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Electron – Pilot Paper

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Electron – Pilot Paper

  • This topic has 2 replies, 2 voices, and was last updated 12 years ago by MikeLittle.
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  • May 12, 2013 at 3:24 pm #125258
    acca13
    Member
    • Topics: 57
    • Replies: 175
    • ☆☆☆

    Question:
    Electron has recently constructed an ecologically efficient power station. A condition of being granted the operating
    licence by the government is that the power station be dismantled at the end of its life which is estimated to be 20
    years. The power station cost $100 million and began production on 1 July 2005. Depreciation is charged on the
    power station using the straight line method. Electron has estimated at 30 June 2006, it will cost $15 million (net
    present value) to restore the site to its original condition using a discount rate of five per cent. Ninety-five per cent of
    these costs relate to the removal of the power station and five per cent relates to the damage caused through generating
    energy.

    Answer: Power Station
    Under IAS37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be made at the balance sheet date for the
    discounted cost of the removal of the power station because of the following reasons:
    (i) the installation of the power station creates an obligating event
    (ii) the operating licence creates a legal obligation which is likely to occur
    (iii) the costs of removal will have to be incurred irrespective of the future operations of the company and cannot be avoided
    (iv) a transfer of economic benefits (ie the costs of removal) will be required to settle the obligation
    (v) a reasonable estimate of the obligation can be made although it is difficult to estimate a cost which will be incurred in
    twenty years time (IAS 37 says that only in exceptional circumstances will it not be possible to make some estimate of the
    obligation) The costs to be incurred will be treated as part of the cost of the facility to be depreciated over its production life. However, the costs relating to the damage caused by the generation of energy should not be included in the provision, until the power is generated which in this case would be 5% of the total discounted provision. The accounting for the provision is shown in Appendix 1.

    May 12, 2013 at 3:25 pm #125259
    acca13
    Member
    • Topics: 57
    • Replies: 175
    • ☆☆☆

    According to IAS37, costs relating to the damage caused by the extraction should not be included in the provision until the gas is extracted. But doesn’t the question say production started on 1 july 2005? So shouldn’t the damage cost be capitalised now?

    May 13, 2013 at 4:06 pm #125348
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    Hi

    I think the solution here is that the provision for damage will be made at the end of each year’s production whereas the provision for decommissioning is an obligating event with effect from the date the power station is completed.

    If you think about it, the damage provision will only kick in on 30 June, 2006 ie after the first year’s production

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