consideration under Ind AS 115, Revenue from Contracts with Customers. To Building A/c  Cr                 Rs.16834. 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. 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. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. 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. 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. 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. 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, The unwinding of the discounted value will … 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). The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. In most cases of ARO, the timing of the obligation is a future date. WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. 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. 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. 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. 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 the amount deducted from the cost of the asset shall not exceed its carrying amount. ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.10000. 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. 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. 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. Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. Any such revaluation shall be taken into account in determining        the amounts to be charged to revaluation deficit or revaluation surplus under (i) above. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. 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. 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. (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. In scenarios like these, Ind-AS 16 gives reference to Ind-AS 37 on Provisions, Contingent Assets and Contingent Liabilities. FASB Statement no. MSA metropolitan statistical area . Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. 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. 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. (c) a reliable estimate can be made of the amount of 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. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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. This article explains the provisions of Statement no. 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? However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. If a        revaluation is necessary, all assets of that class shall be revalued. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. The difference is accounted as finance cost. 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. 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 obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). The entity adopts 10% as the revised discount rate with other factors remaining unchanged. CCRs coal combustion residuals . ... asset retirement obligations, etc. This video explains how to account for an asset retirement obligation in the context of financial accounting. 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. Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. 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. 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. 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. 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. 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. 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. 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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 The options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. CSP concentrated solar power . 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. 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. It also takes care of accounting for asset retirement obligations. 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. Your email address will not be published. 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. 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. 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. 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. 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. Copyright © TaxGuru. 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. 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. 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. In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. 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. Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. 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. For instance, a Company A has installed a tower in a portion of land owned by Mr.B. 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. 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. Introduction As the book profit based on Ind AS compliant financial statement is likely to be different from the book profit based on existing Indian GAAP, the CBDT constituted a committee in June, 2015 for suggesting If no similar activities could be traced, then reports from experts either within or outside may be sought. 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. 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. 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. Life interests. (c) a change in the estimated timing of the settlement of obligation. 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. 1834. AROs asset retirement obligations . 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 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. 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. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss. 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. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement 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. 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. If a fair value is not initially obtainable, recognize the … 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. 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. All Rights Reserved. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. Capitalisation under Ind AS 23 is not permitted. 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. Accounting for Asset Retirement Obligation. 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 … Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. 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 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. Join our newsletter to stay updated on Taxation and Corporate Law. 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. 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. Rs.25250. Finance cost to be charged each year= ARO liability X discount rate. If no, then search for any similar past events and the related expenditure. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. 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. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … ] ^12 = Rs.50000 25200 X [ 1+5.876 % ] ^12 =.! Existing Decommissioning, restoration or similar liability required fields are marked *, Notice: it seems you have disabled... 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