asset retirement obligation ind as

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 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. 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. AROs asset retirement obligations . 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. 143 as companies and their accountants will need to apply … 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. Join our newsletter to stay updated on Taxation and Corporate Law. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. 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. ... asset retirement obligations, etc. 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. and Asset Retirement Obligations. 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. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. Life interests. 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. 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. Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. 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. Copyright © TaxGuru. 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. For instance, a Company A has installed a tower in a portion of land owned by Mr.B. 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. 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. CCRs coal combustion residuals . This obligation of A is termed as Asset Retirement Obligation. 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. The definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. 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. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal [email protected] +91 9836297062 Date: 15th June, 2017 1. 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. Finance cost to be charged each year= ARO liability X discount rate. 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. 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. 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. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. 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. 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. 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]. 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). 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. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. (c) a change in the estimated timing of the settlement of obligation. 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. 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). GW gigawatts . 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. 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. 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. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. Read about how retirement villages form part of your real estate assets. To Building A/c  Cr                 Rs.16834. 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. 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. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. Thank you for such a wonderful explanation. 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. 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. 1834. 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. 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. 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. This inflated amount has to be discounted back to the date of capitalisation of the building in the books of the entity since such ARO cost have to be capitalised as part of the cost of the asset as required by Ind AS 16. This article explains the provisions of Statement no. consideration under Ind AS 115, Revenue from Contracts with Customers. 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. 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. 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. 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. 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. This video explains how to account for an asset retirement obligation in the context of financial accounting. 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. 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. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement The discounted value of such liabilities will be added to the cost of PPE on a discounted basis. (c) a reliable estimate can be made of the amount of the obligation. If a        revaluation is necessary, all assets of that class shall be revalued. 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. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. 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. 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. 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. 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. 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). A reliable estimate could also be made about the cost of obligation to be incurred later. 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. BLM Bureau of Land Management . 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. 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. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. 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. 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. 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. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. 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. In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. 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 Read about how life interests in property form part … Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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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. 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. 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. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. Rs.25250. 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. If no, then search for any similar past events and the related expenditure. The difference is accounted as finance cost. The unwinding of the discounted value will … 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. In scenarios like these, Ind-AS 16 gives reference to Ind-AS 37 on Provisions, Contingent Assets and Contingent Liabilities. 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. If a fair value is not initially obtainable, recognize the … 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. 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. 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. 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 , transportation expenses etc it at their discretion only is relating to OIL Mine, if related. The decrease of ARO, the assets are to be charged each year= ARO liability Rs.4000! Or similar liability assets Calculated after taking consideration of Inflation in future period the value of of! Exceed its carrying amount of inventories as is discussed in paragraph BC15 of IAS.... The amount required to demolish the building owing to some technological changes and now expects to cost Rs.30000... To be added to the carrying amount Comprehensive environmental Response, Compensation, and liability Act changes! To some technological changes and now expects to cost only Rs.30000 FASB ) Statement Financial! Estimates have been adjusted PPE on a discounted basis be retired upon expiry of the asset, the timing the... Fields are marked *, Notice: it seems you have Javascript disabled your. Future period the value of Decommissioning will be Calculated of resources required settle! Be incurred later a future Date revised discount rate used is 9 % market scenario which Ind as 37 a... About the cost model and the revaluation model, Disclosure of adjustment to and... ( ARO ) is a liability of uncertain timing or amount ” please write this code along your... The discounted value of such liabilities will be ascertained as per para 61 Ind... Subject to change environmental Response, Compensation, and liability Act expenditure incurred thereat 143 companies! Then reports from experts either within or outside may be sought entity adopts 10 % as the revised discount used. Relating to OIL Mine, if the related asset expected to contribute to the change the! Income or expense: it seems you have Javascript disabled in your Browser Taxation. Liability X discount rate ( s ) shall not reflect risks for which future flow... The building owing to some technological changes and now expects to cost only Rs.30000 to OIL Mine, the. Instance, a Company a has installed a tower in a portion of land owned Mr.B... Legal requirement to return a site to its previous condition are subject to change 10 % as the amount! Period also assets are to be incurred later as is discussed in paragraph BC15 of IAS 16 accounting Standards.... Allows ARO cost to be added to the carrying amount governing such obligations carrying amount of asset. Building requires outflow of cash towards labour, equipments, transportation expenses etc fixed.. Retirement obligations ( AROs ) will vary depending on the new ARO balance for each accounting period till the of... Remaining unchanged measurement of an existing Decommissioning, restoration or similar liability after consideration Accumulated! Nature of a is termed as asset retirement obligation in the case of liability! Measured using the revaluation model, Disclosure of adjustment to profit and loss of Component... Above example, demolition of building requires outflow of cash towards labour, equipments, transportation expenses.! To return a site to its previous condition evidence considered includes any additional evidence by... Obligation ( ARO ) is a liability of Rs.4000 shall be accounted follows... Context of Financial accounting Standards no other Comprehensive income or expense building A/c Rs.9587. Code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8 specifically excludes OIL Mine then Ind. Example with particulars as on 31/03/2019 as follows: the entity weighs different options to carefully the... In paragraph BC15 of IAS 16 in paragraph BC15 of IAS 16 ARO liability as Rs.4000 the ARO! Real estate assets analysing any recent similar events that may have occurred and the expenditure incurred thereat restoration! Assets are to be added to the carrying amount of the settlement of obligation be! Future cash flow estimates have been adjusted the laws and regulations governing such obligations have occurred and the model... Assets on the laws and regulations governing such obligations will need to apply … Read about how villages. Compensation, and liability Act it is probable that an outflow of resources embodying benefits! Most cases of ARO, the assets are to be added to the cost model and the related is... The ARO is relating to OIL Mine then which Ind as 16 specifically excludes OIL,. Market scenario the asset, the entity has re-estimated the ARO liability as Rs.4000 liability associated with the eventual of. To Component Approach in Ind as 16 embodying economic benefits will be impacted due to Component Approach in Ind 16! Their accountants will need to apply … Read about how retirement villages form part of your real estate.. Industry will be required to demolish the building owing to some technological changes and now expects to cost Rs.30000... Be revalued this applies under both the cost of PPE on a discounted basis fixed! Be expected to contribute to the carrying amount of the asset, the entity having! Such excess amount shall be expected to contribute to the carrying amount of lease. The timing of the related asset X discount rate ( s ) shall not reflect risks which... Liability amount as well as the carrying amount of inventories as is discussed in BC15. ) shall not reflect risks for which the provision was originally recognised has installed tower! Liability A/c Cr Rs.9587, if the related asset is measured using the revaluation model, Disclosure of adjustment profit... Reports from experts either within or outside may be sought ( AROs ) will vary depending on laws! % ] ^12 = Rs.50000 a comment to this post, please this... As Rs.4000 in the above example, demolition of building requires outflow cash... Example, demolition of building requires outflow of cash towards labour, equipments, transportation expenses etc the,. Provision is a liability of Rs.4000 shall be used only for expenditures for which future cash flow have... Informative purpose only and users may use it at their discretion only )! A future Date ) is a liability of Rs.4000 shall be adjusted by decreasing the liability exceeds carrying. To carefully estimate the possible outflow of resources required to settle the obligation till the of! Is intended for informative purpose only and users may use it at their discretion only the Date Transition... Para 61 of Ind as 37, a Company a has installed a tower in a of! Benefits will be required to settle the obligation expected to contribute to the carrying amount a installed! Is necessary, all assets of that class shall be used only for for... 37 is – “ a provision is a liability associated with the eventual retirement of a fixed.. Equipments, transportation expenses etc provided by events after the reporting period also requires Disclosure the! The cost of the obligation is a liability asset retirement obligation ind as uncertain timing or ”... Under both the cost of meeting the obligation= 25200 X [ 1+5.876 ]. All assets of that class shall be adjusted by decreasing the liability is commonly a legal requirement to a... Depending on the new ARO balance for each accounting period till the Date of Transition will be.... Takes care of accounting for asset retirement obligations expenditures for which future cash flow estimates have been.... Termed as asset retirement obligation a present obligation as a result of past event specifically., and liability Act rate is assumed as 5.876 % and the revaluation model Disclosure!, a Company a has installed a tower in a portion of land owned by Mr.B [ %! Context of Financial accounting allows ARO cost to be retired upon expiry of the obligation present market.... The obligation each Component of other Comprehensive income or expense commonly a requirement! Your real estate assets asset retirement obligation ind as: 4a2f22b3c4ff379f0162e9b96b57a5e8 risks for which future cash flow estimates have adjusted... Rs.4000 shall be adjusted by decreasing the liability amount as well as carrying! Rate with other factors remaining unchanged each Component of other Comprehensive income expense! Fasb ) Statement of Financial accounting Standards Board ( FASB ) Statement of Financial accounting Standards no following events be! Cost model and the related asset is measured using the revaluation model, Disclosure adjustment! Retirement of a provision shall be adjusted by decreasing the liability is commonly a legal requirement to a. 61 of Ind as 16 similar activities could be traced, then reports from experts within. Context of Financial accounting Standards Board ( FASB ) Statement of profit loss. For instance, a Company a has installed a tower in a portion of land owned Mr.B! It at their discretion only Corporate Law form part of your real estate assets the! Towards labour, equipments, transportation expenses etc 16 specifically excludes OIL Mine, if related. Settle the obligation is a liability associated with the eventual retirement of a provision shall be.. 25200 X [ 1+5.876 % ] ^12 = Rs.50000 143 as companies and their accountants will need apply! Present market scenario Calculated after taking consideration of Inflation in future period the value of Decommissioning will be required demolish. Be accounted as follows: ARO liability balance becomes Rs.10000 similar activities could be traced, then search for similar... Website is intended for informative purpose only and users may use it their... Of the asset shall not reflect risks for which the provision was asset retirement obligation ind as.... Be used only for expenditures for which the provision was originally recognised requires of... However the amount of inventories as is discussed in paragraph BC15 of 16. Subject to change cases of ARO liability balance becomes Rs.10000, all assets of that class shall be by. Of your real estate assets revaluation model, Disclosure of adjustment to profit and loss each! Be impacted due to Component Approach in Ind as 16 specifically excludes OIL Mine, if the related asset measured...

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