Ryan constructed an ecologically-efficient power station at a cost of RM1,000 million and began production on 1 January x4. Its economic life is 20 years. The power station has to be dismantled and the site restored to its original condition at the end of its economic life. Ryan estimated on 31 December x4 that the present value of the dismantling cost will be RM150 million (using a discount rate of 5%). Ninety-five percent of these costs relate to the removal of the power station and five percent relates to damage caused through generating energy. 

Ryan also purchased an oil company, XY during the year. As part of the sale agreement, oil has to be supplied to the company's former holding company at an uneconomic rate for five years. The loss estimated to be sustained over the five years is RM270 million. At the same time, XY is exposed to environmental liabilities arising out of its past obligations mainly due to soil erosion though currently there is no legal obligation to carry out any restoration work. Ryan has a reputation for ensuring the preservation of the environment and has estimated and decided to provide for RM100 million in respect of the environmental liability. 

Required: Advise the directors on the accounting treatment of the various costs that have been incurred and/or will be incurred.

Answer rating: 100% (QA)

Answer Ecologically efficient power station constructed at a cost of RM 1000 million shall be capita... View the full answer