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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Halden Group must restore a mine site. The restoration obligation of $5m (present value) arose on extraction. At the next year end, a revised estimate of future cash outflows increases the provision's present value by $1m, and the related asset is a mine still in use with a carrying amount of $30m (cost model). Which treatment applies under IFRIC 1 and IAS 37?

The $1m increase is added to the cost of the mine asset and depreciated prospectively, with the asset reviewed for impairment if there are indications. IFRIC 1 requires changes in estimate to adjust the asset under the cost model rather than being expensed immediately.

  1. ARecognise the $1m increase in profit or loss as an expense
  2. BAdd $1m to the cost of the mine asset and test the asset for impairment if indicatedCorrect
  3. CRestate the prior year's comparatives for the $1m
  4. DIgnore the change, because estimates are only changed on closure

Explanation

Under IFRIC 1, changes in the decommissioning liability from revised estimates or discount rates are added to or deducted from the asset cost under the cost model. Depreciation is then adjusted prospectively, and the revised carrying amount is considered for impairment. Profit or loss is affected only by the unwinding of the discount and depreciation.

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