Present value technique: decommissioning liability LO4 On 1 July 2019, Emu Ltd assumed a decommissioning
Question:
Present value technique: decommissioning liability LO4 On 1 July 2019, Emu Ltd assumed a decommissioning liability in a business combination. The entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be 10 years. If Emu Ltd were contractually allowed to transfer its decommissioning liability to a market participant, Emu Ltd considers that the market participant would need to take into account the following inputs. • Expected labour costs: $131 250 • Allocation of overhead costs: $105 000 • Contractor’s profit margin: 20% of total labour and overhead costs • Inflation factor: 4% p.a. for 10 years • Market risk premium paid for undertaking risks involved: 5% • Time value of money, represented by the risk‐free rate: 5% • Non‐performance risk including Emu Ltd’s own credit risk: 3.5% Required Determine the fair value of the decommissioning liability at 1 July 2019 using the present value technique.
Step by Step Answer:
Financial Reporting
ISBN: 978-0730363361
2nd Edition
Authors: Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes