Changes in Decommissioning and Similar Liabilities

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. Employee Benefits - Multi-Employer Plan Exemption The IFRIC discussed two issues:
• How to define a multi-employer plan that meets the exemption in IAS 19.30, and
• If the plan does not meet the exemption, how it should apply defined benefit-plan accounting. The IFRIC did not amend its previous definition of multi-employer plan, but it concluded that it did not have sufficient information to state categorically that it would be rare for the exemption to be applied. The Interpretation will address plans in which there are a small number of dominant members in a large fund with many members and that it was likely that the dominant members would have access to plan information. The Interpretation will clarify that a multi-employer plan as defined in IAS 19.7 for which the contribution is set at a fixed level of the underlying payroll is not necessarily excluded. The IFRIC agreed that the staff would consider what guidance is needed on changes arising from allocations between entities in the plan or arising from other entities employees. The Interpretation will be discussed further at IFRIC's July meeting. Decommissioning Funds 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. Rights of Use IFRIC considered a draft Interpretation that proposed that an agreement contains a lease, which should be accounted for under IAS 17, if all three of the following criteria are met: (a) Fulfilment of the agreement depends upon a specific item or items ("the asset"); (b) The purchaser controls the right to use the asset for a specific period of time; and (c) The purchaser's obligation to make payments to the supplier under the agreement is for the time that the asset is made available rather than for actual use of the asset. The draft Interpretation's second criterion ("controls the right to use") can be met in agreements in which a purchaser has rights to acquire substantially all of the output produced by an asset. IFRIC had previously agreed that in such agreements additional criteria were required to distinguish those agreements that convey a right of use from those that do not. This meant that the second criterion is not met (and thus an agreement did not contain a lease) if both:
  • The price per unit of output is either fixed per unit of output or indexed to market prices, and
  • The supplier is required to pay market-based liquidating damages if it fails to deliver.
  The IFRIC discussed whether the inclusion of contracts where substantially all of the output of an asset was acquired focused on ownership of the asset as opposed to control of the asset took place. Certain members believed that the Interpretation potentially changed the definition of control that has been used in Standards to date and focussed on ownership to indicate control. The IFRIC agreed that:
  • The Interpretation should focus on the asset being the right to control the output and not the underlying asset. The IFRIC further agreed that the Interpretation should focus on the right to the capacity of the asset (possibly including an assessment of realistic future changes) and not a current fixed right of output from the asset.
  • The Interpretation should clarify that a right to substitute assets in the contract did not change the assessment of the contract as a lease.
  • There is a need for disclosure in the area of commitments, take or pay contracts and other executory contracts but that this should be addressed as a separate project.
  The staff will make the changes requested and prepare a final draft Interpretation for approval.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.