Factory subsidence
The subsidence is an indication of impairment in relation to the production facility. Consideration would be required to choose a suitable cash generating unit as presumably the factory would not independently generate cash flows for Farham as a standalone asset. The facility is likely to consist of both the factory and various items of plant and machinery and so it would not be possible to independently measure the cash flows from each of the assets. The recoverable amount of the unit would need to be assessed as the higher of fair value less costs to sell and value in use. Reference to IFRS 13 Fair Value Measurement would be required in estimating the fair value of the facility. For example, by considering whether similar facilities have been on the market or recently sold. Value in use would be calculated by estimating the present value of the cash flows generated from the production facility discounted at a suitable rate of interest to reflect the risks to the business. Where the carrying amount exceeds the recoverable amount, an impairment has occurred. Any impairment loss is allocated to reduce the carrying amount of the assets of the unit. This will be expensed in profit or loss and cannot be netted off the revaluation surplus as the surplus does not specifically relate to the facility impaired. No provision for the repair to the factory should be made because there is no legal or constructive obligation to repair the factory.
Sale of Newall
The disposal of Newall appears to meet the held for sale criteria. Management has shown commitment to the sale by approving the plan and reporting it to the media. A probable acquirer has been found in Oldcastle, the sale is highly probable and expected to be completed six months after the year end, well within the 12-month criteria. Newall would be treated as a disposal group since a single equity transaction is the most likely form of disposal. Should Newall be deemed to be a separate major component of business or geographical area of the group, the losses of the group should be presented separately as a discontinued operation within the consolidated financial statements of Farham.
Assets held for sale are valued at the lower of carrying amount and fair value less costs to sell. The carrying amount consists of the net assets and goodwill relating to Newall less the non-controlling interest’s share. Assets within the disposal group which are not within the scope of IFRS 5 Assets Held for Sale and Discontinued Operations are adjusted for in accordance with the relevant standard first. This includes leased assets and it is highly likely that the leased asset deemed surplus to requirements should be written off with a corresponding expense to profit or loss. Any further impairment loss recognised to reduce Newall to fair value less costs to sell would be allocated first to goodwill and then on a pro rata basis across the other non-current assets of the group.
The chief operating officer is wrong to exclude any form of restructuring provision from the consolidated financial statements. The disposal has been communicated to the media and a constructive obligation exists. However, only directly attributable costs of the restructuring should be included and not ongoing costs of the business. Future operating losses should be excluded as no obligating event has arisen and no provision is required for the impairments of the owned assets as they would have been accounted for on remeasurement to fair value less costs to sell. The legal fees and redundancy costs should be provided for. The early payment fee should also be provided for despite being a future operating loss. This is because the contract is onerous and the losses are consequently unavoidable. A provision is required for $13 million ($2 million + $5 million + $6 million). The $6 million will be offset against the corresponding lease liability with only a net figure being recorded in profit or loss.

Ethics
Accountants have a duty to ensure that the financial statements are fair, transparent and comply with accounting standards. The accountant appears to have made a couple of mistakes which would be unexpected from a professionally qualified accountant. In particular, the accountant appears unaware of which costs should be included within a restructuring provision and has failed to recognise that there is no obligating event in relation to future operating losses. Accountants must carry out their work with due care and attention for the financial statements to have credibility. They must therefore ensure that their knowledge is kept up to date and that they do carry out their work in accordance with the relevant ethical and professional standards. Failure to do so would be a breach of professional competence. The accountant must make sure that they address this issue through, for example, attending regular training and professional development courses.
There are a number of instances which suggest that the chief operating officer is happy to manipulate the financial statements for their own benefit. She is not willing to account for an impairment loss for the subsidence despite knowing that this is contrary to International Accounting Standards. She is also unwilling to reduce the profits of the group by properly applying the assets held for sale criteria in relation to Newall nor to create a restructuring provision. All of the adjustments required to ensure the financial statements comply with International Accounting Standards will reduce profitability. It is true that the directors do have a responsibility to run the group on behalf of their shareholders and to try to maximise their return. This must not be to the detriment, though, of producing financial statements which are objective and faithfully represent the performance of the group. It is likely that the chief operating officer is motivated by bonus targets and is therefore unfairly trying to misrepresent the results of the group. The chief operating officer must make sure that she is not unduly influenced by this self-interest threat.
The chief operating officer is also acting unethically by threatening to dismiss the accountant should they try to correct the financial statements. It is not clear whether the chief operating officer is a qualified accountant but the ethical principles should extend to all employees and not just qualified accountants. Threatening and intimidating behaviour is unacceptable and against all ethical principles. The accountant faces an ethical dilemma. They have a duty to produce financial statements which are objective and fair but to do so could mean that they lose their job. The accountant should approach the chief operating officer and remind them of the basic ethical principles and try to persuade them of the need to put the adjustments through the consolidated accounts so that they are fair and objective. Should the chief operating officer remain unmoved, the accountant may wish to contact the ACCA ethical helpline and take legal advice before undertaking any further action.