financial acoounting question for my exam?

Question

Brighton Chemical Company, has as a result of its ongoing operations, contaminated the land on which it operates. There is no legal requirement to clean up the land.
Required. Should the company recognise a liability?

Answer 1

Under IAS 37 you recognise a Liability if:
* there's a Present obligation as a result of past events
* Settlement is expected to result in an outflow of resources (payment)

You disclose a Contingent liability if:
* there's a possible obligation depending on whether some uncertain future event occurs, or
* there's a present obligation but payment is not probable or the amount cannot be measured reliably

In your case, there is no legal obligation, but if the directors wish to avoid bad press and is in damage-control mode and went and announced that nevertheless, they'd do the right thing and would clean up the land, then there would be an obligation and you'd need to take up the liability.

Answer 2

Probably a contingent liability. Should have a reserve in case it is later required to clean up.

This is especially likely to be the answer if you guys have studied contingent liabilities.