Case analysis: Extract Tar Sands Ltd.
Extract Tar Sands is an extraction plant company located in Athabasca, Alberta. It is a leading extraction plant, and one of the worlds most global industries. Large investments are required but the future outcomes are unknown. Athabasca has the largest reservoir of crude bitumen in the world. The tar sands go through a refining process to separate the bitumen (black viscous oil) from the mixture of clay, sand and water. Extracting oil from tar sand is much more complex than pumping oil from an oil well. When the oil is separated from the mixture of sand, normally from the use of hot water, it goes through a thinning process in order to be transported through pipelines. There are many environmental concerns with regards to the mining of tar sands which include global warming, greenhouse emissions, water and air quality from the surrounding communities as well as effects to wildlife. Extract Tar Sands Ltd. has shares on both the New York stock exchange as well as the Toronto stock exchange. They are a publicly owned company and generate high net incomes. The statement users would be potential investors, as well as current shareholders and creditors of the company. Problem identification, issues
Extract Tar Sands is in need of additional capital in order to expand their facilities. They are contemplating whether to do this by issuing more shares of the company, getting financing or combining the two. They also have to determine how they will be valuing their assets under the new International Financial Reporting Standards. Although ETS has had a successful switch over to IFRS for the January 2011 deadline, they have still not determined the accounting policies they will be following. The focus of the question is to determine the differences between pre-IFRS and IFRS that pertain to ETS’s accounts and what is allowable for the company. Analyze the Data
There are many changes to the reporting, recording and presentation of the financial statements. Being an oil extraction plant, the conversion to IFRS may be more difficult than any other company in any other industry. Some of the accounts of Extract Tar Sands have no significant changes with regards to the differences from the Pre-IFRS to the new standards of IFRS that are to be effective as of January 1, 2011. There are however, quite a few that do have differences that will affect the presentation of financial statements, disclosure requirements, reporting and recording of transactions, which are outlined in the following paragraphs.
Property, plant and equipment have significant changes from Canadian GAAP to IFRS although there are many similarities as well. They both state that property, plant and equipment are initially recorded at cost, and any costs required to get that asset functioning for its intended use are recognized as part of the cost. Gains and losses on the disposal of an asset are treated the same under IFRS as the Canadian GAAP. Depreciation policies are also the same under both principles, over their useful life. If the property, plant and equipment is a held for sale item, it is not amortized at all. Under IFRS depreciation of an asset is based on cost less residual value over the useful life of that asset, where-as under GAAP it would be based on the greater of cost less residual value over the useful life, and the cost less the salvage value over the useful life. Reviews are done annually to determine the useful life, residual values and depreciation methods, any changes are reflected as changes in estimates. Under GAAP, residual values are only reviewed if there is reason to believe there has been a change in condition that would affect the current estimates. GAAP does not allow revaluation to fair value but IFRS does. There are two methods for valuation under property, plant and equipment, the cost model or the revaluation model. The cost model is when the asset is carried at cost...
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