Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. 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. 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. 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. and Asset Retirement Obligations. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. 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. if the adjustment results in an addition to the cost of an asset, the entity shall consider whether this is an indication that the new carrying amount of the asset may not be fully recoverable. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. 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. 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. If no, then search for any similar past events and the related expenditure. 1834. 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. 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 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. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. 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. In most cases of ARO, the timing of the obligation is a future date. 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. (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 Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. If a        revaluation is necessary, all assets of that class shall be revalued. 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. 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. The entity adopts 10% as the revised discount rate with other factors remaining unchanged. 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. 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. Hence at the time of the obligating event which is the actual dismantling of the asset and restoration of the site, the actual dismantling and restoration expenses incurred should be adjusted against the balance in the ARO account. Accounting for Asset Retirement Obligation. AROs asset retirement obligations . counting for employee obligations with an option to recognize the entire such gain or loss to retained earnings, at the ... practicable then the fair value of the financial asset at the date of transition to Ind ASs shall be the new ... cept for recognizing asset retirement obligations. 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. 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. 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. Read about how life interests in property form part … IAS 37 outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable). 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. 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. 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. SAP Asset Retirement Obligation Management is an application that allows companies to manage their asset retirement obligations (AROs) from an accounting point of view. 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. ... asset retirement obligations, etc. 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. If a fair value is not initially obtainable, recognize the … 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. results under Ind AS for the first time. 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. This obligation of A is termed as Asset Retirement Obligation. 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 obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). 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. 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, Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … 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. However the amount deducted from the cost of the asset shall not exceed its carrying amount. 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. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. Life interests. 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. 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. Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated. 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. 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. The options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. This video explains how to account for an asset retirement obligation in the context of financial accounting. The discounted value of such liabilities will be added to the cost of PPE on a discounted basis. Thank you for such a wonderful explanation. The liability is commonly a legal requirement to return a site to its previous condition. 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. The following events shall be expected to contribute to the change in measurement of an existing decommissioning, restoration or similar liability. 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. 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. 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. (xxi) Ind AS 16 requires that if property, plant and equipment is acquired in exchange for a non-monetary asset, it should be recognised at its fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. 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 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 … CCRs coal combustion residuals . All Rights Reserved. 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. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. 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. The unwinding of the discounted value will … 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. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. This increase is recognised as borrowing cost. 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). 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. If it is such an indication, the entity shall test the asset for impairment by estimating its recoverable amount, and shall account for any impairment loss, in accordance with Ind AS 36. 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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. 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. The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. 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. 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. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. 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 inflation rate is assumed as 5.876% and the discount rate used is 9%. 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. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. Your email address will not be published. Join our newsletter to stay updated on Taxation and Corporate Law. 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. 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. 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 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 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. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. These factors used to compute the ARO cost are subject to change. 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. 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). 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. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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. Accounting for Asset Retirement Obligation (ARO). 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. BLM Bureau of Land Management . If an entity could estimate only the current cost of meeting the obligation, then such amount could be inflated to the time of fulfillment of the obligation using suitable inflation rate. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. 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. 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. Capitalisation under Ind AS 23 is not permitted. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss. 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. 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. 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