[acca-keep-going]

Hi Mister,

I still don’t get it why then $3M (150*0.02) of the variable provision isn’t included in the initial recognition of the license cost, but is charged to P/L instead?

Thank you.

[acca-keep-going]

Hi Mr,

I did a consulting with ChatGPT and it provided a different and yet convincing explanation:
1. At initial recognition, only the fixed amount clean-up cost is recognised for the provision: $20M, which forms part of the license cost initial recognition, since $20M is a reliable estimate and arises from the license agreement obtained in the past.
2. The variable amount clean-up cost does not form part of the provision at initial recognition, because the extraction amount is not certain at year start and the extraction activity will only occur in the future during the year.
3. However, at the year end, the variable amount clean-up cost estimate becomes reliable since the information regarding extraction activity for the year is available. It now forms part of the carrying amount of the provision at the year end when it becomes an obligation.
4. The carrying amount of the variable clean-up provision is calculated as: $0.02 * 1.08 * 150 = $3.24M, with 1.08 being the factor to bring $0.02 per barrel to the current value at year end. $3.24M will be charged to P/L as extraction cost.
5. The carrying amount of the fix-ed clean-up provision is calculated as: $20 + $20*8% finance cost = $21.6M, with $1.6M being the finance cost for the year.
6. The total carrying amount of the provision at year end will be: $21.6 + $3.24 = $24.84M.

Considering that ACCA’s study hub occassionally has errors, am I correct to think that the solution offered by ChatGPT is more reasonable? Or do we need to bring the $0.02 per barrel unit variable cost to the year end current value? Is $0.02 * 150 = $3M enough for the variable provision at year end?

Thanks.

[acca-keep-going]

Hi Mister,

I am confused. Why should we adjust the revenue line in the current year by $0.8 million, if the current year’s revenue isn’t overstated?

Thanks.

[acca-keep-going]

Thank you sir. So if the revaluation reduction is charged to PL, does that mean the opposing entry in respect to deferred tax asset is also posted to PL?

[acca-keep-going]

Thank you. I will follow the examiner’s steps then when I encounter such questions in the exam.

[acca-keep-going]

Thank you. I tried again and this time calculate the tax separately. I get the difference now.

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