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ACCA Applied Skills · Financial Reporting · Provisions and events after the reporting period

Golf Co has a legal obligation to dismantle a plant at the end of its ten-year life. The present value of the dismantling cost is $50,000 at the date the plant is installed. Which of the following is the correct initial accounting treatment under IFRS Accounting Standards?

Golf recognises a provision at the present value of $50,000 and adds the same amount to the cost of the plant. The cost is then depreciated over ten years, while the discount unwinds each year as a finance cost.

  1. ARecognise a provision of $50,000 and include $50,000 in the cost of the plantCorrect
  2. BRecognise a provision of $50,000 and expense $50,000 immediately in profit or loss
  3. CRecognise nothing now and build the provision up equally over ten years
  4. DDisclose a contingent liability of $50,000 only

Explanation

The obligation arises on installation, so a provision at present value is recognised. The debit is included in the cost of the asset (IAS 16) and depreciated over its life. The discount then unwinds as a finance cost. Building up the provision gradually or expensing it immediately is incorrect.

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