Reference no: EM131910945

FuelSource Co (FuelSource) is a U.S. company with a December 31st year-end that prepares its financial statements in accordance with U.S. GAAP. FuelSource is planning to issue its financial statements on March 20, 2018. It is now March 18, 2018 and FuelSource management is evaluating new information regarding future contingencies and subsequent events to determine their impact (if any) on the December 31, 2017 financial statements.

Environmental Clean-Up

FuelSource operates in the oil industry, and its operations sometimes result in soil contamination. One of FuelSource’s subsidiaries is located outside of the U.S. in Dirty Country where there is no environmental legislation. However, FuelSource has a widely published environmental policy in which it undertakes to clean up all contamination that it causes, regardless of whether it occurs in a jurisdiction with no environmental regulations. FuelSource has a record of honoring this published policy. In November 2017, FuelSource contaminated land while operating in Dirty Country and anticipates that cleanup efforts will begin in May of 2018 and are estimated to cost approximately $1 million.

Acquisition of an Oil Refinery Company

Using the funds from a line of credit, FuelSource’s management drew $10 million on March 10, 2018, to acquire an oil refinery in the northeast United States. On the basis of its initial assessment from the Company’s due diligence (that started shortly before the balance sheet date), management’s best estimate of the allocation of the $10 million purchase price is as follows: $2 million of current assets and $8 million noncurrent assets (comprising $5 million of identifiable noncurrent assets, $2 million of intangible assets, and $1 million of goodwill). The estimated purchase price allocation has not been finalized, but is expected to be after the financial statements are issued.

Required:

Answer the following questions. Be sure to fully discuss the accounting options available to FuelSource for the above events and provide your recommendations for the best accounting treatments. Your responses should be supported by the FASB Codification and any other resources you find helpful (e.g., Conceptual Framework, real-world examples, etc.).

1. How do you think FuelSource should account for the environmental cleanup costs it anticipates incurring during 2018? Should Fuelsource record or disclosing anything about these costs in its December 31, 2017 financial statements? Explain why or why not.

2. Should the acquisition of the oil refinery be recognized or disclosed within the December 31, 2017 financial statements? Explain why or why not.