where an obligation exists to dismantle or remove an asset or restore a site to its 612388

Bayer AG (2010)

Notes to the consolidated financial statements of the Bayer Group [extract]

4 Basic principles, methods and critical accounting estimates [extract]

Property, plant and equipment [extract]

Where an obligation exists to dismantle or remove an asset or restore a site to its former condition at the end of its useful life, the present value of the related future payments is capitalized along with the cost of acquisition or construction upon completion and a corresponding liability is recognized.

A common instance of (c) above is dilapidation obligations in lease agreements, under which a lessee is obliged to return premises to the landlord in an agreed condition. Arguably, a provision is required whenever the ‘damage’ is incurred. Therefore, if a retailer rents two adjoining premises and knocks down the dividing wall to convert the premises into one and has an obligation to make good at the end of the lease term, the tenant should immediately provide for the costs of so doing. The ‘other side’ of the provision entry is an asset that will be amortised over the lease term – notwithstanding the fact that some of the costs of modifying the premises may also have been capitalised as assets. This is discussed in more detail in.