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Decommissioning Provision

Tania Lockas's Profile

Hi there,

I am in need of some help :)!

I have a fully depreciated asset. Recently, my company decided to extend its use until 2029. Also, the interest rate has changed significantly.

Estimated decommissioning cost in today's dollar is $5m.
Inflation rate: 1.1%
Interest (or discount rate): 3.4%
Number of periods: 8

My approach was to get the $5m and recognise the inflation rate, i.e.
=5m*((1+0.011)^8) = 5,457,317 (as of 30/6/21)

I use this amount as my starting point for my present value calculation, i.e.
=5,457,317/((1+3.4%)^0) = 5,457,317 (as of 30/6/2021)
=5,457,317/((1+3.4%)^1) = 5,277,870 (as of 30/6/2022)
[...]
=5,457,317/((1+3.4%)^8) = 4,176,523 (as of 30/6/2029)

My journal for 30/6/2021 would be
DR finance cost (5,547,317*3.4%) 188,609
CR decommissioning provision 188,609

Can anyone please confirm if I am on the right track (in particular with the inflation treatment)?

Many thanks in advance for your help!

Cheers,
Tania

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