Transaction 1

The issue contained in trasaction 1 is Lease arrangement.

The issue here is whether the arrangement with the private sector provider Urban Waste and Co is, or contains, a lease, even if it does not take the legal form of a lease. The substance of the arrangement should be considered in connection with the Conceptual Framework for Financial Reporting and IAS 17 on Leases. Key factors to consider are as follow:

(i) Who obtains most of the benefit from the asset?

(ii) Who controls the asset by operating it or directing others to do so?

(iii) Who has the right to use the asset or to direct others to do so?

(iv) Who has the risks and rewards associated with the asset?

The answer in each case is Daramson.

i. Urban Waste and Co buys the vehicles and uses them exclusively for Daramson. If Urban Waste and Co ceases business, Daramson can re-possess the vehicles and continue to use them for waste collection.

ii. Daramson controls the vehicles, since it stipulates how they are painted, and ostensibly owns them because they must be painted with Daramson’s name.

iii. Daramson can use the vehicles and uses them exclusively for waste collection for nearly all their life.

iv. Following on from this, Daramson has the risks and rewards associated with the asset. The arrangement is in substance a lease. As Daramson has substantially all the risks and rewards of ownership, the arrangement should be treated as a finance lease.

v. The vehicles should be recorded in assets in Daramson statement of financial position, with a corresponding lease liability. The value of the lease may be determined by considering the fair value of acquiring the vehicle.

vi. The service element relating to the waste collection may be considered separately.

Transaction 2:

The transaction relates to IAS 37-Provisions, contingent liabilities and contingent assets. Provisions must be recognised in the following circumstances and must not be recognised if they do not apply.

i. There is a legal or constructive obligation to transfer benefits as a result of past events.

ii. It is probable that an outflow of economic resources will be required to settle the obligation.

iii. A reliable estimate of the amount required to settle the obligation can be made.

iv. A legal or constructive obligation is one created by an obligating event. Here the obligating event is the contamination of the land, because of the virtual certainty of legislation requiring the clean-up.

v. As Daramson has no recourse against Agroallied Limited or its insurance company, this past event will certainly give rise to a transfer of economic benefits from Daramson.

vi. Consequently, Daramson must recognise a provision for the best estimate of the clean-up costs. It should not set up a corresponding receivable, since no reimbursement may be obtained from Agroallied Limited or its insurance company.

Transaction 3:

This transaction is based on impairment of equipment.

i. The basic principle of IAS 36-Impairment of Assets is that an asset should be carried at no more than its recoverable amount, that is, the amount to be recovered through use or sale of the asset.

ii. If an asset’s carrying value is higher than its recoverable amount, an impairment loss has occurred.

iii. The impairment loss should be written off against profit or loss for the year.

iv. An organisation must determine, at each reporting date, whether there are any indications that impairment has occurred. In this case, impairment is indicated because the use to which the equipment is to be put has changed significantly, a situation which will continue for the foreseeable future.

v. The recoverable amount is defined as the higher of the asset’s fair value less costs to sell and the asset’s value in use.

vi. However, these values are unavailable because of the specialised nature of the asset and the only information available is depreciated replacement cost. vii. Using a depreciated replacement cost approach, the impairment loss would be calculated as follows.

Daramson should therefore recognise an impairment loss of N4,060m in profit or loss for the year. The carrying amount of the equipment is higher than its recoverable value.

Workings:

i. Accumulated depreciation on equipment is calculated as follows: N10,000,000 / 20yrs = N500,000 per annum, for 6 yrs will be N500,000 x 6 = N3,000,000

ii. Accumulated depreciation on equipment equivalent size is calculated as N4,200,000 / 20yrs = N210,000 per annum, for 6 yrs will be N210,000 x 6 = N1,260,000