The best estimate of the expenditure required is U100 at the end of year 6. The obligation
Question:
The best estimate of the expenditure required is U100 at the end of year 6. The obligation increases by CU 16.67 Le C0100 divided by 6 years), discounted to a current value each year and the initial discount rate is 6%. Subsequently, as a result of a reassessment of prevailing market rates at the beginning of year 4 the discount rate changes to 4%.
The expense recognized each period in profit or loss will be as follows:
At the beginning of year 4, the discount rate has changed to 4%. The obligation at the end of year 3 was CU41.98. The unwinding of the discount would be the increase in the prior year obligation arising from the passage of time, so an amount of CU1.68 (CU41.98 x 4%) would be charged as a finance cost and the additional amount of CU17.98 (being the net present value of the additional 1/6 of the CU 100 provision for the year plus the increase in the provision resulting from the fall in discount rate from 6% to 4%) would increase the provision as an operating item
Elementary Statistics A Step By Step Approach
ISBN: 978-1259755330
10th edition
Authors: Allan G. Bluman