This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Asset retirement obligations — Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 410-20 is the primary source of guidance on accounting for obligations associated with the retirement of tangible long-lived assets.

Under IFRSs, IAS 16Property, Plant and Equipment, provides guidance on accounting for costs of dismantling and removing property, plant, and equipment, and restoring the site on which it was located when an item is acquired or as a consequence of using the item during a particular period other than to produce inventory. In addition, IAS 37Provisions, Contingent Liabilities and Contingent Assets, provides guidance on the measurement of decommissioning, restoration, and similar liabilities, and IFRIC Interpretation 1Changes in Existing Decommissioning, Restoration and Similar Liabilities, addresses how to account for changes in existing decommissioning, restoration, and similar liabilities.

The table below summarizes these differences and is followed by a detailed explanation of each difference.1

SubjectU.S. GAAPIFRSs

Initial measurement of an asset retirement obligation (ARO)

The fair value of an ARO liability is recognized in the period it is incurred if a reasonable estimate of fair value can be made. When a present value technique is used to estimate the liability, the discount rate will be a risk-free interest rate adjusted for the effect of the entity's credit standing.

ARO2 liability is measured as the best estimate of the expenditure to settle the obligation or to transfer the obligation to a third party as of the balance sheet date. When a present value technique is used to estimate the liability, the discount rate will be a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Asset recognition from an ARO

Upon initial recognition of a liability as an ARO, an entity increases the related long-lived asset by the same amount.

Property, plant, and equipment include the initial estimate of the ARO unless it is incurred during a period in which the property was used to produce inventory, in which case the ARO would be added to the carrying amount of the inventory.

Subsequent measurement of an ARO

Period-to-period revisions to either the timing or amount of the original estimate of undiscounted cash flows are treated as separate layers of the obligation. Upward revisions are discounted using the current credit-adjusted risk-free rate. Downward revisions are discounted using the original credit-adjusted risk-free rate.

The ARO should be adjusted for changes in the estimate of expected undiscounted cash flows or discount rate as of each balance sheet date. The entire obligation should be remeasured using an updated discount rate that reflects current market conditions as of the balance sheet date.

Initial Measurement of an ARO

Under U.S. GAAP, ASC 410-20-25-4 requires that an entity recognize an ARO at fair value in the period in which the liability is incurred if the ARO's fair value can be reasonably estimated. If its fair value cannot be reasonably estimated, the ARO should be recognized when a reasonable estimate of fair value can be made. Under ASC 810-10, the fair value measurement of a liability assumes that a transfer of the liability to a market participant has occurred as of the measurement date, with the liability continuing as an obligation of the counterparty and the nonperformance risk of the liability unchanged with the transfer.

Under IFRSs, IAS 37 provides that the provision for a liability should be the best estimate of the expenditure that would be required to settle the obligation as of the balance sheet date. This is the amount that an entity would pay to settle the obligation or to transfer the liability to a third party as of the balance sheet date. Although it will often be "impossible or prohibitively expensive" to transfer or settle the liability as of the balance sheet date, estimating that amount provides the best indicator of the expense required to settle the obligation at such time. Management estimates the liability using its judgment supplemented by (1) a history of similar transactions, (2) information provided by third-party experts (in certain instances), and (3) additional information provided after the balance sheet date. When the time value of money would materially affect the outcome, paragraph 45 of IAS 37 provides that "the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation."

Paragraph 47 goes on to state: The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.

While both U.S. GAAP and IFRSs provide for a present value approach in measuring the liability obligation, there is a notable difference between the two approaches. Under U.S. GAAP, ASC 410-20-55-15 states that an "entity shall discount expected cash flows using an interest rate that equates to a risk-free interest rate adjusted for the effect of its credit standing (a credit-adjusted risk-free rate)." Under IFRSs, the discount rate should reflect risks specific to the liability. This can be achieved by reflecting risk in the estimation of undiscounted cash flows. While we believe that the initial measurement of the ARO under U.S. GAAP and IFRSs should generally be the same, differences may arise as a result of the use of different discount rates. The selection of the appropriate rate in each case requires careful consideration.

Asset Recognition of an ARO

Under U.S. GAAP, when an ARO is initially recognized, ASC 410-20-25-5 requires that an entity capitalize its asset retirement cost by increasing the long-lived asset's carrying value by the same amount. ASC 410-20-35-2 requires the asset's retirement cost to be recognized subsequently as expense using a "systematic and rational method" (i.e., depreciated) over the long-lived asset's useful life.

Similarly, under IFRSs, IAS 16 provides that one of the components of property, plant, and equipment is the initial estimate of costs to dismantle and remove the item and restore the site on which it was located, for which a corresponding liability obligation is incurred either (1) when the item is acquired or (2) from having used the item during the period, other than for producing inventory. However, when costs to dismantle, remove, and restore the site incurred during a particular period result from the item having been used to produce inventory during that period, an entity should apply IAS 2, Inventories. The application of IAS 2 to dismantling, removal, and restoration costs is further discussed in paragraph BC15 in IAS 16, which states, in part:

[Accounting for these costs initially in accordance with IAS 2] achieves the same result as including these costs as an element of the cost of an item of property, plant and equipment, depreciating them over the production period just completed and identifying the depreciation charge as a cost to produce another asset (inventory), in which case the depreciation charge constitutes part of the cost of that other asset.

Subsequent Measurement of an ARO

Under U.S. GAAP, ASC 410-20-35-3 and 35-4 provide that in periods after the initial recognition of an ARO liability, an entity should recognize changes in the ARO liability that result from "(a) The passage of time [and] (b) Revisions to either the timing or the amount of the original estimate of undiscounted cash flows." The entity should measure changes resulting from the passage of time and incorporate them into the carrying amount of the ARO liability before measuring changes associated with a revision to the timing or estimated cash flow amount.

The entity changes its measurement because of the passage of time, it should apply an interest method allocation to the ARO liability at the beginning of the period, using as the interest rate the credit-adjusted risk-free rate at the time it initially recognized the ARO liability. It should recognize the amount of change as an increase in the ARO liability and as an operating expense (otherwise known as an accretion expense).

The entity should recognize changes in measurement resulting from revisions to the timing or the amount of the original estimate of the ARO liability as an increase or decrease in the carrying amount of the ARO liability and the related long-lived asset. It should discount increases in the estimate of undiscounted cash flow using the current credit-adjusted risk-free rate and create an additional "layer" of the ARO liability, and it should discount decreases using the credit-adjusted risk-free rate that existed upon the initial recognition of the ARO liability.

Under IFRSs, as mentioned in the "Initial Measurement of an ARO" section above, paragraph IN5 of IAS 37 indicates that the "amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period" (emphasis added). Therefore, the best estimate considerations would require reconsideration as of each reporting period. In addition, IFRIC Interpretation 1 provides guidance on accounting for long-lived assets when changes in existing decommissioning, restoration, and similar liabilities occur.

____________________

1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

2 Although IFRSs do not use the term "asset retirement obligation" or "ARO," the term ARO will be used to describe such decommissioning, restoration, and similar liabilities under both the U.S. GAAP and IFRSs sections of this table.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.