Case 12-03 - Contingencies
Scenario 1
Energy should recognize a provision as of December 31, 2011, in reporting to its U.K. parent under IFRSs and in reporting to its U.S.-based lender in accordance with U.S. GAAP. IFRS and GAAP follow three steps in order to determine if a provision should be recognized. They are:
a) the entity has an obligation at the reporting date as a result of a past event;
b) it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; However, in case of U.S. GAAP ‘probable’ is interpreted as a higher threshold than ‘more likely than not’. c) the amount of the obligation can be estimated reliably
Energy has a legal obligation under the laws of the particular country on December 31, 2011 as a result of past occurrences of soil contamination. Since it is virtually certain that a draft law requiring a cleanup of contaminated land will be enacted, it is probable that a settlement will need to be made. The amount of the obligation can also be estimated since Energy has made similar payments for cleanup in other countries. Hence under both IFRS and U.S GAAP a provision needs to be recognized.
Scenario 2
FuelSource should recognize a provision for cleanup costs it may incur in Dirty Country in reporting to its U.K. parent under IFRSs and in reporting to its U.S.-based lender in accordance with U.S. GAAP. An obligation has arisen as a result of past occurrences of soil contamination. FuelSource has constructive obligation because of the widely published policy of both

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