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

Tandor Co operates an offshore platform and must remove it at the end of its 10-year life. It is obliged to do so because of installing it. At 1 January 20X5 the estimated future cost of decommissioning is $10 million and the discount rate is 5% (discount factor for 10 years is 0.614). Which statement correctly reflects the accounting at initial recognition and for the first year-end?

Tandor recognises a discounted provision of $6.14 million, capitalised as part of the platform's cost, and charges the annual unwinding of discount, about $0.307 million in year one, to finance costs in profit or loss.

  1. ARecognise a provision of $10 million, expensed immediately to profit or loss
  2. BRecognise a provision of $6.14 million, capitalised as part of the platform cost, with an unwinding of discount of about $0.307 million charged to finance costs in year oneCorrect
  3. CRecognise no provision until the platform is removed, and disclose a contingent liability
  4. DRecognise a provision of $6.14 million, with the unwinding of discount of about $0.307 million added to the platform cost

Explanation

The obligation arises on installation, so the present value ($10m x 0.614 = $6.14m) is recognised and added to the asset cost (IAS 16). The discount unwinds each year as a finance cost: $6.14m x 5% = $0.307m. Capitalising the unwinding is wrong, and the undiscounted amount is wrong because the time value of money is material.

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