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MTPs QUESTIONS

Q8. (March & October 19 – 10 Marks)

An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started

operating on April 1, 2015. The plant has a useful life of 40 years. Its initial cost was Rs. 1,20,000. This
included an amount for decommissioning costs of Rs. 10,000, which represented Rs. 70,400 in estimated cash
flows payable in 40 years discounted at a risk-adjusted rate of 5 per cent. The entity‖s financial year ends on
March 31. Assume that a market-based discounted cash flow valuation of Rs. 1,15,000 is obtained at March 31,
2018. It includes an allowance of Rs. 11,600 for decommissioning costs, which represents no change to the
original estimate, after the unwinding of three years‖ discount. On March 31, 2019, the entity estimated that,

as a result of technological advances, the present value of the decommissioning liability has decreased by Rs.
5,000. The entity decides that a full valuation of the asset is needed at March 31, 2019, in order to ensure
that the carrying amount does not differ materially from fair value. The asset is now valued at Rs. 1,07,000,
which is net of an allowance for the reduced decommissioning obligation.

How will the entity account for the above changes in decommissioning liability if it adopts a revaluation
model?

SOLUTION

(a) At March 31, 2018: Rs.
Asset at valuation (1) 1,26,600
Accumulated depreciation Nil
Decommissioning liability (11,600)
Net assets 1,15,000

Retained earnings (2) (10,600)
Revaluation surplus (3) 15,600

Notes:

(1) Valuation obtained of Rs. 1,15,000 plus decommissioning costs of Rs. 11,600, allowed for in the valuation but
recognised as a separate liability = Rs. 1,26,600.
(2) Three years‖ depreciation on original cost Rs. 1,20,000 × 3/40 = Rs. 9,000 plus cumulative discount on Rs.
10,000 at 5 percent compound = Rs. 1,600; total Rs. 10,600.
(3) Revalued amount Rs. 1,26,600 less previous net book value of Rs. 1,11,000 (cost Rs. 120,000 less
accumulated depreciation Rs. 9,000).

The depreciation expense for 2018-2019 is therefore Rs. 3,420 (Rs. 1,26,600 × 1/37) and the discount expense
for 2019 is Rs. 600. On March 31, 2019, the decommissioning liability (before any adjustment) is Rs. 12,200.
However, as per estimate of the entity, the present value of the decommissioning liability has decreased by Rs.
5,000. Accordingly, the entity adjusts the decommissioning liability from Rs. 12,200 to Rs. 7,200.

The whole of this adjustment is taken to revaluation surplus, because it does not exceed the carrying amount
that would have been recognised had the asset been carried under the cost model. If it had done, the excess
would have been taken to profit or loss. The entity makes the following journal entry to reflect the change:

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