MGT401 GDB 1 Solution and Discussion
Total Marks 3
Starting Date Tuesday, January 21, 2020
Closing Date Monday, January 27, 2020
Question Title IAS37
An offshore oil exploration company is required by its license to remove the rig and restore the seabed. Management has estimated that 85% of the eventual cost will be incurred in removing the rig and 15% through the extraction of oil. The company’s practice on similar projects has been to account for the decommissioning costs using the ‘unit of production’ method whereby the amount required for decommissioning was built up year by year, in line with production levels, to reach the amount of the expected costs by the time production ceased. Keeping in mind the past experiences, the company has created the provision for this purpose.
Being a financial analyst, you are required to analyze the above decision of the company by answering following questions:
Is there a present obligation as a result of a past event? Is there a probable transfer of economic benefits? Can the amount of the outflow be reasonably estimated?
Is there a probable transfer of economic benefits?
A transfer of economic benefits is regarded as probable if the event is more likely than not to occur – the probability that the event will occur is greater than the probability that it will not.
Is there a present obligation as a result of a past event?
A present obligation exists as a result of past events only if: the entity has already obtained economic benefits or taken an action; and. as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.