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Dear ,
can you please explian the present value of future dismentaling cost calculation through discounted down rate in PPE IAS 16
here is an example for tht
You buy an asset at the start of the year with the following costs:
1) Purchase Price 1,000
2) Legal fees 500
3) Admin costs in negotiating the fee 100
4) Future dismantling cost of 200 in 3 years time
Discount rate is 10%
How much is the cost of the asset at the start of the year? whts the Future dismantling cost show workingMikeLittle, why the legal fees ($500) and the admin costs ($100) are not accounted for to compute the cost of the asset?
Dear Mike ,
Admin cost for negotiating for asset is $100 is period realated but Legal Fee $500 should be included in cost of capital
You have calculated Future dismentaling cost accurate 150
Answer is Total cost of capital $1650The technique of discounting future cash flows is fully covered in the video lectures for F5. May I ask that you watch those videos and then, should you still not understand, post again
Hello Mike,
Could you please explain( with workings) the subsequent effects regarding the capitalised dismantling cost and the corresponding provision?
Would the asset be depreciated (I.e 150/3=50′ new cv 100, double book entry: db CoS 50 cr asset 50) and the provision unwinded (150×0,1= 15; cr ADmin C 15 db 0rovison 15)?
What will be the SFP and the IS look like one year later?
Thanks A
So, take the today’s estimated costs of dismantling, discount by three years at the company’s cost of capital, and make a provision for that amount.
Dr asset, Cr Provision today by the value of that obligation
As each year rolls by, unroll the discount
Dr finance costs, Cr provision
Meanwhile you are depreciating the “inflated” value of the asset over its expected useful life including the capitalised cost of dismantling
At the end of the period, you should have the cost of dismantling in the provision account (as adjusted annually for revisions of that estimate)
Then credit cash ( with the dismantling cost) and Dr the Provision account
Does that help?
Hello Mike,
Thanks. That will effect, that I have 2 effects in the income statement for subsequent periods:
1. Depreciation of the capitalized dismantling asset (db CoS cr Asset)
2. Unwinding the provision (db Admin cost cr provision)Correct?
Thanks
A
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