IAS 37 Provisions, Contingent Liabilities and Contingent Assets

**Section A** WindPower constructed an offshore wind farm which commenced operations on 1 January 20X5. The local government requires WindPower to dismantle the turbines at the end of their 20-year useful life. The estimated cost of dismantling in 20 years' time is $15 million. The appropriate risk-adjusted discount rate is 6%. The present value of $1 in 20 years at 6% is 0.3118. What is the total charge to the Statement of Profit or Loss for the year ended 31 December 20X5 in relation to this decommissioning provision? (Assume straight-line depreciation for the asset).

**Section B - Case 2** *PharmaNova is a pharmaceutical company with a financial year end of 31 December 20X5. On 15 December 20X5, a patient filed a lawsuit against PharmaNova for $2 million, claiming side effects from a drug. Legal counsel advises there is a 60% probability PharmaNova will lose the case and have to pay the full $2 million. On 28 December 20X5, the board decided to close a research facility. A detailed formal plan was drawn up, but it was not communicated to the affected employees until 5 January 20X6. The estimated closure costs are $500,000. On 10 January 20X6, a major wholesale customer went bankrupt. The customer owed PharmaNova $300,000 at 31 December 20X5. On 1 February 20X6, PharmaNova decided to change its inventory valuation method from FIFO to Weighted Average to better reflect its business model.* **Question:** How should PharmaNova account for the lawsuit in its financial statements for the year ended 31 December 20X5?

**Section B - Case 2** *PharmaNova is a pharmaceutical company with a financial year end of 31 December 20X5. On 15 December 20X5, a patient filed a lawsuit against PharmaNova for $2 million, claiming side effects from a drug. Legal counsel advises there is a 60% probability PharmaNova will lose the case and have to pay the full $2 million. On 28 December 20X5, the board decided to close a research facility. A detailed formal plan was drawn up, but it was not communicated to the affected employees until 5 January 20X6. The estimated closure costs are $500,000. On 10 January 20X6, a major wholesale customer went bankrupt. The customer owed PharmaNova $300,000 at 31 December 20X5. On 1 February 20X6, PharmaNova decided to change its inventory valuation method from FIFO to Weighted Average to better reflect its business model.* **Question:** What is the correct accounting treatment for the research facility closure costs in the financial statements for the year ended 31 December 20X5?