41 Burley Burley, a public limited company, operates in the energy industry.

41 Burley Burley, a public limited company, operates in the energy industry.

Burley, a public limited company, operates in the energy industry. It has entered into several arrangements with other entities as follows.

(a) Burley also entered into an agreement with Jorge, a public limited company, on 1 December 20X8.

Each of the companies holds one half of the equity in an entity, Wells, a public limited company, which operates offshore oil rigs. The contractual arrangement between Burley and Jorge establishes joint control of the activities that are conducted in Wells. The main feature of Wells’s legal form is that Wells, not Burley or Jorge, has rights to the assets, and obligations for the liabilities, relating to the arrangement.

The terms of the contractual arrangement are such that:

(i) Wells owns the oil rigs. The contractual arrangement does not specify that Burley and Jorge have rights to the oil rigs.

(ii) Burley and Jorge are not liable in respect of the debts, liabilities or obligations of Wells. If Wells is unable to pay any of its debts or other liabilities or to discharge its obligations to third parties, the liability of each party to any third party will be limited to the unpaid amount of that party’s capital contribution.

(iii) Burley and Jorge have the right to sell or pledge their interests in Wells

(iv) Each party receives a share of the income from operating the oil rig in accordance with its interest in Wells.

Burley wants to account for the interest in Wells by using the equity method, and wishes for advice on the matter.

The oilrigs of Wells started operating on 1 December 20W8, ie ten years before the agreement was signed, and are measured under the cost model. The useful life of the rigs is 40 years. The initial cost of the rigs was $240 million, which included decommissioning costs (discounted) of $20 million. At 1 December 20X8, the carrying amount of the decommissioning liability has grown to

$32.6 million, but the net present value of decommissioning liability has decreased to $18.5 million as a result of the increase in the risk-adjusted discount rate from 5% to 7%. Burley is unsure how to account for the oilrigs in the financial statements of Wells for the year ended 30 November 20X9.

Burley owns a 10% interest in a pipeline, which is used to transport the oil from the offshore oilrig to a refinery on the land. Burley has joint control over the pipeline and has to pay its share of the maintenance costs. Burley has the right to use 10% of the capacity of the pipeline. Burley wishes to show the pipeline as an investment in its financial statements to 30 November 20X9.

Required

Discuss with suitable computations where necessary, how the above arrangements and events would be accounted for in the financial statements of Burley.

Professional marks will be awarded in this question for clarity and expression.

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