- 6 Marks
FR – L2 – Q44 – Provisions
Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.
Question
The following information relates to the financial statements of Kumasi Ltd for the year to 31 March 20X4.
The mining division of Kumasi Ltd has a 3 year operating licence from an overseas government. This allows it to mine and extract copper from a particular site. When the licence began on 1 April 20X3, Kumasi Ltd started to build on the site. The cost of the construction was GH¢500,000.
The overseas country has no particular environmental decommissioning laws. In response to the global sustainability agenda, Kumasi Ltd has developed its own policy for sustainable operations. It has made information about this policy public and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be GH¢100,000.
The cost of the site currently shown in the trial balance is GH¢500,000. The company has a cost of borrowing of 10%.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
Find Related Questions by Tags, levels, etc.
- Tags: Decommissioning Costs, Financial Reporting, IAS 37, Non-current Assets, Provisions, Sustainability
- Level: Level 2
- Topic: Provisions
