Complex IFRS Applications and Taxation

SECTION B MetroWater Co is a public utility company providing water treatment and distribution services. On 1 January 20X5, MetroWater sold its primary water treatment facility to an investment bank for $100 million. The carrying amount of the facility just prior to the sale was $75 million. Its fair value was $100 million. Immediately upon sale, MetroWater leased the facility back for a period of 15 years. The remaining useful life of the facility is 40 years. The lease payments are $8 million per annum, payable in arrears. The interest rate implicit in the lease is 5%. The present value of the annual lease payments is $83 million. The transaction satisfies the requirements of IFRS 15 'Revenue from Contracts with Customers' to be accounted for as a sale. Separately, MetroWater has an extensive network of underground pipelines. Under environmental legislation, MetroWater has a legal obligation to decommission and safely remove these pipelines at the end of their useful lives. A decommissioning provision was established years ago. On 31 December 20X5, due to new, stricter environmental laws, the estimated future cash outflows required to decommission the pipelines increased significantly. Furthermore, the discount rate used to measure the provision has decreased due to changing market conditions. Required: (a) Explain and calculate how the sale and leaseback of the water treatment facility should be accounted for in the financial statements of MetroWater for the year ended 31 December 20X5. (12 marks) (b) Discuss how the changes in the estimated cash flows and the discount rate relating to the decommissioning provision should be accounted for under IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' and IFRIC 1. Furthermore, explain the deferred tax implications (under IAS 12) of recognizing a decommissioning provision and the related asset. (13 marks)