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- 3 Marks
Question
Taini Ltd (Taini) is a listed mining company that operates in the Bono Region with a ten-year term concession commencing on 1 April 2022. After the expiry of the current mining term, Taini has a duty to rehabilitate the area. These rehabilitations are anticipated to cost GH¢12.09 million on April 1, 2032. On April 1, 2022, the present value of the restoration cost was calculated using the company’s 8% cost of capital at GH¢5.6 million.
Required:
In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain the financial reporting treatment of the above transaction in the financial statements of Taini Ltd for the year ended 31 March 2023.
Answer
Any amount recorded at the present value of future cash flows should be adjusted as time passes. The adjustment allows for the fact that the time to maturity is shorter. The adjustment is measured as the opening balance multiplied by the original discount rate.
Here, GH¢5.6 million × 8% gives GH¢0.448 million. This is charged (debited) to profit or loss (finance costs) and increases the present value of the provision (credit entry).
Debit profit or loss GH¢0.448 million
Credit provision for restoration GH¢0.448 million
Alternatively:
DR Non-current Asset GH¢5.6 million
CR Provision for decommissioning cost GH¢5.6 million
(To initially recognise the asset and liability relating to decommissioning cost.)
DR Statement of profit or loss (depreciation) GH¢0.56 million
CR Non-current asset GH¢0.56 million
(To recognise depreciation charge for the year.)
DR Statement of profit or loss (unwound discount) GH¢0.448 million
CR Provision for decommissioning cost GH¢0.448 million
(To recognise the unwound discount on the liability for the year.)
(Total: 3 marks)
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