On 1 July 20X4, Experimenter opened a chemical reprocessing plant. The plant was due tobe active for five years until 30 June 20X9, when it would be decommissioned. At 1 July20X4, the costs of decommissioning the plant were estimated to be $4 million in 5 years’time. Experimenter considers that a discount rate of 12% is appropriate for the calculation ofa present value, and the discount factor at 12% for five years is 0.567.What is the total charge to the statement of profit or loss in respect of the decommissioningfor the year ended 30 June 20X5?
Question
On 1 July 20X4, Experimenter opened a chemical reprocessing plant. The plant was due tobe active for five years until 30 June 20X9, when it would be decommissioned. At 1 July20X4, the costs of decommissioning the plant were estimated to be $4 million in 5 years’time. Experimenter considers that a discount rate of 12% is appropriate for the calculation ofa present value, and the discount factor at 12% for five years is 0.567.What is the total charge to the statement of profit or loss in respect of the decommissioningfor the year ended 30 June 20X5?
Solution
The total charge to the statement of profit or loss in respect of the decommissioning for the year ended 30 June 20X5 can be calculated as follows:
Step 1: Calculate the present value of the decommissioning cost at the start of the plant's operation. This is done by discounting the future decommissioning cost using the discount rate.
The present value (PV) is calculated as follows:
PV = Future Value (FV) x Discount Factor (DF)
Where: FV = $4 million (the estimated decommissioning cost in 5 years) DF = 0.567 (the discount factor at 12% for five years)
So, PV = 2.268 million
This is the amount that should be recognized as a liability on 1 July 20X4.
Step 2: Calculate the unwinding of the discount for the year ended 30 June 20X5. This is done by applying the discount rate to the carrying amount of the liability at the start of the period.
The unwinding of the discount is calculated as follows:
Unwinding of discount = Carrying amount of liability x Discount rate
Where: Carrying amount of liability = $2.268 million (the present value of the decommissioning cost) Discount rate = 12%
So, Unwinding of discount = 0.27216 million
This is the amount that should be charged to profit or loss for the year ended 30 June 20X5 in respect of the decommissioning.
Therefore, the total charge to the statement of profit or loss in respect of the decommissioning for the year ended 30 June 20X5 is $0.27216 million.
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