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Hi Mike,
In the answer to this question ACCA add the environmental clean-up costs to the licence fee for an oil well for amortization. Please could you tell me why the environmental costs were included in the amortization? IAS 37 is mentioned earlier in the question but I don’t think IAS37 mentions amortization of provisions?
Thank you,
Dan
It’s a “peculiarity” of the IAS. When a company is faced with an obligation in the future to restore a site / location after the company has finished its business there, the anticipated costs of site clearance today are projected into the future and discounted to present value.
That amount ( the present value of the expense of site restoration ) is added to the value of the asset which is to be used on the site where we are going to have to clear up in a number of years’ time. In my lecture example, it’s a nuclear power station with a 20 year life and de-commissioning costs of ( present value ) $300 million. The $300 million is added to the costs of construction ( $1,000 million ) and $1,300 million is depreciated over 20 years.
The question you ask is about the site clearance costs of an oil well. It’s not our well, we operate it under licence. But still, at the end of the licence period, we have the obligation to clean up. So, add the present value of that future obligation to the cost of the licence and then amortise over the life of the licence.
Does that answer it?
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