Question 2b

Delta prepares its financial statements to 30 September each year. The financial statements for the year ended 30 September 2017 are shortly to be authorised for issue. The following events are relevant to these financial statements:

(b) On 1 April 2017, Delta completed the construction of a power generating facility. The total construction cost was $20 million. The facility was capable of being used from 1 April 2017 but Delta did not bring the facility into use until 1 July 2017. The estimated useful life of the facility at 1 April 2017 was 40 years.

Under legal regulations in the jurisdiction in which Delta operates, there are no requirements to restore the land on which power generating facilities stand to its original state at the end of the useful life of the facility. However, Delta has a reputation for conducting its business in an environmentally friendly way and has previously chosen to restore similar land even in the absence of such legal requirements. The directors of Delta estimated that the cost of restoring the land in 40 years’ time (based on prices prevailing at that time) would be $10 million. A relevant annual discount rate to use in any discounting calculations is 5%. When the annual discount rate is 5%, the present value of $1 receivable in 40 years’ time is approximately 14·2 cents. (9 marks)

Required: 
Explain and show how the two events would be reported in the financial statements of Delta for the year ended 30 September 2017. When considering the reporting of events in the statement of comprehensive income, you should distinguish between events being reported in profit or loss from events being reported in other comprehensive income, where this is relevant. However, you do not need to comment on potential future reclassification issues.

Note: The mark allocation is shown against both of the two events above.