explore psab’s exposure draft on asset retirement...

Explore PSAB’s Exposure Draft

on Asset Retirement Obligations

April 6, 2017

2

Webinar Overview

• Intended outcomes and expected effects

• Exposure Draft proposals

• Implications of withdrawing Section PS

3270

• Boundaries: Asset Retirement Obligations

vs. Contaminated Sites

• Next steps

3

Intended Outcomes

• Faithful representation

• Consistent accounting

• Comprehensive reporting

• Enhanced comparability

4

Expected Effects

• Review agreements, contracts, legislation,

etc.

• Determine whether there are unrecorded

liabilities

• Estimate future cash flows and other

inputs in the measurement of the liability

• Review current accounting for asset

retirement obligations

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Project Scope

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A legal obligation associated with the retirement of a

tangible capital asset

Asset retirement

obligation

Scope considerations

• controlled by the public sector

• In productive use, or not longer in

productive use

• Includes leased tangible capital

assets

Which tangible capital assets? Scope includes

• Solid waste landfill closure and post

closure liabilities (PS 3270)

• Asbestos

• Routine replacement

• Contaminated sites (PS 3260)

• Improper use

• Unexpected events

• Alternative use

• Waste and by-products

Scope excludes

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Project Scope

Limit scope to legal obligations (exclude constructive and equitable obligations)

CONSIDERATIONS:

• Consistency within PSA Handbook

• Professional judgement

• Examples of asset retirement obligations

• Development of useful guidance and its effect

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Project Scope

• Asset retirement obligations related to

controlled tangible capital assets:

− in productive use

−no longer in productive use New!

• Includes landfill-related asset

retirement obligations (PS 3270) New!

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Recognition of Liability

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An asset

retirement

obligation is

recognized

when:

There is a legal obligation to incur retirement costs;

The past transaction giving rise to the liability has

occurred;

It is expected that future economic benefits will be

given up; and

A reasonable estimate of the amount can be made.

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9

An asset

retirement

obligation is

recognized when:


The past transaction giving rise to the liability has occurred;

It is expected that future economic benefits will be given up;

and


A legal obligation can result from:

Agreements or contracts

Legislation of another

government

A government’s own legislation

Promissory estoppel

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10

A liability can be incurred due to:

The acquisition, construction or development of a tangible capital asset

Normal use of a tangible capital asset

An asset

retirement

obligation is

recognized when:



It is expected that future economic benefits will be given up;

and


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11

An asset retirement

obligation is

recognized when:



It is expected that future economic benefits will be given up; and


Example

A public sector entity acquires a building that contains asbestos. Regulations

require the entity to handle and dispose of it in a prescribed manner when

the building undergoes renovations or is demolished.

Does a legal obligation exist?

What is the obligating event?

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Example

A public sector entity opens a landfill site. Regulations require that the final

cover and vegetation be put in place irrespective of the landfill site use.



An asset retirement

obligation is

recognized when:





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13

Example

A public sector entity operates an energy-from-waste facility. As the bricks in

the furnace become contaminated, the entity has a legal obligation to remove

and dispose of them in a prescribed manner.



An asset retirement

obligation is

recognized when:





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Recognition and Allocation of Asset Retirement Costs

In productive

use

No longer in

productive use

Allocate to expense in a

rational and systematic

manner (component OR

network level)

CAPITALIZE EXPENSE

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Recognition Examples

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Capitalize

Expense

In productive

use

No longer in

productive use

Example – fully amortized asset in productive use

A public sector entity controls a fully amortized school containing

asbestos. The school is still in productive use.

How should the asset retirement costs be recognized?

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16

Capitalize

Expense

In productive

use

No longer in

productive use

Example – no longer in productive use

A new legislation was created after the water treatment facility has

been removed from service. The new legislation now requires its

disposal in a prescribed manner and specific post-retirement

activities.

How should the asset retirement costs be recognized?

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17

Capitalize

Expense

In productive

use

No longer in

productive use

Example – allocation of asset retirement costs

A public sector entity operates a transformer station (network) to be

retired after a 50-year period for which its power transformers

(component) need to be retired every 25 years.

Over what period should the asset retirement obligation associated with

the transformers be amortized?

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Measurement

• Best estimate of the amount required to

retire a tangible capital asset

• A present value technique is often the best

available method

• No prescriptive guidance on appropriate

measurement techniques and discount

rate

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Subsequent Measurement

Adjust the Tangible

Capital Asset

Expense

• Timing

• Amount

• Discount rate

• Passage of time

(accretion)

• If related asset is

no longer in

productive use

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Recoveries

• A recovery should not be netted against the liability

• Follow:

– ASSETS, Section PS 3210 -> recognize; or

– CONTINGENT ASSETS, Section PS 3320 -> disclose.

• Consistency with PSA Handbook:

– CONTINGENT LIABILITIES, Section PS 3300 -> may be different

circumstances

– LIABILITY FOR CONTAMINATED SITES, Section PS 3260 -> proposed

consequential amendment

– FINANCIAL INSTRUMENTS, Section PS 3450 -> consistent with

proposals

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Disclosure

Key elements:

• Description of the liability and associated

tangible capital asset

• Basis for the estimate of the liability

• Reconciliation of the changes in carrying

amount during the period

• How funding and assurance provisions are met

• Estimated recoveries

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Implications of Withdrawing Section PS 3270

1. Asset retirement obligation standard is

more principles based

2. Transition

3. Different accounting treatment

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Asset Retirement Obligation vs. Section PS 3270

ARO Section PS 3270

Liability Recognized as incurred

– earlier recognition

Recognized

incrementally as landfill

used – later recognition

Total liability Generally the same

Assets ARO is capitalized N/A

Net debt Both methods impact net debt

ARO = earlier increase in Net Debt

Total expenses Generally the same

Annual expenses Differences in annual expenses are due to

differences in methodology used

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24

Asset Retirement Obligation vs. Section PS 3260

ARO Contaminated Sites

Cause for the retirement or remediation obligation

• Acquisition, construction,

development, normal use

• Not necessarily associated

with contamination

• Unexpected event,

improper use

• Contamination needs to

exist

Type of obligation

• Legal (related to TCA of the entity) • All liabilities (direct responsibility

and assumed)

Extent of contamination

• Does not need to exceed

the environmental standard

• Must exceed the

environmental standard

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Transitional Provisions

• Effective date – April 1, 2021

• Transitional provision options:

– Prospective

– Retroactive

– Modified retroactive

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Get Involved and Stay Informed

• Read the Exposure Draft

www.frascanada.ca

• Provide your comments by June 15, 2017

• Stay informed

– subscribe to emails http://www.frascanada.ca/subscribe

– Asset Retirement Obligations project page http://www.frascanada.ca/standards-for-public-sector-entities/projects/active/item56216.aspx

http://www.frascanada.ca/

http://www.frascanada.ca/subscribe



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