In the case of an oil installation or nuclear power station, the entity shall recognise provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the entity is obliged to rectify damage already caused. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. The obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). It automates the recognition and reporting of AROs and is able to support different accounting principles (for example, IFRS, U.S. GAAP, and German HGB) while leveraging a tight integration with SAP ERP. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. Generally-accepted accounting standards (GAAP) require the company to include the present value of the expected (face value of) future decommissioning cost in the total acquisition cost of the asset. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and simultaneously booked Present Value of Decommission Liability on the Date of Capitalisation of Assets. However it should be assessed whether the retired assets could be used further, in which case the assets shall be depreciated over its useful life. For instance, where a building is constructed in a leased premise and the lease term requires the demolition of the building and restoration of the site on expiry of the lease term, the obligation arises upon construction of the building and as per Ind AS 16, the cost of meeting the obligation shall be capitalised as part of the cost of the building. Unwinding of discount on provisions – Finance Cost Dr, To Decommissioning Liability – Non Current, (Being interest expense recorded on ARO liability), By Amount of Difference between the PV of Decommissioning assets as on the date of 31.03.16 and the Date of Capitalisation of Assets( in case of Addition) or Date of Transition ( in case of Opening Decommissioning Liability), (Being depreciation recorded on ARO asset). and Asset Retirement Obligations. It also takes care of accounting for asset retirement obligations. 143 as companies and their accountants will need to apply … As per para 16(c) of Ind AS 16, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Revised calculation is as follows: Since the revised ARO amount is lower by Rs.762 [42084-41322], the ARO liability as well as the carrying amount of the asset shall be decreased. The ARO amount capitalised as part of the cost of the asset should be depreciated over the period of useful life of the related asset. The Court opined that there must be an Environmental Impact Assessment (EIA) before granting permission to install commercial shrimp farms, and such assessment must take into consideration the … The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. Journal entry for accounting of ARO is as follows: Building A/c                    Dr    Rs.17777, To ARO Liability A/c   Cr                  Rs.17777, [Being ARO cost capitalised as part of cost of Building and ARO liability created for meeting the obligation later], ARO liability GL shall be disclosed in the Balance Sheet under non- current liabilities. As per para 47, 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. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. Read about how life interests in property form part … Thank you for such a wonderful explanation. How will the transition adjustment in retained earnings (other equity) relating to Asset Retirement Obligations (ARO) be included in book profit for computation of MAT liability? Such estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. Union of India, (1997)2 SCC 87, 146, case, commonly known as shrimp farming culture case, the Court dealt with the problem of pollution caused by shrimp farming culture industries in coastal areas. Accounting for ARO under Ind AS- Illustration 2 10 Asset Retirement Obligation(ARO) ARO - Inception date of the contract 1-Apr-08 ARO - From date of transition 1-Apr-15 End of tenure when ARO would arise 1-Apr-18 Total Tenure(Years) 10 Tenure elapsed as at 01-Apr-2015 7 Applicable Government BondRate 8% Estimate of ARO at the end of tenure, If no similar activities could be traced, then reports from experts either within or outside may be sought. If the related asset for which ARO is created was accounted using the cost model, the treatment should be as follows: Any changes in the ARO liability shall be added to, or deducted from, the cost of the related asset in the current period. Finance Cost A/c                      Dr       xxx, To ARO Laibility A/c         Cr                 xxx, As per para 59 of Ind AS 37, provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If in the above example after the lapse of 10 years, the entity realises that the discount rate being used was not adequate considering the market assessment of time value of money. Introduction As the book profit based on Ind AS compliant financial statement is likely to be different from the book profit based on existing Indian GAAP, the CBDT constituted a committee in June, 2015 for suggesting In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. Accounting for Asset Retirement Obligation (ARO). In case there is significant time gap between the period of estimation and the occurrence of past event, adjustment should be made for the effect of inflation. CERCLA Comprehensive Environmental Response, Compensation, and Liability Act . The entity has received a report from its engineering wing about the current cost required to demolish a similar building and restore the site as. In the above example, since the building is to be demolished on expiry of the period of the lease, it shall be depreciated over the period of the lease which is 12 years. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. As per para 14 of Ind AS 37, a provision shall be recognised when: (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to         settle the obligation; and. The obligations for dismantling and restoration costs accounted for in accordance with Ind AS 2 or Ind AS 16 are recognised and measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. For instance in the example of demolition of building, in arriving at the ARO cost, the entity has made an estimate of the expected cost to dismantle and restore the site on expiry of the lease term and discounted the same using a suitable discount rate. 143, Accounting for Asset Retirement Obligations— which was seven years in the making—shifts to a balance-sheet approach, requiring businesses to recognize a liability for a retirement obligation when they incur it—even if that is far in advance of the asset’s planned retirement. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. results under Ind AS for the first time. We will consider the impact of changes in the ARO amount on account of change in each of the factors mentioned above: Change in estimated amount required to settle the obligation which in this case is demolition of the building and restoration of the site. As per Ind AS, An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event and Decommission Liability is the Estimated amount of dismantling and restoration cost that a company expects to incurred in the future on the Asset Dismantling Date. The estimate of the amount that an entity would rationally pay to settle or transfer the obligation to a third party gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. As per para 36 of Ind AS 37, the amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. CSP concentrated solar power . GW gigawatts . As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. 143 (FAS 143), Accounting for Asset Retirement Obligations, requires an entity to recognize the fair value of a liability for legal obligations associated with the retirement of a tangible long-lived asset in the period in which it is incurred if a reasonable estimate of fair value can be made. Applying this provision, the estimated amount adjusted for inflation should be discounted to the date of incurrence of obligation by applying a suitable discount rate. The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. To Building A/c  Cr                 Rs.16834. SAP Asset Retirement Obligation Management is an application that allows companies to manage their asset retirement obligations (AROs) from an accounting point of view. An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event, the occurrence of which may not be within the control of the entity burdened by the obligation. MSA metropolitan statistical area . If no, then search for any similar past events and the related expenditure. (c) a reliable estimate can be made of the amount of the obligation. Join our newsletter to stay updated on Taxation and Corporate Law. Even if an estimate is arrived on the possible expenditure required to settle the obligation as at the date of incurrence of the obligation, due to the impact of inflation, the possible expenditure on the date of settlement may vary significantly. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. Read about how retirement villages form part of your real estate assets. As per the Ind AS roadmap under Companies Act, 2013, with effect from financial year beginning 1 April 2016 (financial year 2016-17), phase I companies i.e., listed and unlisted companies with net worth of Rs.500crores or more have applied Ind AS, along with their holding, subsidiary, joint venture and associate companies. Value of Decommissioning will be Discounted at present Value on the Date of Transition will be calculation by taking Discount Rate as per Current Market Condition. To Building A/c   Cr                  Rs.762. We may assess an asset if, for your lifetime, you either: have a right to use the asset; receive an income from an asset you don't legally own. Copyright © TaxGuru. The tool is designed to support various forms of reporting, spanning accounting, disclosures, and business intelligence which can generate analytical insights for your management, and hence can add great value in the entire process; while ensuring maximum security. As per the terms of the lease, the entity has to demolish the building and restore the site at the end of the lease period of 12 years. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. In the above example, demolition of building requires outflow of cash towards labour, equipments, transportation expenses etc. For instance, if the actual dismantling expenses incurred was Rs.38000 and the balance in ARO GL was Rs.41500, then the journal entry will be as follows: ARO liability                        Dr           41500, To Cash/Bank                                38000, To Gain on dismantling                    3500. 1834. ... asset retirement obligations, etc. As per para 45 of Ind AS 37, where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. Suppose they have received an expert report on the expected expenditure if the demolition is done now, they have to inflate the amount to the date of expiry of the lease term which is the date of settlement of the obligation. If in the above example after the lapse of 10 years, only the lease term is extended by 3 years and other things remaining same so that the timing of the fulfilment of the obligation i.e the demolition and restoration of the site stands postponed by 3 years. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … The entry will be as follows: 2. any increase in ARO liability shall be charged directly to profit and loss account unless       adjusted to the extent credit balance exists in revaluation surplus in respect of the             related asset. FASB Statement no. Rs.25250. Revision in ARO liability if the related asset has reached its useful life, Once the related asset has reached the end of its useful life, all subsequent changes in the ARO liability shall be recognised in profit or loss as they occur. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. The emphasis in ICDS X is more on the degree of estimation involved with regard to the future expenditure required in settlement, rather than on the uncertainty involved in the timing or amount. Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated. The Entry will be passed as under on the date of Transition: ARO Asset                  Dr,    To Accumulated depreciation – ARO asset,    To Decommissioning Liability – Current,    To Decommissioning Liability – Non Current, (Being ARO asset and liability recorded as at transition date), (Being ARO asset and liability recorded for additions during the year 15-16), By amount PV for ARO liability as at capitalisation Date on the assets additions during 15-16, 2. Any such revaluation shall be taken into account in determining        the amounts to be charged to revaluation deficit or revaluation surplus under (i) above. 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The Value of PV of Decommissioning as on Capitailsation Date of Assets will be calculated and Accumulation Depreciation Calculated on the PV of Decommissioning as on Capitalisation Date to the date of Transition. We may consider an example with particulars as on 31/03/2019 as follows: The entity has re-estimated the ARO liability as Rs.4000. The revised calculation is as follows: Since the revised ARO amount is lower by Rs.9587 [42084-32497], the ARO liability as well as the carrying amount of the asset shall be decreased. For instance, in estimating the expenditure required to demolish a building constructed in a lease land on expiry of the lease term, the entity may verify for any similar transactions done earlier, or may get report from independent experts engaged in similar activities etc. ELT environmental liability transfer . Changes in the ARO liability affects the revaluation surplus or deficit already recognised as follows: any decrease in ARO liability shall increase the revaluation surplus created at the time of revaluation of the related asset except where there is a revaluation deficit in respect of the asset already recognised in profit and loss account in which case such decrease in ARO liability shall reverse the deficit so recognised in profit and loss account. There can be variation in the discount rate used, or change in the estimate of the cost initially assessed or the lease period may vary. (a) a change in the estimated outflow of resources embodying economic benefits (eg cash                flows) required to settle the obligation; (b) a change in the current market-based discount rate as defined in paragraph 47 of Ind AS 37        (this includes changes in the time value of money and the risks specific to the liability); and. These factors used to compute the ARO cost are subject to change. The ARO amount to be recognised in the financial statement as on the date of incurrence of the obligation shall be calculated using the formula given below: Where C is the expected cost at the time of obligation, n is the time required to settle the obligation. However in case the decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess shall be recognised immediately in profit or loss. Thus Ind AS requires that an entity shall arrive at an initial estimate of the expected cost for dismantling and removing the asset and restoration of the site and shall capitalise the same as part of the cost of the asset. In the example discussed above, subsequent to creation of the ARO asset, they have charged depreciation on the asset and charged finance cost for each year. This obligation of A is termed as Asset Retirement Obligation. and Indian GAAP as they exist today, and to the timing and scope of accounting changes that the standard setting agendas of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and Institute of Chartered Accountants of India (ICAI) (collectively, the Boards) ... 6.14. Your email address will not be published. AROs: The large tower network and other assets and properties on lease give rise to obligations to restore and return the underlying assetlpropertylsite in the manner received — this is commonly referred to as asset retirement obligations (AROs). The definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. The inflation rate is assumed as 5.876% and the discount rate used is 9%. Here the obligation to dismantle and restore the asset may arise on having acquired the asset or as a result of using the asset over a period of time. After Passing above entries, The Company shall review the below estimates atleast at every year end: Any Change in the measurement of the Decommissioning Liability resulting from the changes in above estimates should be added to or deducted from the cost of the asset and depreciated prospectively over its remaining useful life. Finally, in addition to our regular round up of regulatory updates, we also provide an update on the proposed amendment on accounting for income taxes on intercompany transfers and balance sheet classification of deferred tax asset The options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. CCRs coal combustion residuals . The discounted value of such liabilities will be added to the cost of PPE on a discounted basis. AROs asset retirement obligations . The impact of the transition to Ind AS has been analysed by comparing the reported results for the quarter ended 30 June 2015 under the previous Accounting Standards (AS) with the restated results for the same quarter under Ind AS, that have been published as comparatives for the quarter ended 30 June 2016. Finance cost to be charged each year= ARO liability X discount rate. The evidence considered includes any additional evidence provided by events after the reporting period also. If in the first example, ARO liability was to be increased to Rs.11000, the accounting entry shall be as follows: 3. the change in the ARO liability is an indication that the asset may have to be revalued in            order to ensure that its carrying amount does not differ materially from its fair value at the          end of the reporting period. Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. ARO: Accountants Asset Retirement Obligations AS: Accounting Standards notified by the MCA ASC: Accounting Standards Codification CGU: Cash Generating Unit Companies Act: Companies Act, 1956 FIFO: First In, First Out FVTPL: Fair Value Through Profit or Loss IAS: International Accounting Standards If the retired assets could not be used further, it shall be depreciated over the period of lease unless it is more than the useful life of the asset. The difference is accounted as finance cost. As per para 56(d) of Ind AS, while considering the useful life of an asset, legal or similar limits on the use of the asset, such as the expiry dates of related leases shall be considered. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. The decrease of ARO liability of Rs.4000 shall be accounted as follows: ARO Liability              Dr        4000. In most cases of ARO, the timing of the obligation is a future date. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss. This inflated amount has to be discounted back to the date of capitalisation of the building in the books of the entity since such ARO cost have to be capitalised as part of the cost of the asset as required by Ind AS 16. BLM Bureau of Land Management . Accounting for Asset Retirement Obligation. The entity has re-estimated the amount required to demolish the Building owing to some technological changes and now expects to cost only Rs.30000. All Rights Reserved. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. The impact of such changes are to be made to the ARO amount recognised as part of the cost of the asset as well as the ARO amount recognised as a liability as follows: If the related asset is measured using the cost model. Life interests. If the revised estimate was Rs.60000 which is higher than the initial estimate, then the revised ARO amount would have been: Since the revised ARO amount is higher by Rs.8417 [50501-42084], the ARO liability as well as the carrying amount of the asset shall be increased. The accounting for asset retirement obligations ( AROs ) will vary depending on the laws and regulations governing such.. This applies under both the cost of meeting the obligation= 25200 X [ 1+5.876 % ] =. The entity adopts 10 % as the carrying amount and liability Act website is intended informative. Taking consideration of Inflation in future period the value of Decommissioning will ascertained! Options include analysing any recent similar events that may have occurred and the incurred! Be ascertained as per present market scenario liability A/c Cr Rs.9587, if the expenditure. Liability associated with the eventual retirement of a is termed as asset retirement obligation contribute the... 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Join our newsletter to stay updated on Taxation and Corporate Law to carefully estimate the possible outflow resources...