Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › Dismantling Costs
- This topic has 7 replies, 3 voices, and was last updated 7 years ago by MikeLittle.
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- May 22, 2016 at 6:25 pm #316450
Hi Mike,
Can you please advise why dismantling costs has to be capitalised? What is the rationale behind it? Thanks,
Tess
May 22, 2016 at 7:26 pm #316472Why it’s capitalised? Because Standards say it must be!
Rationale? The entity is entered into a contract to dismantle. This represents an obligation
As an obligation it needs to be recognised immediately at its present value
So Dr Asset
Cr Dismantling ProvisionAs each year goes by, that discounting applied to arrive at present value is unrolled
Dr Finance Costs
Cr Dismantling ProvisionEach year the “today” cost of dismantling is assessed, put into the future and discounted
The “today” cost is likely to change each year – for inflation if nothing else
The entity’s cost of capital may well change too
So each year the provision for dismantling will change for:
1 change in cost of capital / discount rate
2 unrolling of discounted present value because we’re one year closer to the obligation crystallising
3 changes in the estimated “today” cost of dismantlingAll these changes go through statement of profit or loss
Meanwhile the original capitalised dismantling cost is subjected to depreciation over the life of the asset.
The same net effect would have been achieved simply by creating a provision on day 1 and amending that provision through the passage of time
But standards say “This is how you do it” so this is how we do it!
OK?
May 25, 2016 at 12:53 am #316923Fantastic got it now. Million thanks for this!
May 25, 2016 at 8:03 am #316961You’re welcome
August 6, 2017 at 11:52 am #400726Hi Mike,
I am preparing to P2 but my question is related to above- dismantling costs. According to IAS 37 such cost meet criteria of provision and should be capitalised in Plant and equipment along with let’s say oil platform. That’s fine, but I don’t understand this because provisions are liabilities and we capitalise it in the assets?
I have impression that this question is stupid but prefer to ask. Thanks Mike for helping out.
August 6, 2017 at 12:22 pm #400728Not stupid at all
What the IAS is saying is that, instead of debiting an expense account and writing off that expense to profit or loss each year, we instead debit the related asset account with the present value of the dismantling costs
Of course, by pushing up the value of the asset, we also thereby increase the base upon which depreciation is calculated
Specifically to answer your question:
“I don’t understand this because provisions are liabilities and we capitalise it in the assets?”
Yes, provisions ARE liabilities but where’s the debit entry going to go that matches the credit entry that creates the liability?
Where’s the debit?
Answer: it’s in the asset account (instead of being in an expense account)
Is that better?
(If you’re doing P2, I have two questions for you
1) what’s this post doing on P7 Ask ACCA Tutor forum
2) why is this post not on the P2 Ask ACCA Tutor forum)
August 6, 2017 at 7:17 pm #400789Hi, thank you for your response, it make sense now. I post question there because it is related to questions above and to this thread. Just did want to create new thread for the same topic.
August 7, 2017 at 7:03 am #400839OK!
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