(a) Accounting for the Joint Arrangement between LPG Plc. and Tan Oil Nigeria Limited

Under IFRS 11 – Joint Arrangements, the classification of a joint arrangement as either a joint operation or a joint venture depends on the rights and obligations of the parties involved. The following points are key in determining the classification of the joint arrangement:

1. Joint Arrangement Definition: A joint arrangement exists when two or more parties have joint control. Control is shared when decisions about the relevant activities require the unanimous consent of the parties.
2. Joint Operation vs. Joint Venture:
   • A joint operation is an arrangement where the parties do not establish a separate vehicle, and each party has direct rights to the assets and obligations for the liabilities.
   • A joint venture involves a separate vehicle, typically a separate legal entity, where the joint venturers have rights to the net assets of the arrangement.
3. In the Case of LPG Plc and Tan Oil Nigeria Ltd:
   • Joint Operation: Based on the facts provided, the arrangement between LPG Plc and Tan Oil Nigeria Ltd is a joint operation because:
     • There is no separate vehicle involved; the two parties share services and costs according to their percentage holding.
     • Decisions regarding the operation of the gas storage facility require unanimous consent from both parties.
   • Accounting Treatment:
     • As a joint operator, LPG Plc. must recognize its share of the assets, liabilities, revenues, and expenses associated with the joint operation in accordance with the relevant IFRS standards.
     • The gas storage facility qualifies as property, plant, and equipment (PPE) under IAS 16, as it is held for use in the production and supply of goods and services over more than one accounting period. LPG Plc. should recognize its share of the storage facility as PPE.
     • Decommissioning Costs: Under IAS 16 and IAS 37, LPG Plc. must also recognize the decommissioning costs associated with the facility. These costs should include the present value of the expected expenditures required to dismantle the facility and restore the site, as required by Nigerian law. Since LPG Plc. owns 55% of the facility, it should recognize 55% of the decommissioning costs in its financial statements.
     • Contingent Liability: LPG Plc. is also exposed to the risk of Tan Oil Nigeria Ltd’s share of the decommissioning costs. If Tan Oil Nigeria Ltd is unable to meet its share of the obligation (e.g., due to liquidation), LPG Plc. might have to bear the full cost. As such, LPG Plc. should disclose a contingent liability for its exposure to Tan Oil Nigeria Ltd’s share of the decommissioning costs.

(b) Accounting for the Provision for Major Overhaul

LPG Plc. has proposed to accrue the cost of the overhaul for the gas plant, but IAS 37 provides specific guidance on when a provision is recognized. The following conditions must be met to recognize a provision:

1. A present obligation exists as a result of a past event.
2. It is probable that an outflow of economic benefits will be required to settle the obligation.
3. The amount can be reliably measured.

In this case:

• Accrual of the Overhaul Costs: It is not acceptable to accrue the cost of the overhaul as a provision at this stage. Instead, the major overhaul costs should be treated as a separate component of the gas plant, recognized at the time of purchase.
• Depreciation: The overhaul component (₦15 million for parts and equipment) should be recognized separately as part of the gas plant and depreciated over its useful life (i.e., over the two years until the next overhaul).
• Routine Maintenance: The costs for routine maintenance (₦10 million for labour) should be expensed as incurred, as they do not relate to a major overhaul, but to regular servicing of the asset.

Summary of Treatment:

• Major Overhaul (₦15 million): Recognize as a separate component of PPE, and depreciate over two years.
• Routine Maintenance (₦10 million): Expense as incurred.
• Provision for Overhaul: Not required. Instead, depreciation of the overhaul cost should be recognized in profit or loss over the period to the next overhaul.