MGA618 Case 11 - Group write up for assignment in Professor Xu\'s class PDF

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Group write up for assignment in Professor Xu's class...

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OMITTED AUTHORS Lack of Information MGA618 – Financial Reporting Professor Xu

Memorandum To: Professor Weihong Xu

From: OMITTED AUTHORS Re: Lack of Information Date: April 28th, 2017 Summary: This case highlights several issues faced by Lack of Information on whether or not it needs to recognize an asset retirement obligation with its’ warehouses to determine the appropriate recognition and measurement of each transactions. We hereby offer our proposals and analyses for a successful resolution of the issues in accordance with U.S. GAAP. Introduction A company called Lack of Information (LOI or “the Company”), currently own and operates 50 warehouses throughout the country and wants to determine if it needs to recognize any liabilities related to any asset retirement obligations (ARO) related to the asbestos chemicals. LOI’s internal audit group has drafted a memo on its findings from interviews and site visits to those warehouses. They’ve determined that LOI does not need to recognize anything related to these obligations because it has asserted that these obligations are not probable or that there is not sufficient information available. Our task is to review the memo and determine whether or not we agreed with the comments made by LOI’s internal audit group. The key issue of this case revolves around three different set of scenarios that the internal audit team has identified and whether or not their recommended procedures are valid. We concluded that all of the scenarios would merit a different conclusion than what the internal audit group recommended, which we will outline below in details. Analysis Issue 1 In order to determine whether or not the LOI’s internal audit team was right in its decision on the asset retirement obligations, we need to dissect the memo into three distinct parts. The first issue relates to 10 of the 23 warehouses containing asbestos that reside in states with regulations on special handling and removal of these chemicals that the LOI intends to sell within the next 5 years. The internal audit team stated that since LOI will never effectively have to settle the obligation to remove the asbestos from the buildings, therefore it does not need to recognize an ARO. However, based on our research of ASC 410-20-25-13, even if an entity may believe that it does not have plans to settle the obligation to remove the asbestos from the buildings, it still has to recognize the obligation. According to ASC 410-20-25-13: 25-13 If a current law, regulation, or contract requires an entity to perform an asset retirement activity when an asset is dismantled or demolished, there is an unambiguous requirement to perform the retirement activity even if that activity can be indefinitely deferred. At some time deferral will no longer be possible, because no tangible asset will

last forever (except land). Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. LOI should still recognize the obligation to perform the asset retirement activity since it is unconditional from the timing and method of settlement. In addition, ASC 410-20-55-61 provides an example that states that although an entity may decide to abandon the factory, the ability to defer settlement does not relieve the entity of its obligation. We went further and research an example in the implementation guidance to find more guidance that supports the case. LOI is in the situation that it plans to sell the warehouses and does not want to settle the obligation. We found a very similar situation in ASC 410-20-55-61, it states 55-61 Although the entity may decide to abandon the factory and thereby defer settlement of the obligation for the foreseeable future, the ability to defer settlement does not relieve the entity of the obligation. The asbestos will eventually need to be removed and disposed of in a special manner, because no building will last forever. Additionally, the ability of the entity to sell the factory does not relieve the entity of its present duty or responsibility to settle the obligation. The sale of the asset would transfer the obligation to another entity and that transfer would affect the selling price. Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and method of settlement. This guidance is similar to LOI’s situation since currently LOI believes that it will never effectively settle these obligations to remove the asbestos doesn’t mean it goes away. The company will still have to recognize the ARO. If you don’t recognize an ARO, then LOI is more likely to have loss when it sells the warehouses. Journal entries depicting the sale of the Warehouse Cash xxx ARO xxx...