Oil Spill

Two years ago, a ship owned by a foreign company ran aground during a severe storm and sank at the entrances of a harbor. The vessel blocked the entrance to the harbor and spilled considerable amounts of oil. Under federal legislation, the Canadian government is required to clean up an oil spill immediately and render the harbours entrance safe for other vessels. The legislation states that costs are to be compiled in accordance with "accepted Canadian financial and cost accounting practices," and that they are to be charged to the shipping company and/or its insurers.

ABC, Chartered Accountants, has been approached by a federal government department and ask for assistance in supporting its claim against the shipping company. The partner considering acceptance of this engagement has been prepared in accordance with "accepted Canadian financial and costs accounting practices.

Currently, there is a lack of agreement between the shipping company and the government. Therefore, the report will also be filed with the court if a lawsuit by the federal government becomes essential. No amount has been paid by the shipping company, although the first invoice was rendered one year ago. Government policy is to charge 10 percent interest on all unpaid amounts.

In the discussion of these issues, you have been asked to indicate what arguments ABC Co. can provide in testimony in court. These arguments should include:

1. A defence of the logic of the procedures that were applied in the preparation of the cost schedule; and

2. A rebuttal of possible objections to the procedures used in the preparation of the costs schedule that might be raised by accountants and lawyers for the shipping company.

Your review of the cost schedule and discussion with government employees provided the following information:

1. The $14.5 million is made up of the following cost categories:

Direct contract costs $6,200,000

Government ships and helicopters assigned to clean up and salvage 4,500,000

Government supervisory ships assigned to general duty 2,000,000

Shore facilities - to support ships and helicopters 950,000

Administration - government departments involved in cleanup and salvage 850,000

TOTAL $14,500,000

2. The "direct contract costs" represent the costs charged by various companies and government groups contracted by the government department for cleanup and salvage. Invoices are available to support the $6.2 million and have been signed by government officials to indicate that the services were provided. Included in the $6.2 million are invoices for $800,000, representing one-half of the $1.6 million billed by one supplier. The other half, $800,000, was charged to a government account and represented improvements to the harbor entrance.

3. The "government ships and helicopters" charge of $4.5 million represents the cost of ships and helicopters specifically assigned to cleanup. They would normally be preforming defence and limited commercial duties elsewhere. Therefore, the ships and helicopters were taken from specific assignments to perform the cleaning and salvage quickly. The $4.5 million is made up of

Wages and benefits of crews $2,500,000*

Fuel for ships and helicopters 1,050,000

Supplies for ships and helicopters 500,000

Direct maintenance of ships during cleanup period 150,000

Depreciation of ships during cleanup period 300,000

TOTAL $4,500,000

*Incudes pension costs of $250,000 and personal life insurance costs of $900,000. All crew members were employed by the armed forces of Canada.

4. The "government supervisory ships" charge of $2 million represents the cost of ships that were needed to coordinate the cleanup and direct commercial ships safely through the harbour. They also served to keep sightseeing vessels and other groups away from the wreck. These ships would have been assigned to general civilian rescue and coast-guard duties if they had not been at the location of the cleanup and salvage. The $2 million is made up of

Wages and benefits of crews $1,200,000*

Fuel for ships and helicopters 270,000

Crew meals and related supplies 80,000

Overtime pay to crews for cleanup period 300,000

Direct maintenance of ships during cleanup period 50,000

Depreciation of ships during cleanup 100,000

TOTAL $2,000,000

*Includes vacation pay of &80,000, pension costs of $70,000, and insurance and other employee benefits of $50,000. All crew members are government employees.

5. The "shore facilities" cost of $950,000 is primarily for the refueling of ships and aircraft.

Fuel used by direct-contact ships (not included in the $6,200,000) $600,000

Labour to service direct-contract ships 175,000

Labour to fuel government ships and helicopters 75,000

Supplies used by government ships 100,000

TOTAL $950,000

6. "Administration" costs of $850,000 include

Armed forces personnel taken from other duties and assigned to shore duties related to the cleanup $475,000*

Estimated cost of telecommunications equipment used for cleanup - (at commercial rates) 225,000

Cost of assembling the cost data, for invoicing to the shipping company; estimated, using commercial rates for account services 100,000

Legal advice on invoicing the shipping company 50,000

TOTAL $850,000

*Includes accrued vacation pay for $30,000, pension costs of $45,000, and other employee benefits of $40,000. These personnel would otherwise have been assigned to general duties.

REQUIRED:

Prepare the memorandum to the partner by discussing the relevance of each of the costs. In your memorandum, determine an amount that you think should be claimed.