BHP Billiton and its partner Vale do Rio Doce (‘Vale’) have a joint venture in Brazil called Samarco. Each company owns 50% of the mine (Samarco). Samarco was set up to explore for minerals in Brumadinho, Minas Gerais, Brazil. During this exploration, a dam collapsed and killed more than 300 people in 2015 (Timm-Garcia, Darlington, & Castelli, 2021; Herbert, 2021). Assume since the collapse, this joint venture has paid US$ 2 billion in total, distributing in 2016 (US$ 300 million), 2017 (US$ 1.2 billion), and 2018 (US$ 500 million). 

On 4 February 2021, Vale agreed to pay US$7 billion in compensation after many years of negotiation with the Brazilian authorities. In addition, Vale provisioned an amount of US$1 billion in compensation to be paid in the financial year ending in 2021. Assume managers of Vale discussed the amount of the provision with their accounting departments and a consulting firm that you work for during early 2022. The consulting firm and the accountants believed that the amount of US$ 1 billion was not conservative, suggesting rather, that a provision of US$ 7.5 billion should be made. The managers decided for the ‘good of our shareholders, that they we will make a provision of US$ 1 billion’.

Required: 

Critically evaluate whether the decision of Vale’s management to make a provision of US$ 1 billion was ‘good’ for the users (financial and non-financial users) of the financial accounts. Include in your evaluation, references from relevant accounting regulation (both standards and the conceptual framework) and an ethical evaluation of the impact of this decision.