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IAS 37 Provisions: Changes in Decommissioning, Restoration, and Similar Liabilities

Go To List of IFRIC Issues Issue Description: The IFRIC is considering the accounting treatment of certain changes in decommissioning provisions. It considered the accounting treatment for the effect of changes in (a) the discount rate as defined in paragraph 47 of IAS 37 and (b) estimated cash flows. In particular, it is considering whether the effect of the changes should be capitalised or recognised in profit and loss. Discussion at the IFRIC Meeting November 2002: IFRIC tentatively concluded that a change in a decommissioning liability should be added to or deducted from the related asset to the extent that the change relates to a future period. An Interpretation would provide guidance for determining the amount relating to future periods. Discussion at the 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 the IFRIC Meeting April 2003: Five issues were discussed: Change in the discount rate. Should a change in the discount rate be treated as a revision of the original estimated asset and liability or as a current period event and hence capitalised in full in the current period? The staff proposed that the change in the discount rate should be treated as a revision of the original estimated amount. Certain members of the IFRIC questioned whether the change should affect the asset and believed it should be treated as a current period charge to the income statement. After discussion, the IFRIC agreed to proceed on the basis of the staff's proposal but that the basis for conclusions should note the arguments for and against the two approaches and that comment on this issue should be specifically requested. A concern was raised as to whether the requirement in IAS 37.47 that a provision should reflect a current market assessment of the time value of money was been applied in practice. Calculation of amount to be added to, or deducted from, the asset. The draft Interpretation requires the calculation of the amount to be added to or deducted from the asset (capitalised) to be done on a 'systematic and rational' basis. The IFRIC agreed that the Interpretation should illustrate how this could be done. Revision to paragraph 20A of the Exposure Draft of Improvements to IAS 16, Property, Plant and Equipment. The revision would clarify that IAS 16.20A applies only to the initial capitalisation of costs and not to subsequent changes in the estimated amount of those costs. The IFRIC agreed to submit this proposal to the Board. Measurement of a decommissioning liability. The basis for conclusions of the Interpretation will clarify that IAS 37.36 and IAS 37.47 require the measurement of the liability both initially and subsequently to be the best estimate of the expenditure required to settle the present obligation at the balance sheet date and should reflect a current discount rate. Hence, when a change in estimated cash flows and/or the discount rate is material, the effect of the change should be recognised. The IFRIC agreed to submit this proposal to the Board. Transition for First-Time Adopters. The IFRIC agreed that prospective application is appropriate. Further, the liability should be measured using the current discount rate and the asset should be remeasured as if this rate had applied on initial recognition and had subsequently depreciated. There would not be a requirement to restate for each discount rate change arising in prior years. Discussion by the IASB at the May 2003 IASB Meeting April 2003 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. IFRIC Draft Interpretation D2 Issued 4 September 2003 On 4 September 2003, the IFRIC issued Draft Interpretation D2, Changes in Decommissioning, Restoration and Similar Liabilities. Comments are due by 3 November 2003. Click for: More Information about D2 Press Release (PDF 24k) Full Text of D2, which can be downloaded from IASB's website without charge starting 5 September. Discussion at the IFRIC Meeting December 2003 The IFRIC discussed the comment letters received on Exposure Draft D2, Changes in Decommissioning, Restoration and Similar Liabilities. Based on the overwhelming support for a prospective approach (as opposed to the retrospective approach proposed in D2), the IFRIC agreed to change the position. The effects of this decision will be explored at future IFRIC meetings. The IFRIC retained its position that changes in the discount rate should be accounted for similarly to changes in cash flows. However, this would now also be on a fully prospective basis. Discussion at the IFRIC Meeting February 2004 The IFRIC discussed several issues related to the scope of the draft interpretation for changes in decommissioning, restoration, and similar liabilities. The IFRIC agreed to expand the scope to include liabilities recognised as part of the cost of mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative resources. However, the IFRIC decided not to expand the scope to address whether new liabilities that arise after the asset is recognised (for instance, as a result of a new law) should be expensed or capitalised. The IFRIC discussed whether the zero-asset floor should consider the entire cost of the asset (including the decommissioning layer) or the cost of the asset excluding the layer. The IFRIC agreed that the entire cost of the asset should be considered when determining the amount to write off against the asset and the amount to expense. The IFRIC did not address how to account for costs previously expensed as a result of the zero-asset floor when the asset is subsequently written up. The IFRIC discussed whether the transition should be retrospective under IAS 8. The members noted that IFRS provides an impracticability exception that should make the transition easier for older assets. Some members noted that the retrospective approach in the exposure draft would be preferable for first-time adopters. The majority of IFRIC members felt that an exception to IFRS 1 was not desirable. The IFRIC decided to recommend a 3-month effective date if the final Interpretation is issued by March 2004. A longer effective date will need to be reconsidered if the publication date is much later than March 2004. The staff will proceed with a ballot draft to be issued (preferably) before the next IFRIC meeting. One member indicated an intent to dissent to the interpretation on grounds that all changes in the liability should be recognised in the P&L immediately; two other members said they may dissent for the same reason. One IASB Board member noted that he objects to issuing this interpretation for the same reason as the dissenting IFRIC member and would try to convince the other IASB members to also dissent. The staff noted that they did not believe the IASB would reject this document. Discussion at the IFRIC Meeting March 2004 The IASB recommended a number of changes to this document as a result of their review of the document. The IFRIC considered a draft Interpretation that staff had amended to address the concerns of the Board. The changes included improvement of the explanation as to how the interpretation is applied to revalued assets and the inclusion of an exemption to IFRS 1 for first-time adopters. IFRIC members suggested minor amendments, and the interpretation will be circulated for final approval out of session with a view to the final interpretation being issued in April. May 2004: IFRIC 1 Issued On 27 May 2004, the IFRIC issued IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.