Dyane Company Business of Telecommunication Case Discussion
Dyane Company is in the business of telecommunication. It is given a concession by the government to operate the business for 10 years. In the year 2021, it sets up its telecommunication network facilities. The agreement with the government requires the company to decommission the network facilities at the end of the concession period.
Based on the current technology, the cost of decommissioning at the end of 10 years is estimated at Php 150,000,000. Because of the changes in technology in decommissioning work, it is reasonably probable that the cost of decommissioning would be reduced by the end of the concession period.
The company estimates that there is a 30% (high) chance the cost will be Php 90,000,000. A 40% (medium) chance the cost will be Php 100,000,000 and a 30% (low) chance the cost will be Php 110,000,000. The residual value of the facilities is negligible and no gain or loss is expected from their eventual disposal after 10 years.
The current risk-free rate of interest is 5% for the risk specific to the liability, the variability of the possible outflows, and additional 10% on the expected cash outflows is considered a reasonable estimate.
The present value factors are as follows
Present value factor of 5% for 10 periods 0.613913
Present value factor of 10% for 10 periods 0.385543
What is the amount of provision required for the decommissioning costs that should be recognized and included as additional cost of the facilities?
On the date of retirement, what amount of the proceeds represents the equity component?
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