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On page 26 of Kaplan Textbook, it says (under initial measurement of non current assets):
• Dismantling costs – the present value of these costs should be
capitalised, with an equivalent liability set up. The discount on this
liability would then be unwound over the period until the dismantling
costs are paid. This means that the liability increases by the interest
rate each year, with the increase taken to finance costs in the
statement of profit or loss.– You may need to use the interest rate given and apply the
discount fraction where r is the interest rate and n the number
of years to settlement.1 /
(1 + r) raised to power n.What does this entire paragraph mean? I don’t understand the thing about equivalent liability and interest rate. Please do explain, I shall be grateful.
Hi,
It means that if we are obliged to dismantle the asset at the end of its life then the present value of these costs is added to the cost of the asset and an equivalent provision created DR Cost CR Provision
The provision is then unwound each year by applying the interest rate to the outstanding amount of the provision via a finance cost DR Finance cost CR Provison.
Hope this helps.
Thanks
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