Faff Ltd is a manufacturing company that operates a production facility in the Brisbane suburb of Balmoral. In January 2017, residents living adjacent to the production facility complained that groundwater was being contaminated from waste discharged from Faff Ltd's production facility.In May 2017,environmentalofficers from the City of Brisbane Council confirmed the existence of groundwater contamination although they did not regard the contamination as particularly serious. Faff Ltd immediately responded by implementing new procedures for the storage and disposal of waste material to prevent any further contamination from occurring. Although Faff Ltd is not required by law to restore the contaminated environment, the company made a series of public announcements that it would undertake to restore the contaminated environment in two years' time.

As at 30 June 2017, Faff Ltd estimates the cost of restoring the contaminated environment as follows:

Cost

Probability

$520,000

20%

500,000

70%

400,000

5%

300,000

5%

Also on this date the risk-free discount rate, based on two-year government bonds, is 6%. However, Faff Ltd believes that a discount rate of 4% is appropriate to adjust for the risks specific to this liability.

Required

(a)How is a provision defined in AASB 137 Provisions, Contingent Liabilities and Contingent Assets? Why would Faff Ltd's obligation to restore the contaminated environment be classified as a provision?

(1 mark)

(b)Briefly explain the three methods that, according to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, can be used by an entity to estimate the amount to be recognised as a provision.

(1 mark)

(c)How has Faff Ltd taken risk into account to estimate the amount to be recognised as a provision? What is an alternative approach to taking risk into account?

(1 mark)

(d)Determine the amount that, in your judgement, Faff Ltd should recognise as a provision as at 30June 2017. Justify the approach that you used to calculate the amount.

(3 marks)