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Every three years, Jimbo Ltd closes its factory for a three-month period in order to undertake extensive maintenance of its factory building and equipment. Jimbo

Every three years, Jimbo Ltd closes its factory for a three-month period in order to undertake extensive maintenance of its factory building and equipment. Jimbo Ltd, rather than use internal resources to complete the maintenance, decided it would enter into a contract with an external entity to undertake the extensive maintenance of its factory building and equipment. Details of the contract include:

  • The cost of the next maintenance under the contract is $800,000.
  • The contract is cancellable by either party at any time.
  • The maintenance is required to be completed within three-months or the external entity is required to pay a fine of $1.6 million.

The directors of Jimbo Ltd believe the planned maintenance should be recognised as a liability.

Required

Advise the directors whether a liability should be recorded in the financial period ending 30 June 2022. Justify your answer by reference to the Conceptual Framework definition and recognition criteria.

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