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Question 3b

(b) At 30 November 20X6, the directors of Fill estimate that a piece of mining equipment needs to be reconditioned every two years. They estimate that these costs will amount to $2 million for parts and $1 million for the labour cost of their own employees. The directors are proposing to create a provision for the next reconditioning which is due in two years’ time in 20X8, along with essential maintenance costs. There is no legal obligation to maintain the mining equipment.

As explained above, it is expected that there will be future reductions in the selling prices of coal which will affect the forward contracts being signed over the next two years by Fill.

The directors of Fill require advice on how to treat the reconditioning costs and whether the decline in the price of coal is an impairment indicator. (8 marks)

Required:
Advise the directors of Fill on how the above transactions should be dealt with in its financial statements with reference to relevant IFRS Standards and the Conceptual Framework and its proposed revision where indicated.

Note: The split of the mark allocation is shown against each of the three issues above.