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12 impact of ifrs oil and gas 4 decommissioning and

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Unformatted text preview: ;). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 12 Impact of IFRS: Oil and Gas 4 Decommissioning and environmental provisions IFRS may result in the earlier recognition of provisions than many national GAAPs Oil and gas companies often are exposed to legal, contractual and constructive obligations to meet the costs of decommissioning and dismantling assets at the end of their production life and to restore the site. These costs are likely to be a significant item of expenditure for most oil and gas companies. Measurement Judgement is required to arrive at the `best estimate' The provision is measured at the best estimate of costs to be incurred. This takes the time value of money into account, if material. The best estimate may be based on the single most likely cost of decommissioning and takes uncertainties into account in either the cash flows or discount rate used in measuring the provision. The discount rate should reflect the risks specific to the liability and adjusting the discount rate for risk often is complex and involves a high degree of judgement. There are many complexities in calculating an estimate of expenditure to be incurred. Technological advances may reduce the ultimate cost of decommissioning and may also affect the timing by extending the expected recoveries from reservoirs. The estimate is updated at each reporting date. For midstream and downstream assets with indefinite useful lives, the timing of decommissioning may be so distant that the present value of liabilities is not significant. When there is uncertainty about the useful life of the asset, this uncertainty needs to be taken into account in the measurement of the provision. In such cases, it may be that the provision is not significant until the expected date at which the facilities will be decommissioned is...
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