Explore PSAB s Exposure Draft on Asset Retirement Obligations. April 6, 2017

Transcription

1 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 2

3 Intended Outcomes Faithful representation Consistent accounting Comprehensive reporting Enhanced comparability 3

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 4

5 Project Scope Asset retirement obligation A legal obligation associated with the retirement of a tangible capital asset Scope considerations Which tangible capital assets? controlled by the public sector In productive use, or not longer in productive use Includes leased tangible capital assets Scope includes Solid waste landfill closure and post closure liabilities (PS 3270) Asbestos Routine replacement Contaminated sites (PS 3260) Improper use Scope excludes Unexpected events Alternative use Waste and by-products 5 5

6 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 6

7 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! 7

8 Recognition of Liability 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. 8 8

9 Recognition of Liability There is a legal obligation to incur retirement costs; 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 reasonable estimate of the amount can be made. A legal obligation can result from: Agreements or contracts Legislation of another government A government s own legislation Promissory estoppel 9 9

10 Recognition of Liability 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. A liability can be incurred due to: The acquisition, construction or development of a tangible capital asset Normal use of a tangible capital asset 10 10

11 Recognition of Liability 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. 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? 11 11

12 Recognition of Liability 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. 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. Does a legal obligation exist? What is the obligating event? 12 12

13 Recognition of Liability 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. 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. Does a legal obligation exist? What is the obligating event? 13 13

14 Recognition and Allocation of Asset Retirement Costs CAPITALIZE In productive use EXPENSE No longer in productive use Allocate to expense in a rational and systematic manner (component OR network level) 14

15 Recognition Examples In productive use No longer in productive use Capitalize Expense 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? 15 15

16 Recognition Examples In productive use No longer in productive use Capitalize Expense 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? 16 16

17 Recognition Examples In productive use No longer in productive use Capitalize Expense 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? 17 17

18 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 18

19 Subsequent Measurement Adjust the Tangible Capital Asset Timing Amount Discount rate Expense Passage of time (accretion) If related asset is no longer in productive use 19

20 Recoveries A recovery should not be netted against the liability Follow: ASSETS, Section PS > recognize; or CONTINGENT ASSETS, Section PS > disclose. Consistency with PSA Handbook: CONTINGENT LIABILITIES, Section PS > may be different circumstances LIABILITY FOR CONTAMINATED SITES, Section PS > proposed consequential amendment FINANCIAL INSTRUMENTS, Section PS > consistent with proposals 20

21 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 21

22 Implications of Withdrawing Section PS Asset retirement obligation standard is more principles based 2. Transition 3. Different accounting treatment 22

23 Asset Retirement Obligation vs. Section PS 3270 Liability Total liability ARO Section PS 3270 Recognized as incurred earlier recognition Generally the same Recognized incrementally as landfill used later recognition Assets ARO is capitalized N/A Net debt Total expenses Both methods impact net debt ARO = earlier increase in Net Debt Generally the same Annual expenses Differences in annual expenses are due to differences in methodology used 23 23

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 Type of obligation Unexpected event, improper use Contamination needs to exist Legal (related to TCA of the entity) All liabilities (direct responsibility and assumed) Does not need to exceed the environmental standard Extent of contamination Must exceed the environmental standard 24 24

25 Transitional Provisions Effective date April 1, 2021 Transitional provision options: Prospective Retroactive Modified retroactive 25

26 Get Involved and Stay Informed Read the Exposure Draft Provide your comments by June 15, 2017 Stay informed subscribe to s Asset Retirement Obligations project page 26