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Hello , I am trying to understand in a situation such as part one of this question, why is it that the provision (decontamination cost) has to be shown as a finance cost when its already being added to the asset’s cost and then depreciated. I know it has to be done…I just don’t understand the reasoning behind it. Somehow it seems to be double counting to me. Can you please explain to me ? thanks
Yes, the provision for decontamination is added to the value of the asset and depreciated. However, the amount added is the PRESENT VALUE of the future payment. As each year goes by, we have to unroll the discounted amount so that, when the time comes to decontaminate, we have the full amount necessary shown in the provision account
The unrolling of the discount entry is debit finance costs and credit the provision
Does that explain it for you?
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