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. 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. Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. 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. 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. and Asset Retirement Obligations. 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. 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. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. (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. BLM Bureau of Land Management . Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. If no similar activities could be traced, then reports from experts either within or outside may be sought. 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. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. These factors used to compute the ARO cost are subject to change. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources 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. Value of Decommissioning will be Discounted at present Value on the Date of Transition will be calculation by taking Discount Rate as per Current Market Condition. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. 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. Read about how retirement villages form part of your real estate assets. 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. 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. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. Thank you for such a wonderful explanation. 1834. 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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. 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). 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. (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. 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. 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. Accounting for Asset Retirement Obligation (ARO). 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. 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. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. 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). Could you please let us know which Ind AS deals with ARO. 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. 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. Capitalisation under Ind AS 23 is not permitted. 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. 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. 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. In the case of ARO, the assets are to be retired upon expiry of the lease period. 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. 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. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. The impact of such changes are to be made to the ARO amount recognised as part of the cost of the asset as well as the ARO amount recognised as a liability as follows: If the related asset is measured using the cost model. However the amount deducted from the cost of the asset shall not exceed its carrying amount. 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. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. This video explains how to account for an asset retirement obligation in the context of financial accounting. 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. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. To Building A/c   Cr                  Rs.762. This article explains the provisions of Statement no. 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. 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. Accounting for Asset Retirement Obligation. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. The difference is accounted as finance cost. The decrease of ARO liability of Rs.4000 shall be accounted as follows: ARO Liability              Dr        4000. 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 entity has re-estimated the amount required to demolish the Building owing to some technological changes and now expects to cost only Rs.30000. 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. In most cases of ARO, the timing of the obligation is a future date. 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. To Building A/c  Cr                 Rs.16834. CERCLA Comprehensive Environmental Response, Compensation, and Liability Act . 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 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 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. 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. The ARO amount to be recognised in the financial statement as on the date of incurrence of the obligation shall be calculated using the formula given below: Where C is the expected cost at the time of obligation, n is the time required to settle the obligation. However in case the decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess shall be recognised immediately in profit or loss. 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. 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. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. 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 liability is commonly a legal requirement to return a site to its previous condition. CSP concentrated solar power . 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. 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 a fair value is not initially obtainable, recognize the … FASB Statement no. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. 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. 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. 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]. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … 143 as companies and their accountants will need to apply … This increase is recognised as borrowing cost. The unwinding of the discounted value will … 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. 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. 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. 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. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. (c) a reliable estimate can be made of the amount of the obligation. 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. 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. 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. 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