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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Vale Co operates an oil rig and, on installing it this year, became legally obliged to dismantle it in 10 years. Under IAS 37 and IAS 16, which statement about the dismantling costs is correct?

Recognise a provision at the present value of the expected dismantling costs and capitalise the same amount as part of the asset's cost. The installation creates a present legal obligation, and the discount unwinds as a finance cost over time.

  1. ANo provision is recognised until the dismantling takes place
  2. BA provision for the present value of the costs is recognised, and the same amount is added to the cost of the assetCorrect
  3. CThe undiscounted costs are disclosed as a contingent liability only
  4. DThe costs are recognised as an expense in profit or loss immediately

Explanation

Installation is the past event creating a legal obligation, so a provision is made at the present value of the expected costs. The debit goes to the cost of the asset, which is then depreciated, not to profit or loss. The unwinding of the discount is later charged as a finance cost.

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