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HI Mike!
On 1 October 20X3 Xplorer commenced drilling for oil from an undersea oilfield. The extraction of oil causes damage to the seabed which has a restorative cost (ignore discounting) of $10,000 per million barrels of oil extracted. Xplorer extracted 250 million barrels in the year ended 30 September 20X4. Xplorer is also required to dismantle the drilling equipment at the end of its five year licence. This has an estimated cost of $30 million on 30 September 20X8. Xplorer’s cost of capital is 8% per annum and $1 has a
present value of 68 cents in five years’ time.
What is the total provision (extraction plus dismantling) which Xplorer would report in its statement of financial position as at 30 September 20X4 in respect of its oil operations?1. The answer is $24,532,000
2. In the answer the cost of Restoration of seabed has also been included.
– Could you explain why; especially why it is treated as a provision and not a normal expense (DR exp and CR cash)Thanks.
Have you watched the lectures or read the course notes?
There’s a line in there that says “But where’s the debit” and the answer is, it’s capitalised as part of the cost of the asset and depreciated over the estimated useful life of the asset
The amount capitalised is the present value of the estimated cost of dismantling
Why? Because that’s what IAS says we must do!
Dr Asset, Cr Provision
OK?
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