Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Dismantling costs (IAS 16)

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- July 20, 2023 at 8:52 am #688613
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.

July 24, 2023 at 8:01 am #688784Hi,

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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