Definitions used in Guidance Note

Definitions used in Guidance Note
Unwinding of Discount    30/06/05    30/06/06    30/06/07    30/06/08      
Dr. Interest Expense
   Cr. Provision for restoration    1,487
1,487    1,635
1,635    1,798
1,798    1,979
1,979      
Total Provision    16,351    17,986    19,784    21,763   
See Illustrative example 1 for details of the calculation required for the periodic unwinding of the discount. I.e. the 30/06/05 calculation is [$100,000 / (1.10)19] – [$100,000 / (1.10)20] = 1,487

At 1 July 2008 the entity must increase the provision to reflect the increase of $70,000 in expected cost to make good the premises. As the balance of the provision at
30 June 2008 is $21,763, the entity must recognise the difference, that being:
        [$170,000 / (1.10)16] - $21,763 = 15,234

As Interpretation 1 paragraph 6(a)(ii) outlines, an increase in the liability shall be recognised in profit or loss, except where any credit balance exists in the revaluation reserve in respect of that asset. Therefore, as no revaluations exist for the leasehold improvements, the entity must recognise the increase in the provision in profit or loss.

The entity would be required in accordance with Interpretation 1.8 and as illustrated in example 1, to recognise the unwinding of the discount in profit or loss as a finance cost as it occurs. The periodic unwinding of the discount will now be recognised in respect of the increased amount ($170,000). For example:


Unwinding of Discount    30/06/09    30/06/10    30/06/11    30/06/12      
Dr. Interest Expense
   Cr. Provision for restoration    3,700
3,700    4,069
4,069    4,477
4,477    4,924
4,924      
Total Provision    40,697    44,766    49,243    54,167   
See Illustrative example 1 for details of the calculation required for the periodic unwinding of the discount. I.e. the 30/06/09 calculation is [$170,000 / (1.10)15] – [$170,000 / (1.10)16] = $3,700

The entity would also be required in accordance with AASB 116 and illustrated in example 1, to depreciate the make good included in the cost of the asset (leasehold improvements) over the term of the lease.

Note: Other Provisions


    2004/05    2005/06    2006/07    2007/08    2008/09      
Carrying amount at 1 July 200X (opening)
Additional provisions made
Provisions no longer required
Unwinding of discounted amount
arising from the passage of time
Carrying amount at 30 June 200X (closing)    0

14,864

16,351    16,351
-
1,487

-
-
1,635
17,986    17,986
-
-
1,798
19,784    19,784
-
-
1,979
21,763    21,763
15,234
-
3,700
40,697     

As discussed in paragraph 24, a change in the provision may be an indication that the asset (leasehold improvements and the make good asset) may need to be revalued.

When conducting a regular revaluation entities must comply with the requirements of AASB 116. In conducting regular revaluations entities must determine whether the carrying amount of the asset is materially different from its fair value at reporting date. Where the asset is revalued this will require changes in the provision for make good.

Illustrative example 3 – Recognising an increase in make-good provisions in the asset revaluation reserve

Information:

Assume the same information as Illustrative example 2, except that there is a credit balance of $5,234 existing in the asset revaluation reserve at 1 July 2008 in respect of the leasehold improvements.

Answer:

In accordance with Interpretation 1.6(a)(ii), to the extent of any credit balance that exists in the asset revaluation reserve in respect of the leasehold improvements, the entity would be required to recognise the increase in liability in the asset revaluation reserve. As a balance of $5,234 exists in respect of leasehold improvements, the entity will be required to reduce this balance. The remaining balance will be recognised in profit or loss.


1 July 2008    Debit    Credit      
Dr. Asset Revaluation Reserve
Dr. Other Expense
   Cr. Provision for make good    5,234
10,000   

15,234   


Appendix 2
Definitions used in Guidance Note 2010/1

Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction (AASB 116.6).
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (AASB 137.10).
Property, plant and equipment are tangible items that:
are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
are expected to be used during more than one period (AASB 116.6).
A provision is a liability of uncertain timing or amount (AASB 137.10).