Reference no: EM132538684

Question - Rerun Corp. operates chemical plants located in suburban areas of two cities. The company has always prepared its financial statements as per the standards issued by the IASB, since its inception. In an interview with a business reporter on June 25, 2010, its CEO made a public announcement of a decision to minimize the level of harmful chemical emissions from its factories. The proposals for reduction in emissions were formulated by the directors following agreement in principle earlier in the year.

On June 30, 2010, the average useful life of the factories was 20 years. The depreciation is computed on a straight line basis and charged to cost of sales.

After preparing detailed estimates of the costs of their proposals, the directors showed that the expenditure required for the coming years would be $25 million on June 30, 2011; $30 million on June 30, 2012 and $35 million on June 30, 2013.

All estimates were for the actual anticipated cash payments. No contracts were entered into until after July 1, 2010. The estimate proved accurate as far as the expenditure due on June 30, 2011 was concerned. When the directors decided to proceed with this project, they used discounted cash flow techniques to appraise the proposed investment, using the annual discount rate of 8%. The company is reputed to fulfill its financial commitments after they have been publicly announced.

Required - Explain, with reference to the relevant standard, why the directors need to recognize a provision in the statement of financial position at June 30, 2010.