accounting treament question ias 16 and ias 37?
please can you help to answer this question
The company has established a new manufacturing operation in relation to which the following payments have been made
Feasibility study and site explorations costs £100,000
Purchase of property £400,000
Construction of related driveway, parking and delivery facilities£50,000
The facility will have a useful like of 25 years. At the end of that time the SMT environmental law requires that the site be decommissioned and the new present value of the cost of doing so has been estimated at £200,000
Q) Recommend with reasons, appropriate accounting treatments for each item listed above (Note ISAB definition of assets liabilities, together with requirements of IAS 16 PPE and IAS 37 Provisions, contingents liabilities and contingents Assets are relevant)
Feasibility studies are costs associated with the planning stages, and, while necessary for good governance of an entity’s resources, may not be necessary for the construction of the final asset. These are expensed and not capitalised. (Refer to the PwC guide attached)
Purchase of property and related driveway are capitalized.
(IAS 16.16(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.)
Site decommissioning costs at net present value are capitalised and recognised as a provision at the same time.
(IAS 16.16(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.) Provisions arise from a number of different types of events. The more common of these arise from obligations in relation to: manufacturer’s warranties, site decommissioning, refunds, guarantees, onerous contracts, outstanding litigation and business restructuring.
IAS 37.19 – Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the enterprise is obliged to rectify damage already caused.
IAS 37.45 – Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation.
Testing requirements for PPE
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