Essay on Theoretical Analysis of Restoration Liability Accounting

Essay on Theoretical Analysis of Restoration Liability Accounting

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I. Theoretical Analysis of Restoration Liability Accounting
Firms in the extractive industry usually follow a general pattern of evaluation & exploration, development, production, and finally rehabilitation of the site. According to the AASB Framework, “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 Framework #49a, 2004, p.22) Looking deeper than just the legal form of the mining asset, the economic benefit from the land in such a scenario where the asset (mining site) is leased or bought would flow to the entity rather than its legal owner. Hence, the liabilities corresponding with the site shall also fall upon the company. One such liability is the cost of rehabilitation or restoration of the site at the end of its economic life.
The AASB Framework defines an Obligation as “a duty or responsibility to act or perform a certain way.” (AASB Framework #60, 2004, p.25) The restoration obligation should meet the criteria for a present obligation so as to fully satisfy the definition of a liability. In addition, this item should also meet the recognition criteria for a liability to be recorded in a company’s financial statements, whereby the future economic benefits associated with the item are probable and its cost can be measured reliably. (AASB Framework #83, 2004, p.30)
According to the AASB Framework, “An obligation normally arises only when the asset is delivered or the entity enters into an irrevocable agreement to acquire the asset. In the latter case, the irrevocable nature of the agreement means that the economic consequences of failing to honour the obligation, for exam...

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...Annual Report 2006.
BHP 2009. BHP Billiton Annual Report 2009.
BHP. 2006. Decommissioning, site rehabilitation and environmental costs [Online]. Available: [Accessed].
CPA 2010. Accounting Handbook 2010, Pearson Education Australia.
CPA 2010. CPA Program Ethics and Governance. Module 5 pp49
DEEGAN 2010. Australian Financial Accounting, 6th, Sydney, McGraw-Hill Australia. pp268-286, pp544-568
DOWNING, T. E. 2002. Avoiding New Poverty: Mining-Induced Displacement and Resettlement. Mining, Minerals and Sustainable Development, No. 58, pp15-19.
Joseph U Kish, J., Olin Mathieson, James Morris 1966. 3 New Executive Guides. The Journal of Accountancy, pp66-67.
LGL 2008. Lihir Gold Limited Annual Report 2008.
RIO 2009. Rio Tinto Annually Report 2009.

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