IFRS 911: Accounting for environmental catastrophes? The BP oil spill illustrates a number of issues in IFRS. Here are just the first few we thought of..

BP chief executive Tony Hayward was grilled yesterday by the US Congressional panel.

The failure of the Deepwater Horizon drilling platform has been a catastrophe for lots of people. Stakeholders ranging from individual fishermen through to major shareholders have all been severely impacted.

Being natural accountants though, we couldn’t help but think how this would affect the accounts, given that it may well inspire some future exam questions.

The most obvious effect is the impairment of the well itself.  Only the hardware is currently recognised in assets, since the value of the reserves is too uncertain to be recognised as an asset.  Rigs cost vast amounts of money however and this is a significant impairment.

Similar drilling arrangements will also require major safety upgrades.  This would cause an impairment, but no provision, since BP could always simply close down a well.

Then there is goodwill.  BP grew to its vast size by organic growth and by acquisition.  This activity may well have been through an acquired subsidiary.  This is pretty solid external evidence of an impairment and so goodwill must be written off.  Lots of goodwill needs to be written off.

Fines are a near certainty.  The White House has been careful to ensure that the world knows that the $20 billion payment to a trust to settle damages is not a full and final settlement.  This means that an estimate of likely costs will need to be made and disclosed in a very transparent way.  BP and BP’s lawyers would probably prefer to avoid that transparency of how much they think this is going to cost them.

A number of years ago, IAS 10 was amended to require that only dividends that were legally required to be paid could be shown as liabilities.  Many people commented on how this was not true and fair, since it was unthinkable that large companies could ever change their minds about dividends that had already been proposed.  Well, BP changes that a little, given that they have agreed to skip this year’s dividend to shareholders, in response to huge pressure from wider stakeholders such as affected communities and the President of the United States.  It turns out that companies do sometimes change their minds about dividends before the cheques get sent out!

What about recoverability of insurance proceeds?  That one is simple; BP did not have insurance we believe.  Ouch.  Dare we breathe the words “going concern”?

The ExP Group