International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 379
arises. This is because the construction of the asset (and the environmental damage caused
by it) creates the past obligating event requiring restoration in the future. [IAS 37 IE Example 3].
The accounting for decommissioning costs is dealt with in IAS 37 by way of an example
relating to an oil rig in an offshore oilfield (see Example 27.5 at 3.3 above). A provision
is recognised at the time of constructing the oil rig in relation to the eventual costs that
relate to its removal and the restoration of damage caused by building it. Additional
provisions are recognised over the life of the oil field to reflect the need to reverse
damage caused during the extraction of oil.
[IAS 37 IE Example 3]. The total
decommissioning cost is estimated, discounted to its present value and it is this amount
which forms the initial provision. This ‘initial estimate of the costs of dismantling and
removing the item and restoring the site’ is added to the corresponding asset’s
cost. [IAS 16.16]. Thereafter, the asset is depreciated over its useful life, while the
discounted provision is progressively unwound, with the unwinding charge shown as a
finance cost, as discussed at 4.3.5 above.
The effect of discounting on the statement of comprehensive income is to split the cost of
the eventual decommissioning into two components: an expense based on the present value
of the expected future cash outflows; and a finance element representing the unwinding of
the discount. The overall effect is to produce a rising pattern of cost over the life of the
facility, often with much of the total cost of the decommissioning classified as a finance cost.
AngloGold Ashanti’s accounting policies and provisions note in respect of decommissioning
obligations and restoration obligations are shown in the following extract.
Extract 27.4: AngloGold Ashanti Limited (2017)
ANNEXURE A [extract]
Summary of significant accounting policies [extract]
ENVIRONMENTAL EXPENDITURE
The group has long-term remediation obligations comprising decommissioning and restoration liabilities relating to its past operations which are based on the group’s environmental management plans, in compliance with current environmental and
regulatory requirements. Provisions for non-recurring remediation costs are made when there is a present obligation, it is probable that expenditure on remediation work will be required and the cost can be estimated within a reasonable range of possible outcomes. The costs are based on currently available facts, technology expected to be available at the time of the clean-up, laws and regulations presently or virtually certain to be enacted and prior experience in remediation of contaminated sites.
Contributions for the South African operations are made to Environmental Rehabilitation Trust Funds, created in
accordance with local statutory requirements where applicable, to solely fund the estimated cost of rehabilitation
during and at the end of the life of a mine. The amounts contributed to the trust funds are accounted for as non-current
assets in the company. Interest earned on monies paid to rehabilitation trust funds is accrued on a time proportion
basis and is recorded as interest income. These funds may only be utilised for purposes of settling decommissioning
and environmental liabilities relating to existing mining operations. All income earned on these funds is reinvested
or spent to meet these obligations. For group purposes, the trusts are consolidated.
Provisions, contingent liabilities and contingent assets 1921
Decommissioning costs
The provision for decommissioning represents the cost that will arise from rectifying damage caused before production
commences. Accordingly, a provision and a decommissioning asset is recognised and included within mine infrastructure.
Decommissioning costs are provided at the present value of the expenditures expected to settle the obligation, using
estimated cash flows based on current prices. The unwinding of the decommissioning obligation is included in the income
statement. Estimated future costs of decommissioning obligations are reviewed regularly and adjusted as appropriate for
new circumstances or changes in law or technology. Changes in estimates are capitalised or reversed against the relevant
asset. Estimates are discounted at a pre-tax rate that reflects current market assessments of the time value of money.
Gains or losses from the expected disposal of assets are not taken into account when determining the provision.
Restoration costs
The provision for restoration represents the cost of restoring site damage after the start of production. Changes in the
provision are recorded in the income statement as a cost of production.
Restoration costs are estimated at the present value of the expenditures expected to settle the obligation, using
estimated cash flows based on current prices and adjusted for risks specific to the liability. The estimates are
discounted at a pre-tax rate that reflects current market assessments of the time value of money.
GROUP – NOTES TO THE FINANCIAL STATEMENTS
US dollars millions
2017
2016
26
Environmental rehabilitation and other provisions [extract]
Environmental rehabilitation obligations [extract]
Provision for decommissioning
Balance at beginning of year
279
272
Charge to income statement
2
–
Change in estimates(1)
4
(12)
Unwinding of decommissioning obligation
12
12
Transfer to non-current assets and liabilities held for sale
(20)
–
Utilised during the year
(2)
(2)
Translation
11
9
Balance at end of year
286
279
Provision
for
restoration
Balance at beginning of year
426
411
Charge to income statement
8
10
Change in estimates(1)
(17)
(2)
Unwinding of restoration obligation
10
8
Transfer to non-current assets and liabilities held for sale
(3)
–
Transfer to current portion
(17)
–
Utilised during the year
(4)
(3)
Translation
6
2
Balance at end of year
409
426
(1)
The change in estimates is attributable to changes in discount rates due to changes in global economic
assumptions and changes in mine plans resulting in a change in cash flows and changes in design of tailings
storage facilities and in methodology following requests from the environmental regulatory authorities. These
provisions are expected to unwind beyond the end of the life of mine.
6.3.1
Changes in estimated decommissioning costs (IFRIC 1)
IAS 37 requires provisions to be revised annually to reflect the current best estimate of
the provision. [IAS 37.59]. However, the standard gives no guidance on accounting for
1922 Chapter 27
changes in the decommissioning provision. Similarly, IAS 16 is
unclear about the extent
to which an item’s carrying amount should be affected by changes in the estimated
amount of dismantling and site restoration costs that occur after the estimate made upon
initial measurement. This was addressed by the IASB with the publication of IFRIC 1 in
May 2004. [IFRIC 1.1].
IFRIC 1 applies to any decommissioning, restoration or similar liability that has been
both included as part of the cost of an asset measured in accordance with IAS 16 or as
part of the cost of a right-of-use asset in accordance with IFRS 16 and recognised as a
liability in accordance with IAS 37. [IFRIC 1.2]. It addresses how the effect of the following
events that change the measurement of an existing decommissioning, restoration or
similar liability should be accounted for:
(a) a change in the estimated outflow of resources embodying economic benefits (e.g.
cash flows) required to settle the obligation;
(b) a change in the current market-based discount rate (this includes changes in the
time value of money and the risks specific to the liability); and
(c) an increase that reflects the passage of time (also referred to as the unwinding of
the discount). [IFRIC 1.3].
IFRIC 1 requires that (c) above, the periodic unwinding of the discount, is recognised in
profit or loss as a finance cost as it occurs. [IFRIC 1.8]. The Interpretations Committee
concluded that the unwinding of the discount is not a borrowing cost as defined in
IAS 23, and thus cannot be capitalised under that standard. [IFRIC 1.BC26-27].
For a change caused by (a) or (b) above, however, the adjustment is taken to the income
statement only in specific circumstances. Any revision to the provision (other than to
reflect the passage of time) is first recognised in the carrying value of the related asset
or in other comprehensive income, depending on whether the asset is measured at cost
or using the revaluation model. [IFRIC 1.4-7].
If the related asset is measured using the cost model, the change in the liability should
be added to or deducted from the cost of the asset to which it relates. Where the change
gives rise to an addition to cost, the entity should consider the need to test the new
carrying value for impairment. This is particularly relevant for assets approaching the
end of their useful life, as their remaining economic benefits are often small compared
to the potential changes in the related decommissioning liability. Reductions over and
above the remaining carrying value of the asset are recognised immediately in profit or
loss. [IFRIC 1.5]. The adjusted depreciable amount of the asset is then depreciated
prospectively over its remaining useful life. [IFRIC 1.7]. IFRIC 1 includes the following
illustrative example.
Example 27.17: Changes in decommissioning costs – related asset measured at
cost
An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started
operating on 1 January 2010. The plant has a useful life of 40 years. Its initial cost was $120,000,000; this
included an amount for decommissioning costs of $10,000,000, which represented $70,400,000 in estimated
cash flows payable in 40 years discounted at a risk-adjusted rate of 5%. The entity’s financial year ends on
31 December.
Provisions, contingent liabilities and contingent assets 1923
On 31 December 2019, the plant is 10 years old. Accumulated depreciation is $30,000,000. Because of the unwinding
of discount over the 10 years, the decommissioning liability has grown from $10,000,000 to $16,300,000.
On 31 December 2019, the discount rate has not changed. However, the entity estimates that, as a result of
technological advances, the net present value of the expected cash flows has decreased by $8,000,000.
Accordingly, the entity reduces the decommissioning liability from $16,300,000 to $8,300,000 and reduces
the carrying amount of the asset by the same amount.
Following this adjustment, the carrying amount of the asset is $82,000,000 ($120,000,000 – $8,000,000 –
$30,000,000), which will be depreciated over the remaining 30 years of the asset’s life to give a depreciation
expense for 2017 of $2,733,333 ($82,000,000 ÷ 30). The next year’s finance cost for the unwinding of the
discount will be $415,000 ($8,300,000 × 5%). [IFRIC 1.IE1-4].
In illustrating the requirements of the Interpretation, the example in IFRIC 1 reduces
the carrying value of the whole asset (comprising its construction cost and
decommissioning cost) by the reduction in the present value of the decommissioning
provision. The solution set out in the example does not treat the decommissioning
element as a separate component of the asset. Had this been the case, the component
would have had accumulated depreciation as at 31 December 2019 of $2,500,000
($10,000,000 × 10/40), giving a carrying amount of $7,500,000 at that date and a gain of
$500,000 when reduced by the decrease in the provision of $8,000,000. Accordingly,
we believe that the example in IFRIC 1 indicates that it would not be appropriate to
recognise any gain until the carrying value of the whole asset is extinguished.
If the related asset is measured using the revaluation model, changes in the liability alter
the revaluation surplus or deficit previously recognised for that asset. Decreases in the
provision are recognised in other comprehensive income and increase the value of the
revaluation surplus in respect of the asset, except that:
(a) a decrease in the provision should be recognised in profit or loss to the extent that
it reverses a previous revaluation deficit on that asset that was recognised in profit
or loss; and
(b) if a decrease in the provision exceeds the carrying amount of the asset that would
have been recognised under the cost model, the excess should be recognised in
profit or loss. [IFRIC 1.6].
Increases in the provision are recognised in profit or loss, except that they should be
recognised in other comprehensive income, and reduce the revaluation surplus, to the
extent of any credit balance existing in the revaluation surplus in respect of that asset.
Changes in the provision might also indicate the need for the asset (and therefore all
assets in the same class) to be revalued. [IFRIC 1.6].
The illustrative examples in IFRIC 1 address this alternative.
Example 27.18: Changes in decommissioning costs – related asset carried at
revaluation amount
Assume that the entity in Example 27.17 above instead adopts the revaluation model in IAS 16, and its policy
is to eliminate accumulated depreciation at the revaluation date against the gross carrying amount of the asset.
The entity first revalues the asset as at 31 December 2012 when the nuclear power plant is 3 years old. The
valuation of $115,000,000 comprises a gross valuation of $126,600,000 and an allowance of $11,600,000 for
decommissioning costs, which represents no change to the original estimate, after the unwinding of three
years’ discount. The amounts included in the statement of financial position at 31 December 2012 and the
related revaluation reserve movements are therefore:
1924 Chapter 27
Revaluation
Net book value
Valuation
reserve
$’000
$’000
/>
$’000
Cost or valuation
120,000
126,600
6,600
Accumulated depreciation (3/40)
(9,000)
–
9,000
Carrying amount of asset
111,000
126,600
15,600
Original provision
10,000
Unwinding of discount (3 years @ 5%)
1,600
11,600
11,600
Carrying amount less provision
99,400
115,000
15,600
The depreciation expense for 2013 is therefore $3,420,000 ($126,600,000 ÷ 37) and the discount expense for 2012
is $580,000 (5% of $11,600,000). On 31 December 2013, the decommissioning liability (before any adjustment)
is $12,180,000 and the discount rate has not changed. However, on that date, the entity estimates that, as a result
of technological advances, the present value of the decommissioning liability has decreased by $5,000,000.
Accordingly, the entity adjusts the decommissioning liability to $7,180,000. To determine the extent to which any
of the change to the provision is recognised in profit or loss, the entity has to keep a record of revaluations
previously recognised in profit or loss; the carrying amount of the asset that would have been recognised under
the cost model; and the previous revaluation surplus relating to that asset. [IFRIC 1.6]. In this example, the whole
of the adjustment is taken to revaluation surplus, because it does not exceed the carrying amount that would have
been recognised for the asset under the cost model of $103,000 (see below). [IFRIC 1.IE6-10].
In addition, the entity decides that a full valuation of the asset is needed at 31 December 2013, in order to