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Cases on Recognition Measurement
The Future Site Restoration Case
"The $20 million question"
The Hard Rock Mining Company has just completed the first year of
operations at its new strip mine, the Lonesome Doe. Hard Rock spent
$10 million for the land and $20 million in preparing the site for
mining operations. The mine is expected to operate for 20 years.
Hard Rock is subject to environmental statutes requiring it to
restore the Lonesome Doe mine site on completion of mining
operations.
Based on its experience and industry data, as well as current
technology, Hard Rock forecasts that restoration will cost about
$10 million when it is undertaken. Of those costs, about $4 million
is for restoring the "overburden" that was removed in preparing the
site for mining operations (prior to opening the mine); the rest is
directly proportional to the depth of the mine, which in turn is
directly proportional to the amount of ore extracted.
* * * *
- Should Hard Rock recognize a liability for site restoration in
conjunction with the opening of the Lonesome Doe Mine? If so, what
is the amount of that liability?
- After Hard Rock has operated the Lonesome Doe Mine for 5 years,
new technology is introduced that reduces Hard Rock's estimated
future restoration costs to $7 million, $3 million of which relates
to restoring the overburden. How should Hard Rock account for this
change in its estimated future liability?
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