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Hi sir,
In Q.13.b) Royan from the BPP’s latest revision kit, why is there no treatment for the 2nd paragraph of the b) part in the suggested answers?
The 2nd paragraph is “A market exists for the dismantling of an oil platform…”What would be the treatment for that?
Hi,
The dismantling of the platform creates an obligation in the future so we provide for it now but include the present value of the dismantling costs in the value of the asset. So,
DR PPE
CR ProvisionThe provision is the unwound to its final value over the time to dismantling the platform. So,
DR Finance costs
CR ProvisionHope that helps.
Thanks
Okay I understood the journal entries.
I am having confusion in the probability amounts where it says that there is a 40% probability that the PV will be $129m and 60% probability that PV will be $140m and there is a risk that costs will increase by $5m.How do I account for this?
This question is covering the old exposure draft that was examined as an older current issues question so don’t get too hung up about it.
All they have done is discuss the various possible different proposals. The one you seem to be referring to is where they have taken a weighted averagae of the outcomes and then incoporporated the additional risk of the increase in costs by adding it on.
Hi, what means by “Royan cannot operate the oil without incurring an obligation to pay dismantling costs at the end of ten years, the expenditure also enables it to acquire economic benefits . Therefore, Royan should recognise an asset of $105m” ?
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