## Decommissioning / Dismantling / Site Restoration Costs
When a company is compulsorily required (by law or contract) to restore a site after the asset's useful life (e.g., mining, oil extraction, mineral extraction), this future liability is capitalised on Day 1 at its present value.
### Why Present Value?
The actual cash outflow happens years later. Recognising the full future amount today would overstate the liability. Therefore, the future cost is discounted to its present value using an appropriate discount rate.
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## Accounting Treatment
Step 1: Calculate Present Value of future decommissioning cost.
$$PV = \frac{\text{Future Cost}}{(1 + r)^n}$$
Step 2: Add PV to the cost of the PPE asset.
Step 3: Record a Provision for Decommissioning as a liability (per AS 29 – Provisions).
### Journal Entry on Day 1:
```
PPE A/c Dr [Purchase Price + PV of Decommissioning]
To Cash/Bank [Purchase Price]
To Provision for Decommissioning [PV of future cost]
```
> The Provision for Decommissioning is a liability — it has a credit balance and appears on the liabilities side of the balance sheet.
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## Balance Sheet Presentation
| Side | Item | Balance |
|---|---|---|
| Asset | PPE | Debit balance |
| Liability | Provision for Decommissioning | Credit balance |
Over time, the provision is unwound (interest accreted) until it equals the actual future cost at the time of decommissioning.