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Sir, supposing a company constructs a power station costing $100,000 and has an obligation to dismantle the station in 10 years time. the total PV of cost is $15,000. Now, lets say that if 90% of this PV cost relates to dismantling and 10% due to the damage caused,
I understand that the 90% part of the cost will be added to the value of the asset and will be depreciated. The discount will be unwound and charged to profit or loss.
How will this 10 percent be recorded?
– Will the 10% of PV cost be divided over 10 years or the whole amount be charged to profit or loss in the first year?
– Will we unwind the discount for this provision and add it to finance costs?
– If we do spread the whole provision over the useful life of the station then wouldn’t the unwinding be a complex task?Thanks
The way that you have set up the question, the 10% relating to the damage is included within the present value of $15,000
If that’s what you intended, then the damage costs (restoration? restitution?) will be unwound in the ‘normal’ way
If you had not intended the damage estimate to be part of the $15,000 present value and had meant it to be an annual cost of repairing the damage caused THIS YEAR, then it would be expensed each year as we cause the damage
It would be wrong to estimate the total amount of damage that we are likely to cause over the 10 year period and make an increasing provision, and equally wrong to estimate that total and discount it to present value because …
… we haven’t yet caused any damage in the future years still to come. It could be that we’re very careful in those future years and don’t cause any damage at all.
The obligation for reparation caused is not crystallised, so should not be provided
OK?
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