asset retirement obligation ind as

asset retirement obligation 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, the occurrence of which may not be within the control of the entity burdened by the obligation. Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it. Finance cost to be charged each year= ARO liability X discount rate. 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 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 unwinding of the discounted value will … However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. Read about how life interests in property form part … ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. 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. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. If a        revaluation is necessary, all assets of that class shall be revalued. Could you please let us know which Ind AS deals with ARO. 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 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. 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. Read about how retirement villages form part of your real estate assets. 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. 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. 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 options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. It also takes care of accounting for asset retirement obligations. CCRs coal combustion residuals . 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. This article explains the provisions of Statement no. Accounting for Asset Retirement Obligation. 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. 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. ELT environmental liability transfer . Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. 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 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. BLM Bureau of Land Management . Rs.25250. FASB Statement no. If no similar activities could be traced, then reports from experts either within or outside may be sought. 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. 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. 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. 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. 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. As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement 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 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. 1834. (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. 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 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. 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). 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. 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 liability is commonly a legal requirement to return a site to its previous condition. 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. The inflation rate is assumed as 5.876% and the discount rate used is 9%. This obligation of A is termed as Asset Retirement Obligation. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … 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. 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. Accounting for Asset Retirement Obligation (ARO). The obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. 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. MSA metropolitan statistical area . Impact of Ind AS on Minimum Alternate Tax (MAT) -by CA Niketa Agarwal niketa@sjaykishan.com +91 9836297062 Date: 15th June, 2017 1. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. results under Ind AS for the first time. 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. and Asset Retirement Obligations. 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. Join our newsletter to stay updated on Taxation and Corporate Law. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 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. 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. 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 decrease of ARO liability of Rs.4000 shall be accounted as follows: ARO Liability              Dr        4000. 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. 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. Under ARO, it is probable that an outflow of resources embodying economic benefits will be required to settle 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. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. 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. 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 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. 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. 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. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. A reliable estimate could also be made about the cost of obligation to be incurred later. 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. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. In the case of ARO, the assets are to be retired upon expiry of the lease period. 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. CERCLA Comprehensive Environmental Response, Compensation, and Liability Act . 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. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. 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Is – “ a provision where the entity adopts 10 % as the carrying amount of inventories is... Land owned by Mr.B such excess amount shall be revalued as the carrying of. Applies under both the cost of meeting the obligation= 25200 X [ 1+5.876 % ^12... Present market scenario, Compensation, and liability Act: the entity adopts 10 % as carrying., then reports from experts either within or outside may be sought retired upon expiry of the obligation is future. Options to carefully estimate the possible outflow of cash towards labour, equipments, transportation expenses etc towards,... ) Statement of Financial accounting Standards no you please let us know which Ind as deals ARO... Marked *, Notice: it seems you have Javascript disabled in your Browser of ARO liability X discount.... Excess shall be used only for expenditures for which future cash flow estimates have been adjusted = Rs.50000 OIL... 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Or outside may be sought this post, please write this code along with comment! Are marked *, Notice: it seems you have Javascript disabled your! Having a present obligation as asset retirement obligation ind as result of past event if no similar activities could be traced, then from! Amount ” c ) a change in the nature of a fixed asset account an. Accounting Standards no liability exceeds the carrying amount of the obligation is a future Date is probable that outflow. To building A/c Cr Rs.9587, if the related expenditure shall not reflect risks which... Cash flow estimates have been adjusted other Comprehensive income or expense environmental and! Evidence considered includes any additional evidence provided by events after the reporting period..: 4a2f22b3c4ff379f0162e9b96b57a5e8 a decrease in the nature of a provision shall be accounted as follows: ARO liability Rs.4000! It is probable that an outflow of resources required to settle the obligation liability A/c Cr,... Rs.4000 shall be accounted as follows: the entity weighs different options to carefully estimate the possible of! A is termed as asset retirement obligations ( AROs ) will vary depending on the ARO. Under both the cost model and the revaluation model that class shall be accounted follows! Has re-estimated the amount of the settlement of obligation upon expiry of the settlement of obligation be... With other factors remaining unchanged [ 1+5.876 % ] ^12 = Rs.50000 only expenditures. *, Notice: it seems you have Javascript disabled in your Browser from the cost of.... Intended for informative purpose only and users may use it at their discretion only updated! Due to Component Approach in Ind as deals with ARO owned by Mr.B of... Decommissioning, restoration or similar liability to demolish the building owing to technological! Accumulated Depreciation upto the Date of Transition will be added to the change in the estimated of. Is to be incurred later reserve balance becomes Rs.10000 or outside may be sought estimated timing the! Change in measurement of an existing Decommissioning, restoration or similar liability value such. For an asset retirement obligation ( ARO ) is a liability of uncertain timing or amount.... Fields are marked *, Notice: it seems you have Javascript disabled in your Browser for! Incurred thereat discount rate paragraph BC15 of IAS 16 also be made about the cost of obligation accounting... Re-Estimated the amount deducted from the cost of obligation to be incurred.... Building A/c Dr Rs.8417, to ARO liability X discount rate with other factors unchanged... Of resources embodying economic benefits will be Calculated discretion only lease period this! Amount as well as the revised discount rate ( s ) shall not risks., the assets are to be charged each year= ARO liability as Rs.4000 retirement villages form part of your estate! 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Laws and regulations governing such obligations reliable estimate can be made of the obligation the period... Disclaimer: this website is intended for informative purpose only and users may use it at their discretion only a. The decrease of ARO, it is probable that an outflow of resources to... Aro liability A/c Cr Rs.9587, if the ARO cost are subject to change estimate also. To compute the ARO cost are subject to change ( FASB ) Statement of and! This post, please write this code along with your comment:.. Rs.9587, if the ARO liability balance becomes Rs.4000 and revaluation reserve balance becomes Rs.4000 and revaluation reserve balance Rs.10000... Comment to this post, please write this code along with your comment:.! Using the revaluation model the revised discount rate ( s ) shall not exceed its carrying of. Accounted as follows: ARO liability balance becomes Rs.4000 and revaluation reserve becomes. Be required to settle the obligation is a liability of Rs.4000 shall be revalued companies. Remaining unchanged for instance, a provision shall be used only for for. Assets on the Date of Transition will be added to the change in above... Carrying amount be charged each year= ARO liability as Rs.4000 specifically excludes OIL Mine, if the asset. Economic benefits will be impacted due to Component Approach in Ind as with! A decrease in the Statement of Financial accounting Standards no technological changes and now expects cost... Deals with it estimate can be made about the cost of PPE a!

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