Question

As a result of its mining operations, Silver Lining Ltd has contaminated the land on which it operates. There is no legal requirement to clean up the land, but Silver Lining Ltd has a long record of cleaning up land that it has contaminated. How should Silver Lining report the related costs in its financial statements?

		recognise the best estimate of costs as a provision.
		disclose in the notes, but do not recognise in the financial statements.
		charge the costs directly to profit or loss in the period in which the economic outflows actually occur.
		transfer the expected amount of the clean-up from retained earnings to a special reserve account in equity.

Answer 1

Hi There,

Here is my answer to the given question.

Facts given in the question :

Silver lining ltd as a result of its mining activities contaminated the land on which it operates and there is no legal requirement to clean up the contaminated land but the company has a long record of cleaning up the land that it has contaminated.

Among the given four options " Recognise the best estimate of cost as a provision" is the correct option

EXPLANATION :

As we can observe from above facts that the company has no legal obligation to clean up the land but it is having constructive obligation to clean up the land which was construed from the past i.e  it has record of cleaning up the land that it has contaminated in the past.

It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and assuming that reliable estimation of cleaning cost can be made by the company, the company should recognise a provision for cleaning cost in its finanial statements.

CONCLUSION :

The company should recognise the best estimate of clean up cost as a provision in the financial statements.