ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies
Ferris Co must restore a site at the end of a 5-year licence. Costs of $200,000 are expected, and the obligation arises when the site is first prepared for use. The discount rate is 10% (5-year discount factor 0.621). Ferris capitalises the cost as part of the asset under IAS 37 and IAS 16. What is the finance cost for the first year, after the provision is initially recognised at present value?
The first-year finance cost is $12,420. The restoration provision is initially recognised at present value of $124,200 ($200,000 x 0.621), and the unwinding of the discount is 10% of that figure, charged as a finance cost.
- A$20,000
- B$12,420Correct
- C$124,200
- D$0
Explanation
Initial provision is $200,000 x 0.621 = $124,200, debited to the asset and credited to provision. The discount unwinds each year as a finance cost: $124,200 x 10% = $12,420. $20,000 wrongly applies 10% to the undiscounted amount.
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