• 6 Marks

CR – Nov 2023 – L3 – Q2b – IAS 37: Provisions, Contingent Liabilities and Contingent Assets

Advice on the depreciation adjustment and decommissioning cost for a plant in the books of Odehyieba Plc, including financial statement impacts.

entity has decided to reduce the remaining useful life of the plant by 5 years. For the current year ended 30 April 2023, no entry has been made for depreciation on the plant, neither has there been any adjustments to decommissioning cost.

Item Amount (GH¢)
Carrying value of the plant 6,000,000
Remaining useful life 11 years
Revaluation surplus 960,000
Provision for decommissioning 1,600,000

There is no change in the expected decommissioning cost except for the timing due to the change in useful life. The applicable discount rate is 11% per annum. Odehyieba Plc has a policy of transferring revaluation surplus to retained earnings only upon disposal.

Required:
Advise on the appropriate financial reporting treatment for the above in the books of Odehyieba Plc in the 2023 financial statements for the year ended 30 April 2023. (6 marks)

b)

For Odehyieba Plc, given the significant technological changes and adjustments to the plant’s remaining useful life, the following financial reporting treatments apply:

  1. Depreciation adjustment:
    • The carrying value of the plant is GH¢6,000,000 with a remaining useful life of 11 years, which needs to be reduced by 5 years, making the revised useful life 6 years.
    • Revised depreciation charge: GH¢1,000,000 (GH¢6,000,000 / 6).
  2. Decommissioning cost adjustment:
    • The provision for decommissioning is GH¢1,600,000, which remains unchanged, but the timing affects the discount rate.
    • The decommissioning cost adjusted for the revised useful life using the 11% discount rate results in a liability increase of GH¢136,000.
  3. Revaluation surplus:
    • The revaluation surplus of GH¢960,000 should remain in the revaluation reserve until the plant is disposed of.

Journal Entries:

  • Statement of profit or loss (extract):
    • Finance cost: GH¢297,000 (interest on decommissioning provision)
    • Depreciation: GH¢1,000,000
    • Increase in provision: GH¢136,000
  • Statement of financial position (extract):
    • Non-current assets: Plant = GH¢5,000,000 (adjusted carrying value)
    • Non-current liabilities: Provision for decommissioning costs = GH¢2,993,000

(6 marks)

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