Reference no: EM132513837

Point 1: Renewal Ltd manufactures a special rejuvenating product with no side effects. It apparently induces a feeling of youth and vitality when it is used. This product is manufactured on a farm owned by the company situated in the Agter-Witsenberg valley. One of the main ingredients used in the product is the water from a mountain stream which flows through the farm. In terms of the water rights, Renewal Ltd may use the water but it must allow 50% to flow through to farms in the lower valley.

Point 2: Renewal Ltd needs further financing but is unable to borrow any more money from the bankas its debt to equity ratio is too high (due to high outstanding loans and few assets). The managing director thought it was a pity that one of the company's most important resources, the mountain stream, was not reflected on the company's statement of financial position.

Point 3: The financial director reacted to this by indicating that he is more than willing to place a value on this asset and include it in the statement of financial position. He suggests that they should assume that the mountain stream will be perennial and unpolluted for the next 10 years.

Point 4: Renewal Ltd has annual sales of R155 million and, due to the low input cost (mainly mountain water), has a high gross profit percentage. As Renewal Ltd is operating in an environmentally sensitive area, management is concerned about achieving environmental excellence.

Required:

Question 1: Provide a well-reasoned argument as to whether or not the mountain stream may be recorded as an asset in the financial statements of Renewal Ltd. Include in your argument any reservations you might have in this regard. Only refer to the requiremnts of the Conceptual Framework.