QUESTION FIVE

The definition of a liability forms an important element of the International Accounting Standards Boards Conceptual Framework for Financial Reporting which, in turn, forms the basis for IAS 37 Provisions, Contingent Liabilities and Contingent Assets. On 1 January 2019, Zambezi Mines acquired a newly constructed open pit mining site at a cost of K60 million together with a government licence which gave the company the right to extract copper from the mine site in Mufumbwe. The terms of the licence are that Zambezi Mines will have to remove the entire construction at the mining site (which will have no residual value by then) and restore the mine site to an environmentally satisfactory condition in 20 years time when the copper reserves have been exhausted. The estimated cost of this on 31 December 2038 will be K30 million. The present value of K1 receivable in 20 years at the appropriate discount rate for Zambezi Mines of 6% is K0.31.

Required:

(a) Define a liability and describe the circumstances under which provisions should be recognised. Give two examples of how the definition of liabilities enhances the faithful representation of financial statements. [5 Marks]

(b) Calculate, show and explain how the oil platform should be treated in the financial statements of Zambezi Mines for the year ended 31 December 2019. [10 Marks] (TOTAL: 15 Marks)