Background

Spruce, a public limited company, has a reporting date of 31 December 20X2. It prepares financial statements in accordance with IFRS Standards. Spruce has approached its bank to request an increased overdraft facility. The bank wish to review the financial statements for the year ended 31 December 20X2 before making a decision. They will be paying particular attention to Spruces profit for the period and its level of reported liabilities. A new financial controller has recently started working at Spruce. She is aware that the transactions below have not been accounted for in accordance with International Financial Reporting Standards. She is a member of ACCA but is not sure of her ethical responsibilities.

Specialised machine

On 1 January 20X2, Spruce purchased a new specialised machine for $5 million and recorded it as property, plant and equipment. The machine was immediately brought into use. The machine contains hazardous chemicals whose use and disposal is strictly controlled by legislation. The machine has a useful life of five years, after which Spruce is legally obliged to safely dispose of it. The board minutes note that disposal costs are estimated to be $1 million. A discount rate of 10% should be used if needed. In the statement of financial position as at 31 December 20X2, the machine is carried at $5 million. (4 marks)

Required:

(a) Discuss how the above three issues should be dealt with in the financial statements for the year ended 31 December 20X2. Note: the mark allocation is shown against each of the three issues above.

(b) Discuss the ethical issues raised by the above issues and the actions that the financial controller should take. Professional marks will be awarded question 1(b) for the quality of the discussion. (2 marks)