Accounting

Accounting 3

Accounting

In the case of Excellent Extractions Mining Company, at the beginning of the extraction there was no legal commitment to reclaim the land after the exhaustion of minerals since this was not provided for in the initial agreement. However, the company could have a positive obligation to reclaim the land and this would necessitate the recognition of a provision in company’s books of accounts. As per the AASB 137, constructive commitment is defined as:

A commitment that results from the activities of the company where:

  1. The company has a practice of making good its damages or there is an expressed indication that it will be responsible to meet specific obligations.

  2. The entity has created an impression to the other parties that it will meet the obligations that may result from its activities.

As a consequent of the agreements made by the company that required it to restore the land after mineral exhaustion, Excellent Mining Company has a legal obligation to reclaim the land and therefore a provision must be made for this purpose.

AASB 137 states that a provision is a liability whose amount or timing is uncertain.

As per the provisions of AASB 137, a provision is recognized when:-

  1. A party has a current responsibility as a result of an occurrence that occurred in the past.

  2. There is a possibility that an outflow of economic resources will be needed to fulfill the commitment.

  3. Amount of the commitment can reliably be determined

Provision shall not be recognized if these conditions are not met.

  1. The opening and closing carrying amount

  2. Extra provisions included within the period

  3. Amounts spent, earned and associated with the provision, within the period

  4. Unspent amounts reversed within the period

  5. The accruals within the period in the discounted amount as a result of time passage and the impact of any change in the discount rate.

Reference

Compiled AASB Standard AASB 137 Provisions, Contingent Liabilities and Contingent Assets