Q1: Provision Adjustments and Accounting

Initial Provision Calculation

• On January 1, 2015, there's a provision due in three years: 798,600.

• This future amount must be adjusted to reflect its present-day value.

• A discount rate of 10% is assumed for this adjustment.

Present Value Adjustment

• The present value amount, after discounting, is 600,000.

• Journal Entry:

  • Debit: Rehabilitation cost or Provision expense.

  • Credit: Liability with the present value amount (600,000).

Time Value of Money Adjustment

• At the end of the year, a 60,000 adjustment for the time value of money is required.

• This adjustment is recorded as a finance cost, not an interest expense.

• Journal Entry:

  • Debit: Finance cost (time value of money adjustment).

  • Credit: Provision.

Subsequent Year Adjustments

• Year 2:

  • The journal entry involves 660,000 times 10% (the discount rate).

• Year 3:

  • The journal entry amounts to 72,600, allocated to finance costs.

Provision Utilization

• At the end of year three, when the provision is used:

  • Debit: Liability.

  • Credit: Bank (actual payment of 798,600).

Overpayment Scenario

• If the actual payment exceeds the provision (e.g., paying 800,000 for a 798,600 provision):

  • Clear the provision account to zero.

  • The excess payment is charged to the Profit and Loss (P&L) statement.

Summary of Journal Entries

• Year 1: Debit Provision Expense, Credit Provision Liability for 600,000. Debit Finance cost, Credit Provision for 60,000. Provision liability is 660,000 at year end.

• Year 2: Debit Finance cost, Credit Provision for 66,000. Provision liability is 726,000 at year end.

• Year 3: Debit Finance cost, Credit Provision for 72,600. Provision liability is 798,600 at year end.

• Final Settlement: Debit Provision Liability for 798,600, Credit Bank for 800,000. Debit P&L for 1,400. Provision is cleared after the payment.