Dismantling Costs

Why 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 Provision

As each year goes by, that discounting applied to arrive at present value is unrolled

Dr Finance Costs
Cr Dismantling Provision

Each 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 dismantling

All 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?

You’re welcome

Not 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)

OK!