ensure that the carrying amount does not differ materially from fair value. Suppose that the asset is now
valued at $107,000,000, which is net of an allowance of $7,180,000 for the reduced decommissioning
obligation. The valuation of the asset for financial reporting purposes, before deducting this allowance, is
therefore $114,180,000. The effect on the revaluation reserve of the revision to the estimate of the
decommissioning provision and the new valuation can be illustrated in the table below. [IFRIC 1.IE11-12].
Revaluation
Cost
model
Revaluation
reserve
$’000 $’000 $’000
Carrying amount as at 31 December 2012
111,000 126,600 15,600
Depreciation charge for 2013
(3,000) (3,420)
Carrying amount as at 31 December 2013
108,000 123,180
Revision to estimate of provision
(5,000)
Revaluation adjustment in 2013
(9,000)
(9,000)
103,000 114,180
Provision as at 31 December 2012
11,600 11,600
Unwinding of discount @ 5%
580 580
Revision to estimate
(5,000) (5,000) 5,000
Provision as at 31 December 2013
7,180 7,180
Carrying amount less provision
95,820 107,000 11,600
As indicated at 4.3.6 above, IAS 37 is unclear whether a new discount rate should be applied
during the year or just at the year-end, and whether the rate should be applied to the new
estimate of the provision or the old estimate. Although IFRIC 1 requires that changes in the
provision resulting from a change in the discount rate is added to, or deducted from, the cost
of the related asset in the current period, it does not deal specifically with these points.
However, Example 1 in the illustrative examples to IFRIC 1 indicates that a change in
discount rate would be accounted for in the same way as other changes affecting the
Provisions, contingent liabilities and contingent assets 1925
estimate of a provision for decommissioning, restoration and similar liabilities. That is, it is
reflected as a change in the liability at the time the revised estimate is made and the new
estimate is discounted at the revised discount rate from that point on. [IFRIC 1.IE5].
When accounting for revalued assets to which decommissioning liabilities attach, the
illustrative example in IFRIC 1 states that it is important to understand the basis of the
valuation obtained. For example:
(a) if an asset is valued on a discounted cash flow basis, some valuers may value the asset
without deducting any allowance for decommissioning costs (a ‘gross’ valuation),
whereas others may value the asset after deducting an allowance for decommissioning
costs (a ‘net’ valuation), because an entity acquiring the asset will generally also assume
the decommissioning obligation. For financial reporting purposes, the
decommissioning obligation is recognised as a separate liability, and is not deducted
from the asset. Accordingly, if the asset is valued on a net basis, it is necessary to adjust
the valuation obtained by adding back the allowance for the liability, so that the liability
is not counted twice. This is the case in Example 27.18 above;
(b) if an asset is valued on a depreciated replacement cost basis, the valuation obtained
may not include an amount for the decommissioning component of the asset. If it
does not, an appropriate amount will need to be added to the valuation to reflect
the depreciated replacement cost of that component. [IFRIC 1.IE7].
6.3.2
Changes in legislation after construction of the asset
The scope of IFRIC 1 is set out in terms of any existing decommissioning, restoration or
similar liability that is both recognised as part of the cost of the asset under IAS 16 or as
part of the cost of a right-of-use asset in accordance with IFRS 16; and recognised as a
liability in accordance with IAS 37. [IFRIC 1.2]. The Interpretation does not address the
treatment of obligations arising after the asset has been constructed, for example as a
result of changes in legislation. [IFRIC 1.BC23]. Nevertheless, in our opinion the cost of the
related asset should be measured in accordance with the principles set out in IFRIC 1
regardless of whether the obligation exists at the time of constructing the asset or arises
later in its life.
As discussed at 3.3 in Chapter 18, IAS 16 makes no distinction in principle between the
initial costs of acquiring an asset and any subsequent expenditure upon it. In both cases
any and all expenditure has to meet the recognition rules, and be expensed in profit or loss
if it does not. IAS 16 states that the cost of an item of property, plant and equipment
includes ‘the initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located, the obligation for which an entity incurs either when the
item is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.’ [IAS 16.16(c)]. For example,
the introduction of new legislation to require the clean-up of sites that cease to be used as
gasoline filling stations would give rise to the recognition of a decommissioning provision
and, to the extent that the clean-up obligation arose as a result of the construction of the
filling stations, an increase in the carrying value of the properties. Similarly, IFRS 16 states
that the cost of a right-of-use asset includes ‘an estimate of costs to be incurred by the
lessee in dismantling and removing the underlying asset, restoring the site on which it is
located or restoring the underlying asset to the condition required by the terms and
1926 Chapter 27
conditions of the lease, unless those costs are incurred to produce inventories. The lessee
incurs the obligation for those costs either at the commencement date or as a consequence
of having used the underlying asset during a particular period.’ [IFRS 16.24(d)].
Both IAS 16 and IFRS 16 require an entity to apply IAS 2 to the costs of obligations for
dismantling, removing and restoring the site on which an item is located that are
incurred during a particular period as a consequence of having used the item to produce
inventories during that period. [IAS 16.18, IFRS 16.25]. For example, the cost of restoring the
site of a quarry would be reflected as part of the cost of the aggregate extracted from it,
and not added to the carrying value of the site. Accordingly, if an entity previously had
no obligation to restore the site and new legislation was introduced after 25% of the site
had been excavated and 80% of that output had been sold, then 80% of the new estimate
of the restoration cost would be expensed; 20% added to the cost of inventory; and
none added to the carrying value of the site.
When changes in legislation give rise to a new decommissioning, restoration or similar
liability that is added to the carrying amount of the related asset, it would be appropriate
to perform an impairment review in accordance with IAS 36 (see Chapter 20).
6.3.3
Funds established to meet an obligation (IFRIC 5)
Some entities may partic
ipate in a decommissioning, restoration or environmental
rehabilitation fund, the purpose of which is to segregate assets to fund some or all of the
costs of decommissioning for which the entity has to make a provision under IAS 37.
IFRIC
5 was issued in December 2004 to address this issue, referring to
decommissioning to mean not only the dismantling of plant and equipment but also the
costs of undertaking environmental rehabilitation, such as rectifying pollution of water
or restoring mined land. [IFRIC 5.1].
Contributions to these funds may be voluntary or required by regulation or law, and the
funds may have one of the following common structures:
• funds that are established by a single contributor to fund its own decommissioning
obligations, whether for a particular site, or for a number of geographically
dispersed sites;
• funds that are established with multiple contributors to fund their individual or joint
decommissioning obligations, where contributors are entitled to reimbursement for
decommissioning expenses to the extent of their fund contributions plus any actual
earnings on those contributions less their share of the costs of administering the fund.
Contributors may have an obligation to make potential additional contributions, for
example, in the event of the bankruptcy of another contributor;
• funds that are established with multiple contributors to fund their individual or
joint decommissioning obligations when the required level of contributions is
based on the current activity of a contributor, but the benefit obtained by that
contributor is based on its past activity. In such cases there is a potential mismatch
in the amount of contributions made by a contributor (based on current activity)
and the value realisable from the fund (based on past activity). [IFRIC 5.2].
Such funds generally have the following features:
• the fund is separately administered by independent trustees;
Provisions, contingent liabilities and contingent assets 1927
• entities (contributors) make contributions to the fund, which are invested in a
range of assets that may include both debt and equity investments, and are
available to help pay the contributors’ decommissioning costs. The trustees
determine how contributions are invested, within the constraints set by the fund’s
governing documents and any applicable legislation or other regulations;
• the contributors retain the obligation to pay decommissioning costs. However,
contributors are able to obtain reimbursement of decommissioning costs from the
fund up to the lower of the decommissioning costs incurred and the entity’s share
of assets of the fund; and
• the contributors may have restricted or no access to any surplus of assets of the
fund over those used to meet eligible decommissioning costs. [IFRIC 5.3].
IFRIC 5 applies to accounting in the financial statements of a contributor for interests
arising from decommissioning funds that have both the following features:
• the assets are administered separately (either by being held in a separate legal
entity or as segregated assets within another entity); and
• a contributor’s right to access the assets is restricted. [IFRIC 5.4].
A residual interest in a fund that extends beyond a right to reimbursement, such as a
contractual right to distributions once all the decommissioning has been completed or
on winding up the fund, may be an equity instrument within the scope of IFRS 9, and is
not within the scope of IFRIC 5. [IFRIC 5.5].
The issues addressed by IFRIC 5 are:
(a) How should a contributor account for its interest in a fund?
(b) When a contributor has an obligation to make additional contributions, for
example, in the event of the bankruptcy of another contributor, how should that
obligation be accounted for? [IFRIC 5.6]
6.3.3.A
Accounting for an interest in a fund
IFRIC 5 requires the contributor to recognise its obligations to pay decommissioning
costs as a liability and recognise its interest in the fund separately, unless the contributor
is not liable to pay decommissioning costs even if the fund fails to pay. [IFRIC 5.7].
The contributor determines whether it has control, joint control or significant influence
over the fund by reference to IFRS 10 – Consolidated Financial Statements, IFRS 11 –
Joint Arrangements – and IAS 28 – Investments in Associates and Joint Ventures. If the
contributor determines that it has such control, joint control or significant influence, it
should account for its interest in the fund in accordance with those standards
(see Chapters 6, 12 and 11 respectively). [IFRIC 5.8].
Otherwise, the contributor should recognise the right to receive reimbursement from
the fund as a reimbursement in accordance with IAS 37 (see 4.6 above). This
reimbursement should be measured at the lower of:
• the amount of the decommissioning obligation recognised; and
• the contributor’s share of the fair value of the net assets of the fund attributable to
contributors. [IFRIC 5.9].
1928 Chapter 27
This ‘asset cap’ means that the asset recognised in respect of the reimbursement rights
can never exceed the recognised liability. Accordingly, rights to receive
reimbursement to meet decommissioning liabilities that have yet to be recognised as
a provision are not recognised. [IFRIC 5.BC14]. Although many respondents expressed
concern about this asset cap and argued that rights to benefit in excess of this amount
give rise to an additional asset, separate from the reimbursement asset, the
Interpretations Committee, despite having sympathy with the concerns, concluded
that to recognise such an asset would be inconsistent with the requirement in IAS 37
that ‘the amount recognised for the reimbursement should not exceed the amount of
the provision’. [IFRIC 5.BC19-20].
Changes in the carrying value of the right to receive reimbursement other than
contributions to and payments from the fund should be recognised in profit or loss in
the period in which these changes occur. [IFRIC 5.9].
The effect of this requirement is that the amount recognised in the statement of
comprehensive income relating to the reimbursement bears no relation to the expense
recognised in respect of the provision, particularly for decommissioning liabilities
where most changes in the measurement of the provision are not taken to the profit or
loss immediately, but are recognised prospectively over the remaining useful life of the
related asset (see 6.3.1 above).
One company that has been affected by the ‘asset cap’ is Fortum as shown below. In this
extract, the company observes that because IFRS does not allow the asset to exceed the
amount of the provision, [IFRIC 5.BC19-20], it recognises a reimbursement asset in its
statement of financial position that is lower than its actual share of the fund.
Extract 27.5: Fortum Oyj (2017)
Notes to the consolidated financial statements [extract]
28
Nuclear related assets and liabilities [extract]
Accounting policies [extract]
Fortum owns Loviisa nuclear power plant in Finland. In Fortum’s consolidated balance sheet, Sh
are in the State
Nuclear Waste Management Fund and the Nuclear provisions relate to Loviisa nuclear power plant. Fortum’s nuclear
related provisions and the related part of the State Nuclear Waste Management Fund are both presented separately in
the balance sheet. Fortum’s share in the State Nuclear Waste Management Fund is accounted for according to
IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds which
states that the fund assets are measured at the lower of fair value or the value of the related liabilities since Fortum
does not have control or joint control over the State Nuclear Waste Management Fund. The Nuclear Waste
Management Fund is managed by governmental authorities. The related provisions are the provision for
decommissioning and the provision for disposal of spent fuel.
[...]
Fortum’s actual share of the State Nuclear Waste Management Fund, related to Loviisa nuclear power plant, is higher
than the carrying value of the Fund in the balance sheet. The legal nuclear liability should, according to the Finnish
Nuclear Energy Act, be fully covered by payments and guarantees to the State Nuclear Waste Management Fund.
The legal liability is not discounted while the provisions are, and since the future cash flow is spread over 100 years,
the difference between the legal liability and the provisions are material.
Provisions, contingent liabilities and contingent assets 1929
28.1 Nuclear related assets and liabilities for 100% owned nuclear power plant, Loviisa [extract]
EUR million
2017
2016
Carrying values in the balance sheet
BS Nuclear provisions
858
830
BS Fortum’s share of the State Nuclear Waste Management Fund
858
830
Legal liability and actual share of the State Nuclear Waste Management Fund
Liability for nuclear waste management according to the Nuclear Energy Act
1,161
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 380