PPE – initial measurement

You would be need to discount the cost of dismantling when the question says things like for example

A company starts using an oil rig at a cost as follows:
Construction 200
Installation 100
The oil starts pumping at the year start. At this point the company sign a licence
with the government agreeing to dismantle the rig when the oil runs out which is
estimated to be 20 years. The cost of dismantling the rig is estimated at $120m
and the discount rate is 10%..

1. To use the asset you have company have signed the licence with the government to dismantle the rig. So the company have a legal obligation to dismantle the Rig in 20 years time. So you need to capitalize the dismantling cost on top of the construction cost

2. The cost of dismantling in 20 years time is estimated times is 120m but to capitalize it, you need the present value of $120m in order to include it in initial measurement of PPE that you will calculate by discounting.

You will discount it as : $120/(1.10) power 20 years

So the initial cost will be:

Construction 200
Installation 100
Dismantling 17.8
Total 317.8

You may wanna look at a practice question on the same concept that

There is a question Electron in pilot paper that tests the same concept in second paragraph.

https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/p2int_2006_dec_ppq.pdf