Part 1: Accounting for Provision and Contingent Liability

ChemX Inc, a chemical company, found out one week before its fiscal year end 12/31/X1 that its branch leaked significant amount of mercury (above safety level) at a plant site in Country A that requires a chemical company to buy and install specialized equipment (costing $500,000) to prevent mercury leakage.  Country A also has legislation that requires a company to clean up mercury contamination.

As of 12/31/X1, ChemX has not bought and installed the specialized equipment, and there has been no allegation against ChemX regarding the mercury leakage.  ChemX estimated that there is about 70% probability that it will be subject to an enforcement action by Country A’s environmental authority regarding the contamination.  ChemX incurred $1 million last year to clean up a similar mercury contamination at its plant site in another nearby country that has a legislation requiring the clean-up.

Required for each of the four questions:

1. Use IFRSto answer each question below.

2. Use U.S. GAAPto answer each question below.

3. Should ChemX provide footnote disclosure under IFRS and under U.S. GAAP?  Why or why not?  If it should, discuss information that should be disclosed

Answer the part A

1. As of 12/31/X1, is ChemX required to recognize a liability relating to the purchase and installation costs of the specialized equipment?  Why?  

Tip: By law, a motorist should not drive a car with a broken windshield.  If your car has a broken windshield and you have not yet replaced it, when will you incur an obligation to pay for material and labor costs of windshield replacement?