NDL drilled a new oil well, which started production on 1 March 2003. The licence granting permission to drill the new oil well included a clause that requires NDL to 'return the land to the state it was in before drilling commenced'.
NDL estimates that the oil well will have a 20-year production life. At the end of that time, the well will be decommissioned and work carried out to reinstate the land. The cost of this decommissioning work is estimated to be $20 million.
Required:
As the trainee management accountant, draft a memo to the production manager explaining how NDL must treat the decommissioning costs in its financial statements for the year to 31 March 2003. Your memo should refer to appropriate International Accounting Standards.