When the recognition of a provision gives rise to an asset
An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. 90% of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, with 10% expected to arise through the extraction of oil. At the end of the reporting period, the rig has been constructed but no oil has been extracted.
A provision is recognised in respect of the probable costs relating to the removal of the rig and restoring damage caused by building it. This is because the construction of the rig, combined with the requirement under the licence to remove the rig and restore the seabed, creates an obligating event as at the end of the reporting period. These costs are included as part of the cost of the oil rig.
However, there is no obligation to rectify any damage that will be caused by the future extraction of oil. [IAS 37 Appendix C, Example 3].
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