Memorandum Letter Example
Date: April 17, 2017
To: Walt Grimwald, CFO Ocean Petroleum, Inc
From: Staff Accountant
Re: Analysis of the issue relating to dismantling and removing the platform
Thank you for the opportunity to advise you on the issues in question. As requested, I have conducted a research and analysis of the facts relating to the case and applied relevant FASB ASC standards. Based on the analysis, I have reached the following conclusions:
OPI must account for the expected future cost in the end of 2026.
Future cost estimates relating to labor should be done in 2017.
The conclusions were reached using relevant FASB ASC standards namely ASC 720 “Other Expenses” and ASC 420 “Exit or Disposal Cost Obligations” and ASC 420. The costs of $2,158,932 shall be charged to expense when incurred in the end of 2016. A liability for a cost associated with disposal activity shall be recognized in the period in which the liability is incurred. (ASC, Subtopic 25-2, “Recognition,” of Topic 420). By itself, a disposal plan does not create a present obligation expected to be incurred under the plan. OPI’s commitment to disposal plan is not, by itself, the requisite for recognition of a liability.
Under ASC 420-25-3, future operating losses, such as labor costs, expected to be incurred in connection to dismantling and removing of the oil platform should be recognized in the period in which they incurred (Subtopic 25, “Recognition,” of Topic 720). In this case, the period in which losses will be incurred due to labor cost is at the end of 2026 when the platform will be dismantled.
Regarding the issue of when to conduct estimations regarding future labor costs, it is worth mentioning that estimations do not, by themselves, create the necessity to book additional expenses in 2017 (Pulsipher & Daniel Iv, 2000).
Enclosed you will find a reference page. Should you require any additional information, do not hesitate to contact me immediately.
References
Castro-Santos, L., Martins, E., & Soares, C. G. (2016). Cost assessment methodology for combined wind and wave floating offshore renewable energy systems. Renewable Energy, 97, 866-880.
FASB (Financial Accounting Standards Board). (2010). Accounting Standards Codification (ASC). Retrieved April 1, 2017, from FASB Accounting Standards Codification …
