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Driller Co undertakes oil and gas exploration activities. One of the conditions of the operating licence is that Driller must make good any damage caused to the local environment as a result of its exploration activities. As at the year-end date of 31 August 20X4, Driller Co estimated that the cost of rectifying damage already caused at current exploration sites at $5 million.At that date Driller Co estimated that that the cost of rectifying expected future damage at current exploration sites at an additional $20 million. Driller Co also estimated that all current exploration sites will operate until 20X7 or beyond that date.
How should this information be reported in the financial statements of Driller Co for the year ended 31 August 20X4?
A) As a provision classified as a current liability for $5 million
B) As a provision classified as a current liability for $25 million
C) As a provision classified as a non-current liability for $5 million
D) As a provision classified as a non-current liability for $25 million
Dear tutor, Clcould you pls explain this question? Thanks in advanceWhy are you attempting a question for which you do not have an answer? You should be using a Revision Kit – it has answers and explanations.
At present they only owe for rectifying damage that has already been caused and it is estimated to cost $5m. Therefore they need to make a provision for this amount. They will need to pay soon and so it should be shown in the SOFP as a current liability.
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