- June 29, 2021 at 12:05 am #626551shaunak22Participant
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If only the cost incurred in bringing the asset into the present working conditions are to be capitalized then why are dismantaling cost capitalized?
and even if it is for some reason capitalized why is it also shown in laibilty and why that liabilty is increased by the interest rate given ?June 30, 2021 at 7:30 pm #626729P2-D2Keymaster
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Think of the dismantling costs from the perspective of a provision first. We recognise a provision for the dismantling costs as we have a legal/constructive obligation and is is recognised at present value. The other side of the credit entry would usually be to profit or loss, however as the costs are directly attributable to the asset itself then we capitalise them and depreciate them to match the cost of the dismantling to the period to which we get the benefit from the asset. It would not meet the matching concept to recognise the full expense at the point of dismantling as we will have had all the benefit from using the asset already.
Once the provision is recognised at present value then it is unwound, with each year there being an increase in the value of the provision and a finance cost recognised.
Hope that clears it up for you.
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