- This topic has 2 replies, 2 voices, and was last updated 7 years ago by
.
- Posts
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 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 untill 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?
1.there should be a provision classified as a current liability for $5 million
2.there should be a provision classified as a current liability for $25 million
3.there should be a provision classified as a non-current liability for $5 million
4.there should be a provision classified as a non-current liability for $25 million
Given corret answer is 2, but there is a contrast tutorial note and correct answer.20million isn’t present obligation that’s why i think correct answer 1 or 3 but not sure about non-current or current..pls explain it
Thanks in advanceSorry, but I didn’t catch what you mean(( Given explanation confused me..
Explanation as follows:
“Tutorial not: IAS 37 requires that a provision should be recognised when it’s probable that there will be a future outflow of economic benefits as a result of a past event.
Based upon the licence terms,damage has already been caused which will cost $5 million to rectify in 20X7 or later.This should be recognised and classified as a non-current liability.If damage has not yet been caused,there is not yet an obligation to rectify it..Therefore at 31 August 20X4 no provision can be made for expected future damage.”
Sir, 2nd answer says 25 million current liability as a provision..but 20 million isn’t current i think..The correct answer is indeed 1 – their explanation is not correct.
There should be a provision of $5 million as we can only provide for the damage already caused that needs to be made good under the operating licence. We cannot provide for the $20 million as this damage has not been caused and we could terminate the operating licence and so would not have caused the damage and so not need to make it good.
The provision should then be a non-current liability as given that the operations are due to continue past 20X7 and today is 20X4 then we won’t need to be making any payment for more than a year.
- The topic ‘Provision,contingent liability’ is closed to new replies.