01 April 2024
cost of an item of property plant & equipment comprises:
the initial estimate of the cost of dismantling, removing the item and restoring the site on which it is located, referring to as decommissioning, restoration and similar liabilities; the obligation for which an Enterprise 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 the period.
primarily explaination required from "or as a consequence......"
06 July 2024
The phrase "or as a consequence of having used the item during a particular period for purposes other than to produce inventories during the period" primarily refers to liabilities that arise due to the usage of the property, plant, or equipment (PPE) for purposes other than inventory production. Here’s a detailed explanation:
1. **Liabilities Arising from Usage**: When an enterprise uses an item of PPE, especially for activities other than inventory production (such as manufacturing goods for sale), it may incur liabilities related to the eventual decommissioning, restoration, or other obligations associated with the item. These liabilities are typically incurred over time as the asset is used and can include costs for dismantling the asset, removing it, and restoring the site once its useful life ends.
2. **Examples of Liabilities**: Let’s consider an example where a manufacturing company uses heavy machinery to produce goods. Over time, this machinery might wear out and require dismantling and removal, with the site restored to its original condition. The cost estimation for these activities (decommissioning, removal, and restoration) would be part of the total cost of the machinery. These obligations arise not just at the point of acquisition but also during the operational life of the asset as it incurs wear and tear.
3. **Recognition in Cost**: According to accounting standards (like IFRS and GAAP), these liabilities are recognized as part of the cost of the asset because they represent future economic benefits that the enterprise expects to derive from its usage of the asset. By including these liabilities in the cost of the asset, the enterprise ensures that the total cost of ownership is appropriately reflected in its financial statements over the useful life of the asset.
In summary, "or as a consequence of having used the item during a particular period for purposes other than to produce inventories during the period" emphasizes that the costs associated with decommissioning, removal, and restoration are recognized not only at the acquisition stage but also as they accrue during the operational life of the property, plant, or equipment. This ensures that the enterprise accurately reflects the total economic impact of using the asset in its financial reporting.
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