Dixon Ltd acquired all the assets and liabilities of Nemo Ltd a number of years ago when it took over that companys operations.

Dixon Ltd has always marketed itself as operating in an environmentally responsible manner, and is an advocate of sustainable fishing. The public regards it as a dolphin-friendly company as a result of its previous campaigns to ensure dolphins are not affected by tuna fishing.

The marketing manager of Dixon Ltd has noted the efforts of the ship, the Panamax, to disrupt and hopefully stop the efforts of Japanese whalers in the Pacific Ocean and the publicity that this has received. He has recommended to the board of directors that Dixon Ltd strengthen its environmentally responsible image by guaranteeing to repair any damage caused to the Panamax as a result of attempts to disrupt the Japanese whalers. He believes that this action will increase Dixon Ltd.s environmental reputation, adding to the companys goodwill. He has told the board that such a guarantee will have no effect on Dixon Ltd.s reported profitability. He has explained that, if any damage to the Panamax occurs, Dixon Ltd can capitalise the resulting repair costs to the carrying amounts of its brands, as such costs will have been incurred basically for marketing purposes. Accordingly, as the companys net asset position will increase, and there will be no effect on the statement of profit or loss and other comprehensive income, this will be a win-win situation for everyone.

The chairman of the board knows that the marketing manager is very effective at selling ideas but knows very little about accounting. The chairman has, therefore, asked me to provide him with a summary advising the board on how the proposal should be accounted for under the Financial Reporting Standards and how such a proposal would affect Dixon Ltd.s financial statements.