PART 2 IAS 37 Provisions, contingent liabilities and contingent assets was issued in 1998. Prior to its publication, there was no International Accounting Standard that dealt with the general subject of accounting for provisions.

Mango Limited prepares its financial statements to 31 December each year. During the years ended 31 December 2016 and December 2017, the following events occurred. Mango limited is involved in extracting minerals in a number of different countries. The process typically involves some contamination of the site from which the minerals are extracted. Mango Limited makes good this contamination only where legally required to do so by legislation passed in the relevant country.

The company has been extracting minerals in Copperland for a long time and expects its site to produce output until December 2021. On 23 December 2016, it came to the attention of the directors of Mango Limited that the government of Copperland was 9 virtually certain to pass legislation requiring the making good of mineral extraction sites. The legislation was dully passed on 15 March, 2017. The directors of Mango Limited estimate that the cost of making good the site in Copperland will be N$ 2 Million. The estimate is of the actual cash expenditure that will be incurred on 31 December, 2021.

Required (a) Explain why there was a need for an accounting standard dealing with provisions, and summarise the criteria that need to be satisfied before a provision is recognised (12)

(b) Compute the effect of the estimated cost of making good the site on the financial statements of Mango limited for BOTH of the years ended 31 December 2016 and 2017. Give explanations of the figures you compute (13)

The annual discount rate to be used in any relevant calculation is 10%

The relevant discount factors at 10% are:

Year 4 at 10% 0.683

Year 5 at 10% 0.621