Reference no: EM133372160

Case Study: Candelabra Limited (CL) is a manufacturing company that is privately owned. The company's production facilities produce a significant amount of carbon dioxide, and currently the town is suing CL for polluting the surrounding area. The company is enjoying a period of significant prosperity and earn- ings have been steadily increasing. CL plans to double in size within the next 10 years. The production facility was financed by a 100-year bond that pays 5% interest annually. The bond includes a covenant that stipulates that the debt to equity ratio must not exceed 2:1. The debt to equity ratio is currently just below this threshold.
The government has recently introduced a system to control pollution whereby each company is allocated a certain number of "carbon credits." The carbon credits allow the company to produce a cer- tain amount of carbon dioxide as a by-product from its production facilities. CL has been allocated a fixed number of these credits by the government at no cost. If CL produces more carbon dioxide than allowed, it will have to pay a fine. CL is confident that it will exceed the amount allowed under the government- allotted carbon credits. Many companies in the surrounding area have extra carbon credits and, as a result, the government has established an informal marketplace where companies can trade their extra credits. The value of the carbon credits changes depending on supply and demand.
CL has purchased several carbon credit contracts in the marketplace as a hedging strategy. At the time it acquired the contracts, there was an oversupply and CL was able to acquire them at little cost. Currently, demand for the credits has increased significantly.
As another backup plan, CL is investigating diverting excess carbon dioxide to an underground cave that is situated on company-owned property (sequestration). CL has spent a significant amount of money to investigate the feasibility of diverting and storing the extra carbon dioxide it produces. The engineers working on the project are still not convinced that this type of storage is workable on a larger scale. At present, they have started to store some excess carbon dioxide there on a test basis.
Instructions

Question: Audit & Assurance Assume the role of CL's auditors and analyze the financial reporting issues. Note where there are differences between IFRS and ASPE.