Home   Site Map   Standards   Interpretations   Agenda   Structure   Newsletter   Resources   Jurisdictions   Links   Search

IAS 37: Interests in Decommissioning and Environmental Rehabilitation Funds

Go To List of IFRIC Issues Issue Description: Some companies have obligations to decommission assets or for environmental rehabilitation that are recognised as provisions under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. In some cases, the company contributes to a fund established to meet the costs of the decommissioning or environmental rehabilitation. The fund may be set up to meet the decommissioning costs of a single contributor or for several contributors. Discussion at IFRIC Meeting November 2002: The initial discussion focussed on the following four main accounting issues related to the contributor: 1. Should such funds be consolidated by contributors? There was general agreement that all the relative factors should be considered to determine whether an entity applies IAS 27, 28, or 31 and all respective SIC interpretations, particularly SIC 12? 2. If the funds are not consolidated, do they give rise to (a) a net asset or liability (being attributable fund assets and the decommissioning obligation) or (b) a separate asset (rights to fund assets) and a liability (the decommissioning obligation)? 3. In a case where, if the contributor becomes bankrupt and is unable to make its scheduled contributions the future contributions of all other contributors are increased, what is the nature of the potential additional liability that will arise on the bankruptcy of another contributor? 4. If a separate asset is recognised under issue 2 above, what is the nature of that asset? IFRIC tentatively concluded that the funds should only be consolidated if the contributor has control over the funds. Usually, if the fund is managed by independent trustees or if surplus fund assets are not available to contributors, consolidation would not be appropriate. Discussion at IFRIC Meeting February 2003: The IFRIC concluded that: The draft interpretation should be structured so that it states that the accounting for the liability (from which the fund is required or voluntarily entered into) should not impact the accounting for the contributions made to the fund. The first step will be to determine whether the fund should be consolidated by the contributor by reference to IAS 27 and SIC 12. If control does not exist, the entity will need to determine whether significant influence exists and therefore whether the fund is an associate. The entity will then need to determine the extent of its guarantee on the liabilities of others in the fund. IFRIC should address the issue of silos separately from this interpretation. The IASB staff clarified that the virtually certain test in IAS 37 should be applied to whether the liability will be incurred, not whether the reimbursement will occur. The test for the reimbursement would be based on the definition of an asset, or probable. The right to receive reimbursement from the fund meets the definition of a financial instrument and should be accounted for as an originated loan under IAS 39. However, the IFRIC expressed doubt that the information will be available to compute amortised cost (duration, interest rate, etc.) and therefore believe that in the absence of such information, the asset should be recorded at fair value as a held for trading security. Since the expense related to the liability would be running through expense, the IFRIC believes the income from the asset should also be to earnings. Decommissioning funds are not similar to insurance contracts and that the requirements in IAS 19 should not be applied by analogy. Discussion at IFRIC Meeting April 2003: The IFRIC's tentative conclusions to date were noted: When determining whether a contributor should consolidate, proportionately consolidate, or account under the equity method for a fund, the IFRIC tentatively agreed that relevant considerations include the extent to which the contributor has the ability to determine investment decisions of the fund (for instance by determining the appointment of the fund's trustees) and the extent to which the contributor bears the benefits and risks of the fund's assets. If funds are not consolidated, proportionately consolidated, or accounted for under the equity method, the contributor should recognise a separate asset (for rights to amounts from the fund) and liability (for its decommissioning obligation), since these funds do not relieve the contributor of its obligation to decommission. If a contributor becomes bankrupt and is unable to make its scheduled contributions and the future contributions of all other contributors are increased, the potential additional liability is a contingent obligation within the scope of IAS 37. The right to receive reimbursement from the fund meets the definition of a financial asset and should be accounted for under IAS 39. The asset would seem to fall within the IAS 39 classification of an originated loan and, therefore, be accounted for at amortised cost. The IFRIC tentatively agreed that a better treatment would seem to be to account for the asset at fair value with changes in fair value reported in the income statement. The staff proposed that reimbursement assets should be classified as available for sale assets under IAS 39. Some IFRIC members questioned whether these assets were financial assets that should be dealt with under IAS 39 or reimbursements that should be dealt with under IAS 37. The staff replied that if they arise from a contract and were to be settled in cash, they meet the definition of a financial asset. In addition they noted that IAS 37.1 excludes from its scope all provisions, contingent liabilities, and contingent assets covered by another standard, and that standard in this case is IAS 39. This was questioned as it was considered either to be contingent or to be a reimbursement. The IFRIC agreed that this should be addressed in the basis for conclusions. The IFRIC noted that this addressed the situation where the reimbursement was contractual and in cash, but did not address cases in which the reimbursement is either as a result of a regulatory or legislative requirement or is in the form of services. IFRIC members agreed that in all cases the assets should be recorded at fair value with all changes in fair value through the income statement. The IFRIC further agreed that the proposed Interpretation should require the use of the designation as a "held-for-trading" asset for any financial asset covered by this interpretation should that option remain in the improved IAS 39 standard. The IFRIC agreed that the interpretation should not address the issue of "SILOs" within decommissioning funds. The IFRIC asked its staff to draft a proposed interpretation covering the above for consideration. If IFRIC is unable to agree on a single solution, it would present proposals to the Board for discussion. Discussion by IASB at May 2003 IASB Meeting: The IFRIC had requested the Board to consider scoping out of IAS 39 "a right to receive a reimbursement in cash from a fund" in respect of a provision. The IFRIC would then be able to issue an interpretation on how to measure these reimbursements in cash and services on the same basis. The Board asked to the staff and IFRIC to explore the implications of scoping this out of IAS 39 and of requiring fair value treatment of these items within IAS 39 before making a decision. Discussion at the September 2003 IFRIC Meeting: The IFRIC will consider a draft of an interpretation, which incorporates the Board's decision to amend the scope of IAS 39 to exclude rights to reimbursement. This decision would result in all rights to reimbursement falling under the scope of IAS 37 and enable the IFRIC to provide guidance on the measurement of such asset arising from these funds. The IFRIC discussed the requirement to fair value the right to access the assets in the fund. It was noted that this fair value would include the risk of default of other participants in the fund. Additional contributions as a result of there being insufficient funds as a result of default of another party would still be treated as a contingent liability. The IFRIC agreed with this approach. It was noted that this would give rise to an immediate loss on making a contribution to the fund. The IFRIC approved the document for exposure subject to the changes detailed above and a review of those changes. Draft Interpretation D4 On 15 January 2004, the IFRIC published for comment Draft Interpretation D4 Decommissioning, Restoration and Environmental Rehabilitation Funds. Discussion at the May 2004 IFRIC Meeting The IFRIC was presented with a summary of comment letters on D4. The IFRIC decided to reconsider whether a model based on IAS 37 or IAS 39 was appropriate. This analysis will be conducted as a result of comments received on whether the asset cap equal to the liability is appropriate. Discussion by the IASB at the November 2004 IASB Meeting The Board considered and approved the draft Interpretation D4 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. The Board suggested that the amendment to IAS 39 proposed in this draft Interpretation should be made effective for periods beginning on or after 1 January 2006 (different from the rest of the draft) due to 'stable platform' concerns. The staff would seek concurrence from IFRIC members on this issue and then proceed with issuance of the document. Discussion at the December 2004 IFRIC Meeting In November the IASB voted to issue IFRIC Interpretation 5 and the consequential amendments to IAS 39 arising. However, concern was expressed about the intended effective date (three months after the date of issue). Board members requested that the effective date be amended to 1 January 2006 in order to avoid the issuance of any amendments to IAS 39 that would be effective for the year beginning 1 January 2005. The IFRIC agreed to this amendment. The expected publication date of IFRS 5 is 16 December 2005. December 2004: IFRIC 5 Issued On 15 December 2004, the IFRIC issued Interpretation 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds.