The full cost of an environmental provision should be recognized as soon as the obligation arises. Because it may be many years before the costs relating to the provision are incurred the provision is normally recognized at its present value. As the day of payment draws nearer, the discount unwinds and the provision increase. The increase in the provision will be charged to the income statement as a finance cost.
It is common for modern extraction licenses to include an obligation to clean-up when the license expires. In these situations, the present value of the clean-up costs are treated as part of the cost of the license.
2 Targeting costs
2.1 Definition of target costing
