• IAS 37, Provisions, Contingent Liabilities and Contingent Assets

History

• IFRIC D2 Changes in Decommissioning, Restoration and Similar Liabilities was issued 4 September 2003
• Comment deadline 3 November 2003
• Final Interpretation 1 issued 27 May 2004
• Effective for annual periods beginning on or after 1 September 2004
• Press Release on IFRIC 1 (PDF 27k).

IFRIC contains guidance on accounting for changes in decommissioning, restoration and similar liabilities that have previously been recognised both as part of the cost of an item of property, plant and equipment under IAS 16 and as a provision (liability) under IAS 37. An example would be a liability that was recognised by the operator of a nuclear power plant for costs that it expects to incur in the future when the plant is shut down (decommissioned). The interpretation addresses subsequent changes to the amount of the liability that may arise from (a) a revision in the timing or amount of the estimated decommissioning or restoration costs or from (b) a change in the current market-based discount rate.

IAS 37 requires the amount recognised as a provision to be the best estimate of the expenditure required to settle the obligation at the balance sheet date. This is measured at its present value, which IFRIC 1 confirms should be measured using a current market-based discount rate. The Interpretation deals with three kinds of change in an existing liability for such costs.

The two main kinds of change dealt with in the Interpretation are those that arise from:

• a) the revision of estimated outflows of resources embodying economic benefits. For example, the estimated costs of decommissioning a nuclear power plant may vary significantly both in timing and amount; and
• (b) revisions to the current market-based discount rate.

Most entities account for their property, plant and equipment using the cost model. Where this is so, these changes are required to be capitalised as part of the cost of the item and depreciated prospectively over the remaining life of the item to which they relate. This is consistent with the treatment under IAS 16 of other changes in estimate relating to property, plant and equipment.

In the spirit of convergence, the IFRIC considered the US GAAP approach in Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations. The Interpretation treats changes in estimated cash flows in a similar way to SFAS 143. However, SFAS 143 does not require any adjustment to the cost of the item, or to the provision, to reflect the effect of a change in the current market-based discount rate. The IFRIC did not choose this approach because IAS 37, unlike US GAAP, requires provisions to be measured at the current best estimate, which should reflect current discount rates. Also, the IFRIC considered it important that both kinds of change should be dealt with in the same way.

Where entities account for their property, plant and equipment using the fair value model, a change in the liability does not affect the valuation of the item for accounting purposes. Instead, it alters the revaluation surplus or deficit on the item, which is the difference between its valuation and what would be its carrying amount under the cost model. The effect of the change is treated consistently with other revaluation surpluses or deficits. Any cumulative deficit is taken to profit or loss, but any cumulative surplus is credited to equity.

The third kind of change dealt with by the Interpretation is an increase in the liability that reflects the passage of time – also referred to as the unwinding of the discount. This is recognised in profit or loss as a finance cost as it occurs.