On 1 July 2024, Adnap Ltd assumed a decommissioning liability in a business combination. The entity is
Question:
On 1 July 2024, Adnap 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 Adnap Ltd were contractually allowed to transfer its decommissioning liability to a market participant, Adnap Ltd considers that the market participant would need to take into account the following inputs.
- Expected labour costs: \(\$ 162500\)
- Allocation of overhead costs: \(\$ 125000\)
- Contractor's profit margin: \(20 \%\) of total labour and overhead costs
- Inflation factor: \(\mathbf{3 \%}\) 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 Adnap Ltd's own credit risk: 3.5\%
Required Determine the fair value of the decommissioning liability to Adnap Ltd at 1 July 2024 using the present value technique.
Step by Step Answer:
Financial Reporting
ISBN: 9780730396413
4th Edition
Authors: Janice Loftus, Ken Leo, Sorin Daniliuc, Belinda Luke, Hong Nee Ang, Mike Bradbury, Dean Hanlon, Noel Boys, Karyn Byrnes