Dismantling and restoration costs in asset cost
How the estimated costs of dismantling an asset and restoring a site join its cost under IAS 16, and where the matching IAS 37 provision goes.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A quarry operator's mining right obliges it to rehabilitate the land when extraction ends. A telecoms tower company leases rooftop space and must remove its equipment when the lease runs out. A restaurant fits out leased premises and has agreed to hand them back as a bare shell. Each faces a cost years away that it is already committed to, and many small clients account for none of it until the bulldozers arrive.
IAS 16 and IAS 37 bring that future cost onto the balance sheet from the start.
IAS 16 puts the initial estimate in cost
Under IAS 16, the cost of an item of property, plant and equipment includes the estimated costs of dismantling and removing the item and restoring the site on which it is located, unless those costs relate to inventories produced during that period. ACCA's explanation of cost under IAS 16 lists the initial estimate of dismantling and site restoration costs, recognised as a provision under IAS 37, alongside the purchase price and directly attributable costs.
So the asset's cost has two parts: what was spent to build or buy it, and the present obligation to undo it later. Both are depreciated over the asset's life.
The estimate itself should come from someone who can stand behind it: an environmental consultant's rehabilitation plan for a quarry, the landlord's specification for reinstating premises, or a contractor's quote for removing equipment. Keep that source with the working, because every later review of the provision starts from it.
The exception in IAS 16 matters for quarries and mines. Restoration costs that relate to inventories produced during a period, such as damage caused by that year's extraction, are not added to the asset; they belong with the inventory produced.
The matching IAS 37 provision
The other side of the entry is a provision. Under IAS 37, a provision is measured at the amount the entity would rationally pay to settle the obligation at the end of the reporting period, or to transfer it to a third party at that time. IAS 37 also says that risks and uncertainties are taken into account, and that a provision is discounted to its present value.
For a restoration obligation that lies far in the future, discounting makes a large difference. The first entry:
- debit the asset, as part of the cost of property, plant and equipment;
- credit the restoration provision, at the present value of the expected cost.
Then, each year after that:
- the asset, including its restoration component, is depreciated;
- the discount on the provision unwinds, increasing the provision, and the unwinding is charged as a finance cost;
- the estimate is reviewed, and any change is dealt with as the standards require.
Measurement in general is covered in measuring provisions, and recognition in provisions and contingent liabilities.
Leased premises: restoration costs in the right-of-use asset
Where the obligation comes from a lease, such as the restaurant's bare-shell clause or the tower company's removal clause, IFRS 16 deals with it. ACCA lists what the right-of-use asset includes: the initial lease liability, payments made at or before commencement less lease incentives received, the lessee's initial direct costs, and an estimate of dismantling, removal or site restoration costs.
A lessee's make-good obligation therefore sits within the right-of-use asset, with a provision alongside it. The wider measurement of that asset is covered in the right-of-use asset at the start of a lease.
Booking the entries and the lease register's role
Achekam's Financials Studio does not calculate depreciation; it presents the charge in the trial balance, flags it when it disagrees with the movement in accumulated depreciation, and allows a year-end adjusting entry. For a client that never recorded its restoration obligation, the firm posts the asset and the provision by adjusting entry, with the working on file: the cost estimate, the discount rate and its source, and the expected timing. A wrong adjusting entry is reversed with a record of who and why, never deleted.
Remember the follow-on effect. Once the restoration component is part of the asset's cost, the depreciation charge should include it. If the client's register leaves it out, the charge needs adjusting as well.
For lease obligations, staff can keep a client's lease register in Achekam (Financials Studio, Leases) under IFRS 16 or IFRS for SMEs Section 20. An AI draft of a lease read from the contract is not used until a person confirms it, and every number the AI reads must appear in the contract text. Read each lease for a restoration or make-good clause when confirming it. The obligation is written into the contract, and a draft that missed it is exactly what the confirmation step exists to catch.
Disclosures a client is likely to forget
Clients that know about the obligation still tend to leave things out. A short checklist:
- A provisions note showing the restoration provision, its movement for the year including unwinding, and the main uncertainties about amount and timing.
- An accounting policy stating that the restoration estimate is included in the asset's cost and provided for at present value.
- The restoration component within the property, plant and equipment note, or within right-of-use assets for leases.
- Any change in the estimate during the year, and its effect.
The IFRS Foundation's summary of IAS 16 sets out the principles for recognising property, plant and equipment and measuring its carrying amount.
The hardest part of this topic is usually not the accounting but finding the obligation. Ask every client with a mining right, a site licence or a lease with a make-good clause to show you the clause. Once it is on the table, the entries follow.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
