Attachment NBEUB IR-40 Accounting_Policy_Property_Plant _and_equipment NB Power Accounting Policy Property Plant & Equipment Scope This accounting policy addresses the following property, plant, and equipment topics: Recognition; Recognized Costs; Research & Design Costs; Overhead Costs; Borrowing Costs; Classification of Expenditures; Unrecognized Costs; Training Costs Subsequent Measurement Method; Depreciation; Impairment (Separate Accounting Policy); and Derecognition. Applicable Standards IAS 16: Property, Plant, and Equipment IAS 23: Borrowing Costs Definition Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.
Recognition 16.7 The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. 16.10 An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. 16.22 The cost of a self-constructed asset is determined using the same principles as for an acquired asset. NB Power capitalizes initial and subsequent costs related to purchase and/or constructed assets as follows: Purchases of, and expenditures on, capital assets are recognized when the asset is available for use. This includes costs listed in the Recognized Costs section below and excludes those in the Unrecognized Costs section. Overhead is charged to capital jobs on a monthly basis. See the Overhead Costs section below for more details. Borrowing costs eligible for capitalization, as described in the Borrowing Costs section below, are applied at each month end to the accumulated expenditures to the end of the previous month, meaning that when a project commences, borrowing costs are not applied for the first month. Other subsequent property, plant, and equipment expenditures as incurred, as described in the Classification of Expenditures section.
Recognized Costs 16.16 The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (c) 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. 16.17 Examples of directly attributable costs are: (a) costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment; (b) costs of site preparation; (c) initial delivery and handling costs; (d) installation and assembly costs; (e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) professional fees. Below is a list of costs NB Power includes within recognized property, plant, and equipment: Costs incurred for the detailed design of a specific asset (see Research & Design section); Expenditures for the purchase or construction and commissioning of specific assets; Contracted services; Direct labour and material; Engineering costs specifically related to a capital project; Initial installation costs; Overhead costs (see Overhead Costs section);
Recognized Costs Borrowing costs (see Borrowing Costs section); Expenditures on an existing asset that result in the enhancement of the service potential of the asset as described earlier in this policy and which exceed the materiality limits (see Classification of Expenditures section); and The cost of replacement of a plant retirement unit. Initial estimate of the costs of dismantling and removing a generation station and other significant assets, and restoring the site on which it was located. See the Decommissioning Accounting Policy. (For decommissioning costs only). See un-recognized cost section below. Research & Design Costs Per IAS 16.16(c) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management can be capitalized as part of a self-constructed asset. As IAS 16 does not provide further guidance on what aspects of research and design would be considered directly attributable, IAS 38 is looked upon for the definition and examples of research costs that are not eligible for capitalization. 38.8 Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. 38.56 Examples of research activities are: (a) activities aimed at obtaining new knowledge; (b) the search for, evaluation and final selection of, applications of research findings or other knowledge; (c) the search for alternatives for materials, devices, products, processes, systems or services; and (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. There are various assets that NB Power capitalizes that involve self-construction projects. The first stages in these projects are the Identify and Initiate Stages involving general (determining and assessing alternatives) and pre-engineering (alternative selected and determining project plan) research and studies.
Research & Design Costs These are followed by the Planning, Executing, and Completion Stages. General studies involving alternative assessments are not considered directly attributable to bringing the asset to intended use and therefore is expensed when incurred. Pre-engineering studies completed after an alternative has been selected are directly attributable to the asset and are therefore capitalized as part of the Construction in Progress. Many of the costs incurred in the Planning, Executing, and Completion Stages are considered directly attributable and are therefore also eligible to be capitalized. However, if the costs incurred in these categories are not directly attributable to the asset and they are expensed as incurred. For guidance and examples of situations where these capitalized expenses are required to be written off and expensed, see the Derecognition section. Overhead Costs Per the IAS 16 guidance in paragraphs 16 and 19, only overhead that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management can be recognized within the cost of property, plant, and equipment, and not any that is considered administration and other general overhead costs. At NB Power, only overhead costs that are incremental in nature, and would be avoidable over a three to five year period, are capitalized, as these would not exist if they did not construct their own property, plant, and equipment. The overhead costs that typically fall under this criteria include: Salaries and benefits of construction and engineering personnel not directly chargeable to project costs but are directly attributable to the cost of constructing an asset; and The cost of administrative services provided by various departments which are required as a result of construction activity, including information systems labour which includes a markup to recover other costs of the Information Systems Department. The cost of energy when it is used during the construction phase of a project. Conversely, the project is credited for the value of power generated during commissioning.
Overhead Costs Overhead rates are determined based on analytical reviews which are done periodically every two to three years. As part of these reviews, management personnel are interviewed to determine how much time and effort is expended on controlling and monitoring capital jobs and other support services. The overhead rate is calculated by dividing the overhead allocated to capital (updated at a minimum of once every four or five years) by the total direct costs of capital projects in a given year (updated annually). These overhead costs are charged using the rates, to all expenditures, including survey, acquisition and site improvement costs, with the exception of interest expenditures. If a project is postponed or deferred, overhead application is suspended. NB Power retains KPMG LLP to complete a study every five years over its estimates of the amount of overhead costs that should be allocated to capital in each operating year. Another aspect of overhead that needs to be considered separately is the allocation of equipment and machinery expenses to self-constructed assets. These allocations relate to equipment and machine that are purchased and used exclusively for capital projects, as, if it weren t for the capital projects, these costs would be directly avoidable. The allocation includes a portion of the operating expenses of and depreciation on the equipment and machinery that meets the above criteria, based on the hours used in the capital project. Borrowing Costs 23.5 This Standard uses the following terms with the meanings specified: Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. 23.8 An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them.
Borrowing Costs In accordance with IAS 23, borrowing costs are only capitalized to qualifying assets which are defined above. NB Power defines a substantial period of time as six months. 23.10 The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. 23.12 To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. 23.14 To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of borrowing costs it incurred during that period. The interest rate to be used in the calculation of borrowing costs will be set each year in advance of the fiscal year. The rate used for borrowing costs will either be specific or general, depending on whether the capital project is classified as a major capital project, or as other capital project. The threshold defining major capital projects varies by company, and are based on historical estimates of major capital projects:
Borrowing Costs Holding Division. & Distribution and Customer Service Division. - $50m Nuclear and Generation Division. - $75m For major capital projects, borrowing costs will be determined using a composite rate based on the financing plan for the major capital project expenditures to be made in the upcoming year. For other capital projects, the average borrowing rate for all of NB Power s debt is used in determining the amount to be capitalized. 23.17 An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions: (a) it incurs expenditures for the asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. 23.20 An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development of a qualifying asset. 23.22 An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 23.24 When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, the entity shall cease capitalizing borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale. NB Power begins, suspends, and ceases the capitalization of borrowing costs per the above guidance under IAS 23. Borrowing costs for both major and other capital projects are capitalized using the compound method, and therefore applied monthly to the previous month s job to date expenditures, including accumulated borrowing costs. If there is a material variance from the financing plan, an adjustment will be made in the interest rate used in the calculation.
Classification of expenditures Major Overhauls and Inspections 16.13 Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle in paragraph 7, an entity recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognized in accordance with the derecognition provisions of this Standard (see paragraphs 67 72). 16.14 A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognized. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed.
Classification of expenditures NB Power incurs on a regular basis both major overhauls, known as generation station outages, and major inspections within these generation stations. The outages are required to continue to operate in a safe and reliable manner, and meet safety standards. Some inspections, such as for the boiler and pressure vessel, are required by law, while others are required for maintaining operating licenses and/or insurance coverage. There are two major categories of inspections: 1. Initial Inspections Occur upon commissioning of a plant and involves putting components through various tests to ensure proper installation and correct specifications. 2. In-Service Inspections Occur regularly throughout the life of the plant and are done to determine the condition of the components. NB Power capitalizes major overhauls as they occur, pending that they are planned and reach the minimum outage of three weeks and occurrence interval of two years or more. Initial inspections are capitalized and amortized over the life of the plant, while in-service inspections are capitalized and amortized over the estimated time frame until the next in-service inspection. Through the use of retirement unit accounting for all assets, except distribution assets, major components and subcomponents of asset categories are identified as unique asset items in the fixed asset records so that when items are replaced or inspections are renewed, the original cost can be removed from the records and the cost of the new item can be capitalized. Capital vs. Expenditures (i.e. Repairs & Maintenance) NB Power assesses subsequent expenditures related to property, plant, and equipment to determine whether they are capital or operating in nature. Based on a lack of specific guidance in IAS 16 regarding capitalization of subsequent expenditures, NB Power looked to the Basis of Conclusions for IAS 16 that accompanies, but is not a part of IAS 16. BC5 BB 12:
Classification of expenditures IAS 16 does not distinguish between subsequent expenditure that maintains the existing service potential of an asset ( repairs and maintenance ) and subsequent expenditure that enhances that service potential ( improvements ). Instead, all major subsequent expenditure should be capitalized, provided that it is probable that future economic benefits will flow to the entity, and any part of the existing asset that has been replaced should be derecognized, irrespective of whether it has been depreciated separately. However, the costs of the day-to-day servicing of property, plant and equipment are not capitalized, even though they are arguably incurred in the pursuit of future economic benefits, because they are not sufficiently certain to be recognized in the carrying amount of an asset under the general recognition principle. Expenditures are considered for capitalization when they meet the above requirement of offering future economic benefits, and if they are greater than the materiality limit established for the related asset category. A materiality limit, once identified, is the minimum dollar value that will normally be considered for capitalization. It does not mean that any expenditure over the materiality limit will automatically be capitalized; in order for expenditures to be capital, they must also meet the capitalization criteria. The following table outlines the materiality limits for various categories of assets: Asset Category Materiality Limit Power Generating Stations $150,000 Terminals $10,000 Feeder & Industrial Load Substations $5,000 Transmission System $10,000 Land & Buildings $10,000 Communications Equipment $5,000 Tools $5,000 Computer Equipment $5,000 Computer software $250,000 Distribution $200 & Considered an Asset/WO Motor Vehicles $5,000 Office Equipment $5,000
Classification of expenditures When an asset component is retired, the capital cost of the old asset is removed from the property, plant, and equipment records, and the cost of the new asset (if replaced) is capitalized. Unrecognized costs 16.19 Examples of costs that are not costs of an item of property, plant and equipment are: (a) costs of opening a new facility; (b) costs of introducing a new product or service (including costs of advertising and promotional activities); (c) costs of conducting business in a new location or with a new class of customer (including costs of staff training); and (d) administration and other general overhead costs. 16.20 Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment: (a) costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; (b) initial operating losses, such as those incurred while demand for the item's output builds up; and (c) costs of relocating or reorganizing part or all of an entity's operations. NB Power does not include the following OM&A costs within property, plant, and equipment, based on the applicable guidance above: Costs associated with generating or distributing power to customers; All borrowing costs, except those discussed above; All overhead costs, except those discussed above; Costs incurred for training as discussed in separate Training Costs section; Costs incurred for research and development which cannot be associated with the design and construction of a specific asset as discussed in separate Research and Development Costs section;
Unrecognized costs Costs associated with existing assets which are below the materiality guidelines or are above the materiality guidelines but do not result in an enhancement of the service potential of the asset as discussed in Classification of Expenditures section; Preliminary studies and site searching; Planning and pre-development costs incurred before final authorization of the project; and Costs related to abnormal amounts of wasted material, labour, or other resources incurred in the construction of the asset. Demolition or disassembly of existing assets such as sub-station /terminal, transmission line components, generating station components and distribution assets, these are expensed when incurred. Professional judgment is required in determining if the cost incurred is directly attributable to the new asset or whether it relates to the dismantling the old. Training costs Per IAS 16.19(c) costs of conducting business in a new location or with a new class of customer (including costs of staff training) are not to be capitalized and included within the cost of property, plant, and equipment. Further guidance on this topic is found within Deloitte s igaap 2015 Volume A A Guide to IFRS Reporting, Section 4.2.1.2: Costs Not Suitable for Capitalization, as follows: Example 4.2.1.2 - Training cost as a component of the cost of an asset: An entity acquires equipment of a type that its employees have never operated before. During the installation period, the employees receive extensive training on the equipment. The cost to the entity includes the incremental cost of hiring experts to conduct the training, and the directly attributable cost of wages of the employees during the training period. The equipment could not be used by the entity unless its employees received the training.
Training costs These training costs do not qualify as a component of the cost of the equipment; they do not fall within the scope of costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the management. The equipment would be capable of operating in the manner intended by the management without the entity incurring the training cost even though the employees would not know how to operate the equipment. In accordance with [IAS 38:15] and [IAS 38:69] of IAS 38 Intangible Assets, the training costs will typically be recognized as an expense when incurred. Based on the above guidance and example given, under IAS 16, NP Power does not capitalize training related costs including the cost of hiring the trainer, training per employee, or of the employees wages for the training duration. Training manuals developed and printed by NB Power, as well as other tangible items acquired for training purposes, are considered to meet the definition of property, plant, and equipment and are therefore capitalized. Training software acquired/developed by NB Power and other like items, are considered to meet the definition of intangible items and are therefore capitalized. See the Intangibles Accounting Policy for further details on the capitalization of training software. Subsequent measurement method 16.29 An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. NB Power uses the cost model, as allowed per the guidance above, and as described further below. 16.30 After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
Depreciation 16.43 Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. 16.53 The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount. 16.50 The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. 16.51 The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. 16.60 The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. 16.61 The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8. 16.55 Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognized. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.
Depreciation All property, plant, and equipment at NB Power are depreciated using the straight line method, as allowed per IAS 16.62. This method accounts for the residual value and results in a constant charge over the useful life if the asset's residual value does not change. The service lives of assets that are used for depreciation purposes are determined and reviewed by the Internal Depreciation Review Committee and are approved by the Executive and the Audit Committee of the Board of Directors, at a minimum, each fiscal year-end. Assets obtained through acquisition are assigned service lives based on an evaluation of their condition. Assets to be retired because of obsolescence or system changes may have their expected lives reduced and depreciation rates amended accordingly. The majority of assets have immaterial residual values, with the exception of generation assets, which are deemed to have material residual values. The residual values of the generation assets go through the same review and approval process as the service lives of assets as described above, as do the depreciation methods for all assets. When assets are taken out of service and management determines that it is more likely than not (> 50% possible) that the asset will be used in the future, the carrying amount of the asset continues to be depreciated, until it is derecognized. See the Derecognition section for determining when the asset is no longer considered out of service and instead derecognized. The only asset category with a differing policy than above is distribution assets (poles, transformers, etc.) which are depreciated using group depreciation. Under this ground depreciation method, all like assets acquired in a year are amortized over the average life and earn a return over that life. NB Power has independent studies done to determine the depreciation for each year. These studies are done using statistical methods and allow for the appropriate average service lives as well as expected future losses, which means the cost of distribution assets retired net of salvage, is charged to accumulated depreciation and the loss is amortized over the remaining life of the remaining assets in service.
Impairment 16.63 To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets. That Standard explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognizes, or reverses the recognition of, an impairment loss. NB Power maintains a separate accounting policy for impairment of property, plant, and equipment under IAS 36. See separate policy for more details on impairment. Derecognition 16.67 The carrying amount of an item of property, plant and equipment shall be derecognized: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. 16.68 The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognized (unless IAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue. Property, Plant, and Equipment Items that were previously taken out of service and continued to be depreciated are considered derecognized when after two years from the date the asset was taken out of service, the asset is still not being used and there is no persuasive evidence that it will be used again. When any item of property, plant, and equipment is derecognized the cost and accumulated depreciation is written out of the accounts with the gain or loss on disposal being charged to operations. As mentioned above, items considered under group depreciation have any anticipated loses accounted for through the depreciation rates over their useful lives, and therefore there is only an income statement impact on their derecognition if there is a material variance between the expected and actual loss on disposal.
Derecognition Capital Projects At the end of each fiscal year, capital projects are reviewed to determine if they meet the derecognition criteria above of not being expected to provide future economic benefits. Capital projects are considered deferred projects and derecognized if the following criteria are met, as set by NB Power: Have had no expenditures for a full fiscal year; No funds are budgeted for the project in the upcoming year; No funds are designated for the project in the five year forecast; or Management confirms that it is more than likely (>50%) that the project will not be continued and completed. If a capital project is reviewed and considered a deferred project, the capitalized costs are written off on in income. End of document