Nette, a public limited company, manufactures mining equipment and extracts natural gas. Nette has recently constructed a natural gas extraction facility and commenced production one year ago (1 June 20X3). There is an operating licence given to the company by the government which requires the removal of the facility at the end of its life which is estimated at 20 years. Depreciation is charged on a straight line basis. The cost of the construction of the facility was $200 million and the net present value at 1 June 20X3 of the future costs to be incurred in order to return the extraction site to its original condition is estimated at $50 million (using a discount rate of 5 per cent per annum). Of these costs, 80 per cent relate to the removal of the facility and 20 per cent to the rectification of the damage caused through the extraction of the natural gas. The auditors have told the company that a provision for decommissioning has to be set up.

Required:

Explain, with reasons and suitable extracts/computations, the accounting treatment of the above situation in the financial statements for the year ended 31 May 20X4.