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It says in the question that INCLUDED in PPE is a coal mine purchased by Minster; it also says that the environmental provision of $150,000 is included in the carrying amount of the mine. Then why, in the PPE account (I’m studying BPP’s solution) is the environmental provision added to the existing carrying value?
Thank you!
Hi,
I am an ACCA student, not a tutor, but here is my answer if it helps.They purchased the coal mine and put it as an asset on their balance sheet, that’s pretty standard, right? Now, they also know they will have to incur some costs to do the environmental clean up after the mine is depleted. These future costs are normally quite high and they are capitalised (processed as an asset on the balance sheet) and depreciated as normal.
so, the entry for such future costs would be:
Environment clean-up (asset) XXX
Environment clean-up provision (liab) XXXHope it helps,
Valentina@valentinat171:
thanks for your reply!
But that wasn’t quite what i was confused about. In the question, it clearly states that the costs have already been included in the carrying value of the mine (already shown in the SOFP), so why is the $150,000 added again in the asset ledger account? It’s this re-treatment of the cost that I don’t follow!Oh, I see. I’ve just looked at it and this is what I think.
the PPE-carrying value working you are looking at starts with the opening balance of 940. This is at 30 September 20X5. The mine was purchased on 1 October 200X5, that’s why they added it.
hope it helps.
ValentinaOhh I see that now; I figured it’d be included in the acquisition cost of the mine, but it seems they’ve segregated the provision balance to calculate the discount unwound plus exclude it from cash flows from investing activities, didn’t think of that.
Thank you! 🙂
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how to treat provisions in statement of cash flows…
the adjustment in minster question is quiet confusing for me :S
please helppppan increase in a provision should be added back to pbt in a statement of cash flows because it’s a non-cash expense
a decrease? should be deducted from pbt – it will have been added in in arriving at pbt but, because it’s non-cash, it needs to be deducted.
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with ref to Dec 2011 Q4 (b) (i) – HKT, Y/E 30/9/2011 & the co. commenced extraction of oil on 1/10/10, the question stated that $50m : costs of licence (10 yr ) / $20m is the PV fixed cost of environmental prov / variable costs of 2 cents per barrel extracted (Y/E 30/9/11: 150m barrels of oil extracted). Discounted rate 8%.
I would like to know how to calculate finance costs for YE 30/9/12 (not 30/9/11). I.e. the second yr. Thanks!
Unroll the environmental provision pv by another year at 8% ( if it’s 20 at the start of the year, then 8% would be 1,600,000. If at the start of this year it’s already 21,600,000 then this year’s unrolling will be 8%*21,600,000 = 1,728,000 so at the end of this second year the provision would now be 23,328,000 ( I’m sorry, I couldn’t work out from your post where I was meant to be starting from, but I think I’ve explained it )
The licence should be amortised over 10 years, presumably straight line
and the royalties of 2c per barrel need to be calculated and accrued until paid
Does that answer it?
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@mikelittle said:
an increase in a provision should be added back to pbt in a statement of cash flows because it’s a non-cash expensea decrease? should be deducted from pbt – it will have been added in in arriving at pbt but, because it’s non-cash, it needs to be deducted.
If the movement is an increase from nil as in this question of Minster, provision increased from nil to 162, I defer that we don’t need to add it back to pbt, but I don’t explain why. Thank you!
If it’s a question about cash flows ( which is where you started this ) then an increase in provision from whatever base to whatever final position DOES need to be added back to profit before tax. The amount has been deducted ( Dr expenses Cr Provision ) But it’s not a CASH FLOW and should therefore be added back to pbt
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