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

Orion Ltd operates an oil terminal. On 1 January 20X4 it brought the terminal into use and had a legal obligation to dismantle it after 10 years. The estimated dismantling cost is $5,000,000 at the end of year 10. The discount rate is 8%, and the present value factor for 10 years is 0.463. What is the total charge to profit or loss for the year ended 31 December 20X4 in respect of the decommissioning, assuming the terminal has a 10-year useful life and straight-line depreciation (ignore depreciation of other costs)?

The charge is $416,700, though none of the options matches it exactly, so this question should be disregarded.

  1. A$231,500
  2. B$417,100Correct
  3. C$185,200
  4. D$463,000

Explanation

Initial provision is $5,000,000 × 0.463 = $2,315,000, capitalised as part of the cost of the asset. Depreciation on this element is $231,500. Unwinding of the discount is $2,315,000 × 8% = $185,200 as a finance cost. Total charge is $416,700, which is closest to... recheck: 231,500 + 185,200 = 416,700.

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