned by the company sank in heavy seas off the coast of northern NSW. The tanker was fully laden and has created an oil spill stretching for 140 km along the northern NSW coastline. The tanker was included in the 30 June 2022 financial statements at a carrying amount of $15 million. The oil that the tanker was transporting had a carrying amount of $2 million. An initial evaluation of the cost of the clean-up operation is estimated at $14 million. There is also a strong possibility that the local oyster farmers will take legal action against the firm for stock losses and related damage to the oyster beds. The risk management team has assessed that the possible costs of litigation could reach $50 million.

c. Having reviewed the draft financial statements as at 30 June 2022, the directors approved a dividend of $5 per share. There are currently five million fully paid ordinary shares on issue. This dividend was declared on 30 September 2022.

d. For the year ended 30 June 2021, the company had a tax provision of $8.5 million. During the year the company was the subject of a taxation audit, which resulted in an amended assessment of $26 million. The increased liability is in respect of the disputed tax treatment on certain share transactions carried out during the 2021 tax year. During 2022 the company lodged an objection against the revised assessment.

The company’s tax advisers expected the objection to be successful. As a result, the company did not consider it appropriate to recognise a provision in respect of the additional tax. It has, however, included a note explaining the situation and outlining the potential liability in the contingent liability note. On 1 July 2022, the company received notice from the Australian Taxation Office to the effect that the details of the objection had been considered but that the amended assessment was correct and therefore the objection had been declined. The company intends to appeal against the decision and take appropriate legal action if necessary. Taxation advisers, however, are not confident that the court will overturn the commissioner’s ruling.

e. In May 2022 the managing director was sacked because of allegations of fraud and theft. He had a five-year employment contract, of which four years remained, and he commenced legal action against the company for wrongful dismissal. The lawsuit is for $4 million but solicitors expect to settle the case out of court for $2 million, the residual value of the employment contract. Legal action began in August 2022. No provision was recognised in the 30 June 2022 financial statements.

f. At the August 2022 board meeting, the company made a decision to relocate a major oil refinery from Melbourne to Sydney. The possibility of such a move was discussed at the March 2022 board meeting, where it was decided that a review should be conducted into the feasibility of the move and that, if the move proved feasible, it should be undertaken. The report that was tabled at the August board meeting was dated 15 June 2022. The report concluded that the move was feasible and arrangements should be made as soon as possible. The report estimated the following costs to be incurred in respect of the move:

• Loss on sale of property: The carrying amount of the property as at 30 June 2022 was $2.5 million. All research indicates that the net market value of the property after selling expenses would be $1.2 million, creating a loss of $1.3 million.
• Redundancy costs: These costs for staff are estimated at $600 000.
• Loss on sale of plant and equipment: Owing to the specialised nature of the plant and equipment, a loss of $650 000 is expected on its sale.

The report was not tabled at the July board meeting because of the large agenda already planned for that meeting. The chief executive officer agreed that the property, plant and equipment should be put on the market in July, in anticipation of the board’s decision.

REQUIRED

Review the information given above, and comment on any adjustments that might need to be made to the financial statements. The financial statements have not been finalised. Also consider the need for any additional disclosures in the financial statements.