In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. 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. BLM Bureau of Land Management . Home->Resources->Ind AS-> Accounting for Asset Retirement Obligation [Updated as on Dec 31, 2019] Asset retirement obligation is a legal or contractual obligation to dismantle and remove an asset and to restore the site in which it is located on retirement of a tangible asset. But it may be noted that Ind AS 2 does not explicitly provide for the treatment of ARO incurred in producing inventories during that period. 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. Estimated amount at time “n” shall be: Current estimated cost X [1+k]^n, For example, an entity has constructed a building in a leased property at a cost of Rs.300000. CCRs coal combustion residuals . The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. 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. GW gigawatts . In the above example, demolition of building requires outflow of cash towards labour, equipments, transportation expenses etc. By amount of Depreciation rate on the WDV of Assets as on the Date of Transition (in case of Opening ARO Assets) or the Date of Capitalisation ( in case of Addition). 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. Asset Retirement Obligation is a legal and accounting requirement, in which a company needs to make provisions for the retirement of a tangible long-lived asset, to bring the asset back to its original condition after the business is done using 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. The obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). 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. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. Life interests. We shall have no liability for the accuracy of the information and cannot be held liable for any third-party claims or losses of any damages. 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. 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. Finance cost to be charged each year= ARO liability X discount rate. A is required by the contract to dismantle and remove the asset and to restore the land on expiry of the lease term of 20 years. (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. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. 1834. In complying with this requirement, the change in the revaluation surplus arising from a change in the liability shall be separately identified and disclosed as such. 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. However the amount deducted from the cost of the asset shall not exceed its carrying amount. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. Thus in the case of ARO, the discounted ARO amount has to be periodically unwinded to reflect the passage of time and the difference amount is accounted as finance cost. However if the actual dismantling expenses was Rs.47000, then the entry will be: Loss on dismantling             Dr             5500, To Cash/Bank                                47000. 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. 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. As per para 60 of Ind AS 37, where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. A reliable estimate could also be made about the cost of obligation to be incurred later. 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. (c) a change in the estimated timing of the settlement of obligation. Asset retirement obligation/decommissioning cost broadly refers to the amount that a company expects to incur in disposing of the asset and reversing modifications made to the installation site. 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. 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. 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. Capitalisation under Ind AS 23 is not permitted. 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. As per para 51 of Ind AS 37, gains from the expected disposal of assets shall not be taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. Read about how life interests in property form part … CERCLA Comprehensive Environmental Response, Compensation, and Liability Act . 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. 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. All Rights Reserved. Transition adjustment relating to ARO will be included in the book profit for MAT purposes over a period of 5 years staring from the year of Ind AS adoption. 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. 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. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. Your email address will not be published. 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. 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. A business should recognize the fair value of an ARO when it incurs the liability and if it can make a reasonable estimate of the fair value of the ARO. MSA metropolitan statistical area . Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … This increase is recognised as borrowing cost. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal [email protected] +91 9836297062 Date: 15th June, 2017 1. To Building A/c  Cr                 Rs.16834. This video explains how to account for an asset retirement obligation in the context of financial accounting. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. The evidence considered includes any additional evidence provided by events after the reporting period also. 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). 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. 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 definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. Any such revaluation shall be taken into account in determining        the amounts to be charged to revaluation deficit or revaluation surplus under (i) above. 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. 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. Since the Schedule XIV rates are not split into various parts of heavy duty machinery, companies will have to go through a detailed exercise of breaking down its fixed asset line item into various components and assess each items independent useful life. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. 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? The unwinding of the discounted value will … 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. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. 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. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. For instance, a Company A has installed a tower in a portion of land owned by Mr.B. If the value of the ARO asset is adjusted on account of revision of ARO provision, the adjusted depreciable amount of the such asset shall be depreciated prospectively over its remaining useful life or remaining period of lease as the case may be. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. 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. Suppose in the above example, instead of revaluation surplus, there was revaluation deficit of Rs.3000 and the ARO liability was to be reduced to Rs.1500. Thank you for such a wonderful explanation. CSP concentrated solar power . 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. SAP Asset Retirement Obligation Management is an application that allows companies to manage their asset retirement obligations (AROs) from an accounting point of view. Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated. 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. 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. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. 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. (c) a reliable estimate can be made of the amount of the obligation. This obligation of A is termed as Asset Retirement Obligation. Industry will be impacted due to Component Approach in Ind AS 16. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement 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. 3) Accounting for Asset Retirement Obligations (ARO) Ind AS 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. Since the ARO liability is created at the date of incurrence of the obligation, it has to be adjusted to reflect the present value at the date of reporting of the financial statement using the above formula. 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. 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, In such cases, such estimate arrived should be adjusted for appropriate inflation factor so that a best estimate of the amount required to settle the obligation at a future date is arrived. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. 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. Rs.25250. 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. 143 as companies and their accountants will need to apply … 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. An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset 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. 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. However where an entity incurs ARO as a consequence of having used the item during a particular period to produce inventories during that period, such cost of obligation may be treated as per Ind AS 2- Inventories. ELT environmental liability transfer . 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 liability is commonly a legal requirement to return a site to its previous condition. 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 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. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The following events shall be expected to contribute to the change in measurement of an existing decommissioning, restoration or similar liability. In scenarios like these, Ind-AS 16 gives reference to Ind-AS 37 on Provisions, Contingent Assets and Contingent Liabilities. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. Period of 10 years have lapsed and the carrying amount of various GLs are as follows: ARO liability initially recognised: Rs.17777, Finance cost charged for 10 years: Rs.24307, ARO liability balance as on date: Rs.42084. 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. 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. In most cases of ARO, the timing of the obligation is a future date. 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. Accounting for Asset Retirement Obligation. Accounting for Asset Retirement Obligation (ARO). 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 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. 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. Usually this obligation arises when an asset is installed in a leased premise and the lessee is bound by the contract terms to dismantle and remove the same on expiry of the lease term. 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. 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The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. It also takes care of accounting for asset retirement obligations. results under Ind AS for the first time. 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. If no, then search for any similar past events and the related expenditure. 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. 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. 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. The difference is accounted as finance cost. In this publication, we highlight the impact of Ind AS on various topics including revenue recognition under Ind AS 115, Revenue From Contracts with Customers, and how revenue recognition would be impacted for a typical player in this sector upon adoption of Ind AS 115. The inflation rate is assumed as 5.876% and the discount rate used is 9%. If a fair value is not initially obtainable, recognize the … 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. Hence while estimating the expenditure to be incurred for settlement of obligation, the possible realisation from the disposal of the assets or any components will not be considered. 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. These factors used to compute the ARO cost are subject to change. 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 … 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. Such discount rates shall be the judgment of the management which in their opinion closely reflect current market assessment of the time value of money. and Asset Retirement Obligations. 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May consider an example with particulars as on 31/03/2019 as follows: the entity adopts 10 % as carrying. A decrease in the context of Financial accounting Standards Board ( FASB ) Statement of profit and loss of Component! For asset retirement obligations ( AROs ) will vary depending on the laws and regulations governing such obligations as:. Such obligations obligation is a liability of uncertain timing or amount ” obligation is a Date... Fasb ) Statement of Financial accounting Standards no incurred later such liabilities will be impacted due to Approach. Related expenditure rate used is 9 % of meeting the obligation= 25200 X 1+5.876... A tower in a portion of land owned by Mr.B to some technological changes and now expects to only.