ExpertACCA · Question 02 · Ethics and Professional Principles
SECTION A
Background:
AquaGrid is a publicly listed water utility company that is currently transitioning its operations toward renewable desalination plants. You are the Chief Accountant, an ACCA member. The financial year-end is 31 March 20X6.
Event 1: Decommissioning Provision
AquaGrid operates a legacy chemical treatment plant that is legally required to be dismantled in 5 years. The estimated cost of dismantling is $15 million. The CFO has instructed you to either delay recognizing this provision until the plant is actually closed, or to use an artificially high discount rate of 15% (the company's aggressive internal hurdle rate) rather than the risk-free rate of 4%, in order to minimize the liability on the balance sheet. The CFO explicitly stated, "We need to keep our debt-to-equity ratio low to avoid breaching our banking covenants this year."
Event 2: Government Grant
AquaGrid received a $10 million government grant on 1 January 20X6 to assist with the construction of a new solar-powered desalination plant. The grant stipulates that the plant must remain operational and maintain specific water output levels for 10 years; otherwise, the grant is fully repayable. Construction will take 2 years. The CFO wants to recognize the entire $10 million as income immediately in the current year's statement of profit or loss to boost earnings.
Requirements:
(a) Advise the CFO on the correct accounting treatment for the decommissioning provision (under IAS 37) and the government grant (under IAS 20) for the year ended 31 March 20X6. (10 marks)
(b) Discuss the ethical and professional issues you face as the Chief Accountant, and outline the actions you should take in accordance with the ACCA Code of Ethics and Conduct. (10 marks)
SECTION A
Background:
AquaGrid is a publicly listed water utility company that is currently transitioning its operations toward renewable desalination plants. You are the Chief Accountant, an ACCA member. The financial year-end is 31 March 20X6.
Event 1: Decommissioning Provision
AquaGrid operates a legacy chemical treatment plant that is legally required to be dismantled in 5 years. The estimated cost of dismantling is $15 million. The CFO has instructed you to either delay recognizing this provision until the plant is actually closed, or to use an artificially high discount rate of 15% (the company's aggressive internal hurdle rate) rather than the risk-free rate of 4%, in order to minimize the liability on the balance sheet. The CFO explicitly stated, "We need to keep our debt-to-equity ratio low to avoid breaching our banking covenants this year."
Event 2: Government Grant
AquaGrid received a $10 million government grant on 1 January 20X6 to assist with the construction of a new solar-powered desalination plant. The grant stipulates that the plant must remain operational and maintain specific water output levels for 10 years; otherwise, the grant is fully repayable. Construction will take 2 years. The CFO wants to recognize the entire $10 million as income immediately in the current year's statement of profit or loss to boost earnings.
Requirements:
(a) Advise the CFO on the correct accounting treatment for the decommissioning provision (under IAS 37) and the government grant (under IAS 20) for the year ended 31 March 20X6. (10 marks)
(b) Discuss the ethical and professional issues you face as the Chief Accountant, and outline the actions you should take in accordance with the ACCA Code of Ethics and Conduct. (10 marks)
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