Mango Limited prepares its financial statements to 31 December each year. The following issues need to be resolved before the financial statements for the year ended 31 December 2011 can be finalised.

Issue:

On 1January 2011, legislation dealing with emission levels came into effect. As a result, Mango Limited was required to fit special filters by 30 September 2011. Due to management changes and cash flow problems, Mango Limited was unable to install the new filters during 2011. The company expects to start and complete this work during the first half of 2012, at an estimated cost of 2 million. No provision has yet been made in the 2011 financial statements for this or for the fines of 200,000 payable at 31 December 2011 under the legislation. It is estimated that additional fines of 360,000 will become payable before the filters are fitted and operational.

Requirement

Advise the directors of Mango Limited as to the appropriate accounting treatment for Issue Two in the financial statements for the year ended 31 December 2011.

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