Cobalt Ridge Mining opens a mine that its licence requires it to restore in ten years at an estimated cost of $1,000,000. At the company’s 6 % discount rate the ten-year present-value factor is 0.5584. Record the initial recognition of the decommissioning provision.
Cobalt Ridge Mining opens a mine that its licence requires it to restore in ten years at an estimated cost of $1,000,000. At the company’s 6 % discount rate the ten-year present-value factor is 0.5584. Record the initial recognition of the decommissioning provision.
Answer
Dr Mine Site Asset 558400; Cr Decommissioning Provision 558400
Accounts - Mine Site Asset - Decommissioning Provision - Restoration Expense - Cash - Accretion Expense - Accumulated Depreciation—Mine Site PV = 1,000,000 × 0.5584 = 558,400. The obligation is a cost of acquiring the right to use the site, so it is capitalised into the asset and credited to the provision; nothing is expensed at recognition and no cash moves. Expensing 558,400 — or the undiscounted 1,000,000 — is the trap.
Lyryx IFA Vol 2 §12.5.2; Lyryx IFA Vol 1 §9.3.3; IAS 37 ¶45