Land and Water Waste Disposal Ltd (LAWWD) is a public company providing waste disposal services to private homeowners and to customers in the commercial, industrial and public sectors. Because of its active research program, the company has built a fine reputation as the leading handler of waste products in Adelaide.

During the year ended 30 June 2017, LAWWD undertook an investigation on the feasibility of establishing a waste processing plant in one of Melbourne’s eastern suburbs. Financial advisers, engineers, architects and lawyers were consulted to determine the economic and legal feasibility of establishing such a plant. As at 30 June 2017, the company had incurred costs of $800 000 but was still unable to determine clearly the feasibility of the project; these costs were deferred as assets in the company’s financial statements.

LAWWD has several long-term contracts which specify that predetermined quantities of waste must be delivered to certain locations each year. The contracts specify that, if LAWWD is unable to deliver the predetermined quantities, shortfalls must be made up in equivalent cash payments. Unfortunately, LAWWD has not developed a system to keep track of exact quantities delivered to each location. It has become an acceptable practice for delivery requirements to be renegotiated during the life of any contract.

Shortly after the end of the financial year ending 30 June 2017, LAWWD was advised by one of its clients, Dorset Ltd, that there was a shortfall in the tonnage of land waste delivered. The cash penalty for this deficiency was approximately $300 000. Because of the long-standing business relationship between the two parties, the management of Dorset Ltd agreed to a future meeting with LAWWD to be held on 30 September 2017 to discuss waiving the penalty and reducing next year’s delivery requirements. In the finalisation of its general purpose financial reports at the end of August 2017, LAWWD has not recognised any liability for penalties under this contract.

Required

In the light of the Conceptual Framework, discuss LAWWD’s treatment in the general purpose financial reports of the costs incurred for the feasibility study, and the penalty under the contract with Dorset Ltd.