Reference no: EM133059377

Question - PART A - The following information relates to the financial statements of Clay Enterprise Limited (CEL) for the year to 31 March 2019. The mining division of CEL has a 3 year operating licence from an overseas government (Guyana).

This allows it to mine and extract copper from a particular site. When the licence began on 1 April 2018, CEL started to build on the site. The cost of the construction was $ 7,000,000. Guyana has no particular environmental decommissioning laws. In its past financial statements CEL has given information about the company's environmental policy and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period.

The cost of removing the construction at the end of the three years is estimated to be $1,000,000. The capitalized cost of the site currently shown in the trial balance is $7,000,000. The company has a cost of borrowing of 12%.

REQUIRED - Explain the correct accounting treatment for the scenario above with appropriate calculations as necessary.

Hint: Within your answer you must clearly explain provisions and obligations under IAS 37 and the accounting treatment of any calculations made.

PART B - The directors of Clay Enterprise Limited (CEL) are uncertain of the difference between a provision and a contingent liability. Write a brief explanation explaining both concepts to give them clarity.