The definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. 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. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. SAP Asset Retirement Obligation Management is an application that allows companies to manage their asset retirement obligations (AROs) from an accounting point of view. Capitalisation under Ind AS 23 is not permitted. ELT environmental liability transfer . 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. 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. 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. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. The evidence considered includes any additional evidence provided by events after the reporting period also. 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. 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. 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. 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. 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. The difference is accounted as finance cost. Copyright © TaxGuru. 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. 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. This obligation of A is termed as Asset Retirement Obligation. 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. 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. Your email address will not be published. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. 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. 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. Read about how retirement villages form part of your real estate assets. 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. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. 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. 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. 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. The decrease of ARO liability of Rs.4000 shall be accounted as follows: ARO Liability              Dr        4000. A reliable estimate could also be made about the cost of obligation to be incurred later. 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. CSP concentrated solar power . 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. Industry will be impacted due to Component Approach in Ind AS 16. Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated. 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. and Asset Retirement Obligations. GW gigawatts . ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. 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. 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. 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. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. 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. 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. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. 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. If a        revaluation is necessary, all assets of that class shall be revalued. Any such revaluation shall be taken into account in determining        the amounts to be charged to revaluation deficit or revaluation surplus under (i) above. 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. 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. 143 as companies and their accountants will need to apply … This Roadmap is intended to help entities address the impact of certain environmental and asset retirement Hence the ARO is recognised in the financial statements as a provision as at the date at which they are incurred at its measured value. 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. 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. 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. Accounting for Asset Retirement Obligation (ARO). 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). 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. 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 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. 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. 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. 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. 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. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. 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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. (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. For instance, a Company A has installed a tower in a portion of land owned by Mr.B. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. 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). 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. The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. To Building A/c  Cr                 Rs.16834. 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. 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. 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. consideration under Ind AS 115, Revenue from Contracts with Customers. 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. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. If no similar activities could be traced, then reports from experts either within or outside may be sought. 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. 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. 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. Accounting for Asset Retirement Obligation. Join our newsletter to stay updated on Taxation and Corporate Law. To Building A/c   Cr                  Rs.762. 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 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. 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 … Under ARO, it is probable that an outflow of resources embodying economic benefits will 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. 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. (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. 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 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. 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 obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). 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. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. If a fair value is not initially obtainable, recognize the … 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 options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. Finance cost to be charged each year= ARO liability X discount rate. This article explains the provisions of Statement no. In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. 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. 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. 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). In the case of ARO, the assets are to be retired upon expiry of the lease period. This video explains how to account for an asset retirement obligation in the context of financial accounting. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. The discounted value of such liabilities will be added to the cost of PPE on a discounted basis. 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. AROs asset retirement obligations . ... asset retirement obligations, etc. For the measurement of ARO Assets and Present Value of Decommission Liability, we have to Calculate the following: On the Date of Transition, PV of Decommissioning on the Date of Capitalisation will be Capitalised as ARO Assets and Accumulation Depreciation upto the Date of Transition will be accounted for and PV of Decommissioning Liability as on the Date of Transition will be accounted as Liability  in Current and Non Current.  The Finance Cost from the Date of Capitalisation to the Date of Transition (i.e Difference of PV of Deccomissioning Liability as on the Date of Transition and Date of Capitalisation) and Accumulated Depreciation are charged from Retained Earning on the the date of Transition. 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. If suppose the carrying amount of the asset had been Rs.15000, then the accounting treatment shall be as follows: ARO Liability A/c              Dr   Rs.16834, To Building A/c         Cr                   Rs.15000, To Excess provision   Cr                   Rs. 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. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. 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. Could you please let us know which Ind AS deals with ARO. 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. 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. MSA metropolitan statistical area . (c) a change in the estimated timing of the settlement of obligation. 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. 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. The inflation rate is assumed as 5.876% and the discount rate used is 9%. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. 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. 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). However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. CCRs coal combustion residuals . Rs.25250. In scenarios like these, Ind-AS 16 gives reference to Ind-AS 37 on Provisions, Contingent Assets and Contingent Liabilities. 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. 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. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. 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. 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, 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. The following events shall be expected to contribute to the change in measurement of an existing decommissioning, restoration or similar liability. Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. Read about how life interests in property form part … If no, then search for any similar past events and the related expenditure. 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. 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. Due to the re estimation, revised ARO amount is as follows: Thus the ARO balance as on date is higher by Rs.16834 [42084-25250]. All Rights Reserved. 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. 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. 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Some technological changes and now expects to cost only Rs.30000, all assets of that class shall be immediately...

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