Sep/Dec 2017 2(a) Decommissioning Provision

This extract from the question “The estimate of the decommissioning costs has been based on price levels and technology at the reporting date” effectively tells us that the estimate is based on assumptions

If you are asked (in life) to make an estimate of some future expense, you can’t do that until you know some background about the matter, even if it’s only the equivalent figure from a prior period

Now we have that background knowledge, we can make an assumption as to how that expense item will behave relative to the base point

If necessary (as in your post) we need also to make assumptions about such other matters as interest rates

We should know the number of years in advance when that obligation matures and we should be able to discover the today equivalent cost of performing the obligation

So now we have:

base information (last year’s figure)
the ‘today’ cost
the number of years until we are faced with performing the obligation

and we have made assumptions that:

cost of capital / discount rate to be applied will be x%
the expense will bear some relation to the base figure

Combining all this data we should be able to arrive at a reasonable estimate of the future expense and that then becomes our provision figure

Never before, in all my years of teaching this stuff, have I ever been asked to differentiate amongst provisions, estimates and assumptions

And it’s highly improbable that you will ever be asked and it’s equally highly probable that a marker would be sufficiently concerned about which word was used in a P7 answer … particularly if English were not your first language

OK?