what's debit entry for the provisions?

Question

in IAS 37 - debit entry for provisions says,

When a provision (liability) is recognised, the debit entry for a provision is not always an expense-

Sometimes the provision may form part of the cost of the asset. Examples: included in the cost of inventories, or an obligation for environmental cleanup when a new mine is opened or an offshore oil rig is installed. [IAS 37.8]

Please explain what's this? And give me the Double entries.

Answer 1

Your IAS reference seems wrong. IAS 37.8 does not talk about this. However what this means is just you debit an asset account instead of an expense account. As you mentioned if you opened a mine and you are bound to make an environment clean up when the project is completed, you may decide to include the part of such cost into the each each unit of product you manufacture on a predetermined basis. So you credit the provision and debit the inventory.

Comments

Hi, this follow up question may come a bit too late from the original post, but still hope someone can help.

Specifically, this has to do with the airlines industry, where leased aircraft, and sometime purchased aircraft, have major future maintenance costs associated with them, for the life of the asset. These costs often are detailed in the lease agreements, or maintenance agreement in the case of purchased aircraft. The maintenance costs, therefore should be provisioned for. 

But since the provision will be quite large, and are spread over a long period of time, I imagine we should not expense the whole amount upfront in year when the assets are acquired (leased or otherwise). How should I treat this provision in the first year, and how should I "expense" them when the cost are due. Should I book a corresponding asset account (pre-payment?) against the provision entry in the first year? Then as the aircraft as used (by hour flown), amortize that assets account against a reversal of the original provision? In this case, should I also book an expense against cash to recognize the actual maintenance expenses? 

 

Thanks for your help!