why are financing flows such as interest expense and dividend payments excluded from 613255

Changes in decommissioning costs – related asset measured at cost

An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started operating on 1 January 2000. The plant has a useful life of 40 years. Its initial cost was $120,000; this included an amount for decommissioning costs of $10,000, which represented $70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5%. The entity’s financial year ends on 31 December.

On 31 December 2009, the plant is 10 years old. Accumulated depreciation is $30,000. Because of the unwinding of discount over the 10 years, the decommissioning liability has grown from $10,000 to $16,300.

On 31 December 2009, the discount rate has not changed. However, the entity estimates that, as a result of technological advances, the net present value of the expected cash flows has decreased by $8,000. Accordingly, the entity reduces the decommissioning liability from $16,300 to $8,300 and reduces the carrying amount of the asset by the same amount.

Following this adjustment, the carrying amount of the asset is $82,000 ($120,000 – $8,000 – $30,000), which will be depreciated over the remaining 30 years of the asset’s life to give a depreciation expense for 2010 of $2,733 ($82,000 ÷ 30). The next year’s finance cost for the unwinding of the discount will be $415 ($8,300 × 5%). [IFRIC 1.IE1-4].