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Driller Co undertakes oil and gas exploration activities. One of the conditions of the operating licence is the 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 Aug 2004, Driller Co estimated that the cost of rectifying damage already caused at the current exploration sites at $5million. At that date Driller Co estimated that the cost of rectifying expected future damage at current exploration sites at an additional $25 million. Driller Co estimated that all current exploration sites will operate until 2007 or beyond that date.
How should this information be reported in the financial statements of Driller Co year ended Aug 2004?A. There should be a provision classified as a current liability for $5million.
B. There should be a provision classified as a current liability for $26million.
C. There should be a provision classified as a non current liability for $5million.
D. There should be a provision classified as a non current liability for $25 million.At the back of the book the answer is B. How can it be B when it’s a non current liability?? Shouldn’t the answer be D?
It is a tricky one and I can understand why you prefer answer D.
However the problem is that although the sites will operate until 2007 or beyond, we do not know when the damage will occur (and therefore when the costs will be payable). That is the reason why (to be prudent) it is being treated as a current liability.
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