ExpertMedium2 marksMultiple Choice
ACCA · Question 09 · IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Section A
WindPower constructed an offshore wind farm which commenced operations on 1 January 20X5. The local government requires WindPower to dismantle the turbines at the end of their 20-year useful life. The estimated cost of dismantling in 20 years' time is $15 million. The appropriate risk-adjusted discount rate is 6%. The present value of $1 in 20 years at 6% is 0.3118.
What is the total charge to the Statement of Profit or Loss for the year ended 31 December 20X5 in relation to this decommissioning provision? (Assume straight-line depreciation for the asset).
Section A
WindPower constructed an offshore wind farm which commenced operations on 1 January 20X5. The local government requires WindPower to dismantle the turbines at the end of their 20-year useful life. The estimated cost of dismantling in 20 years' time is $15 million. The appropriate risk-adjusted discount rate is 6%. The present value of $1 in 20 years at 6% is 0.3118.
What is the total charge to the Statement of Profit or Loss for the year ended 31 December 20X5 in relation to this decommissioning provision? (Assume straight-line depreciation for the asset).
Answer options:
A.
$233,850
B.
$280,620
C.
$514,470
D.
$750,000
How to approach this question
1. Calculate the initial provision (PV of $15m). 2. Capitalize this amount into the cost of the asset. 3. Calculate annual depreciation on this capitalized amount. 4. Calculate the finance cost (unwinding of the discount) on the provision for the year. 5. Add depreciation and finance cost together.
Full Answer
C.$514,470✓ Correct
1. Initial Provision on 1 Jan 20X5 = $15,000,000 x 0.3118 = $4,677,000. This is added to the cost of the wind farm.
2. Depreciation charge for 20X5 = $4,677,000 / 20 years = $233,850.
3. Finance cost (unwinding of discount) for 20X5 = $4,677,000 x 6% = $280,620.
4. Total charge to P&L = $233,850 + $280,620 = $514,470.
Common mistakes
Forgetting that the provision creates both a depreciation charge (operating expense) and an unwinding of discount charge (finance cost).
Practice the full ACCA FR — Financial Reporting Practice Exam 5
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