- 1 - CAPITAL ASSET ACCOUNTING AND CAPITALIZATION POLICY I. PURPOSE OF THE POLICY The purpse f this Plicy is t utline Pembina s plicies relating t Prperty, Plant & Equipment. This Plicy cvers the recgnitin f assets (capitalizatin f csts), depreciatin charges, derecgnitin f assets, and impairment lsses. II. SCOPE AND APPLICATION This Plicy applies t all fficers, emplyees, cnsultants and directrs f Pembina, and Pembina Operated Jint Ventures with authrizatin t capitalize csts r realize assets, and any individual that supervises the abve activities ( Persnnel ). This Plicy utlines accunting plicies with respect t: recgnitin and capitalizatin f csts as part f Prperty Plant & Equipment n initial recgnitin and subsequent t in-service date; depreciatin f Prperty Plant & Equipment; derecgnitin f Prperty Plant & Equipment; and impairment f Prperty Plant & Equipment. This Plicy des nt cver the fllwing: Prject gvernance refer t the Pembina Prject Delivery and Gvernance Lifecycle Framewrk, wned by the Technical Services Unit; When AFEs must be raised fr capital expenditure apprval refer t the Authrizatin fr Expenditure Plicy, wned by Crprate Accunting; Acquisitins f assets as part f a business cmbinatin cntact Capital Assets fr accunting supprt in the event f the acquisitin f a business; Nn-Current Assets Held fr Sale and Discntinued Operatins cntact Capital Assets fr accunting supprt in the event that assets are held fr sale r peratins are discntinued; Intangible Assets cntact Capital Assets fr accunting supprt in the event f a purchase f r develpment f Intangible Assets;
- 2 - Capital Accruals Refer t the Capital Asset Accrual Guidance wned by Crprate Accunting r cntact Capital Assets; and Accunting fr Leases Cntact Capital Assets fr accunting supprt in the event f the lease f an asset. Definitins In this Plicy: Accunting Plicy means Pembina s Accunting Plicy team; Accunting Interpretatin means a technical paper that prvides an interpretatin f IFRS as it applies t a particular transactin r cntract; AFE means Authrizatin fr Expenditure, mechanism used by Pembina (in EPM, and linked t prjects in SAP) t prepare estimates fr prject r prgram expenditures, facilitate the review and apprval f majr expenditures befre they are made, and prvide the prcess fr recrding and mnitring expenditures relating t each AFE in SAP; Asset Retirement Obligatin means the calculatin f the legal r cnstructive bligatin f Pembina n abandnment f an asset, calculated in accrdance with IFRS; Business Cmbinatin means a transactin r ther event in which an acquirer btains cntrl f ne r mre businesses (integrated set f activities and assets that is capable f being cnducted and managed fr the purpse f prviding a return); Capital Assets means the team respnsible fr accunting fr Capital Assets, and can be reached at CapitalAssets@Pembina.cm; Capital Asset Accrual Guidance means guidance n when accruals must be made fr csts incurred that are in excess f csts receipted in SAP; Carrying Amunt means the amunt at which an asset is recgnized after deducting any accumulated depreciatin and accumulated impairment lsses; CCA means Capital Cst Allwance, which is the amunt f an asset's cst that can be deducted fr incme tax purpses; Cst means the amunt paid r the fair value f ther cnsideratin given t acquire an asset at the time f its acquisitin r cnstructin; Cst f Service Cntract means a cntract that invlves recvery f csts that may r may nt be capital in accrdance with this Plicy; CGU means a cash generating unit; Depreciatin means the systematic allcatin f the depreciable amunt f an asset ver its useful life; "EPM" means Enterprise Prject Management, the system used t raise and apprve AFEs; Executives means cllectively, r individually the Vice Presidents, Senir Vice Presidents, Chief Financial Officer, Chief Executive Officer and/r President f Pembina;
- 3 - Fair Market Value means the price that wuld be received t sell an asset in an rderly transactin between market participants; FEED means Frnt End Engineering & Design; General & Administrative Expenses means csts incurred fr general administratin f the Cmpany that are classified as such in Pembina's financial statements; General Ledger means the ledger in SAP where all accunting transactins are recrded; Gvernment Grants means assistance by gvernment in the frm f transfers f resurces t an entity in return fr past r future cmpliance with certain cnditins relating t the perating activities f the entity. Gvernment includes gvernment agencies and similar bdies whether lcal, natinal r internatinal; Grss Prfit means an accunting measurement that represents Pembina's revenue less perating csts; IDC means brrwing csts cmmnly referred t at Pembina as Interest During Cnstructin; "IFRS" means Internatinal Financial Reprting Standards; Impairment Lss means the amunt by which the carrying amunt f an asset exceeds its recverable amunt; Impairment Trigger means any indicatin f an impairment; In-Service Date means the in-service date f an asset is the date that the asset is available fr use. An asset is available fr use when it is in the lcatin and cnditin necessary fr it t be capable f perating in the manner intended by management; Intangible Asset an identifiable nn-mnetary asset (resurce that is cntrlled by an entity as a result f past events and frm which future ecnmic benefits are expected t flw t the entity) withut physical substance; Jint Operating Agreement means an agreement that gverns the recvery f csts between tw jint perating partners, that may r may nt be capital in accrdance with this Plicy; Lease means an agreement whereby the lessr cnveys t the lessee in return fr a payment r series f payments the right t use an asset fr an agreed perid f time; Nn-Current Asset Held fr Sale means an asset (r dispsal grup f assets) fr which its carrying amunt will be recvered principally thrugh a sale transactin rather than thrugh cntinuing use. The asset(s) must be available fr immediate sale in its present cnditin and its sale must be highly prbable; Operating Expense means cst incurred fr the peratins f Pembina's assets t earn revenue; Operating Margin means grss prfit befre depreciatin and amrtizatin; Pembina means cllectively, Pembina Pipeline Crpratin and its subsidiaries; "Pembina Operated Jint Ventures" means Canada Kuwait Petrchemical Crpratin (CKPC) and Veresen Midstream Limited Partnership (VMLP); Plicy means this Capital Asset Accunting and Capitalizatin Plicy;
- 4 - Prperty, Plant and Equipment r PP&E means tangible items that: (a) are held fr use in the prductin f gds r services, fr rental t thers, r fr administrative purpses; and (b) are expected t be used during mre than ne perid; Recverable Amunt and the higher f an asset s fair value less csts t sell and its value in use; Residual Value means the estimated amunt that an entity wuld currently btain frm dispsal f an asset, after deducting the estimated csts f dispsal, if the asset were already f the age and in the cnditin expected at the end f its useful life; Subsequent Cst has the meaning in sectin 1(b) f this Plicy; Third Party means a cmpany that is nt a subsidiary r Jint Venture f Pembina; and Useful Life means perid ver which an asset is expected t be available fr use by an entity. III. PRINCIPLES 1. Recgnitin f Csts in Prperty Plant and Equipment At Pembina, PP&E cnsist primarily f cnventinal crude il and natural gas liquids (NGL) pipelines, gathering systems, il sands and heavy il pipelines and infrastructure (including pump statins, metering statins, LACTS, etc.), linefill, gas prcessing plants, NGL fractinatin and extractin facilities, and terminalling strage and hub facilities. The plicies utlined in this sectin have been set t be in accrdance with IAS 16 Prperty, Plant and Equipment, IAS 23 Brrwing Csts, IAS 20 Accunting fr Gvernment Grants and Disclsure f Gvernment Assistance, IAS 36 impairment f Assets and IFRIC 18 Transfers f Assets frm Custmers. a) Initial Recgnitin The cst f an item f PP&E is recgnized as an asset if, and nly if: it meets the definitin f PP&E. PP&E are tangible items that: are held fr use in the prductin r supply f gds r service, fr rental t thers, r fr administrative purpses; are expected t be used fr mre than ne perid; it is prbable that future ecnmic benefits assciated with the item will flw t Pembina; and the cst f the item can be measured reliably. All expenditure that meets the criteria abve and is greater than $200,000, r is a cmpnent f a larger capital prject that is greater than $200,000 1 must be capitalized. i) Elements f Cst The cst f PP&E includes the fllwing: purchase price, including imprt duties and nn-refundable purchase taxes, after deducting trade discunts and rebates; 1 This limit applies t all Capital Expenditures fr Pembina whlly wned legal entities. Fr Pembina perated Jint Ventures, please refer t Appendix A fr requirements. Expenditures less than the applicable limits are expensed based n the assumptin that they have an ecnmic life less than a year regardless f the nature f the expense.
- 5 - any csts directly attributable t bringing the asset t the lcatin and cnditin necessary fr it t be capable f perating in the manner intended by management. This wuld include: Csts f emplyee salaries and benefits arising directly frm the cnstructin r acquisitin f PP&E (this includes the planning and design phase f PP&E); Csts f materials and services used in cnstructin; Csts f land and site preparatin; initial delivery and handling csts; installatin and assembly csts; Csts f testing whether the asset is functining prperly n initial cnstructin r purchase (this includes cmmissining wrk up t the pint the asset is assessed as peratinal); and prfessinal fees; the estimate f the Csts f dismantling and remving the item and restring the site n which it is lcated (Asset Retirement Obligatin) 2. ii) Expenditure Specifically Excluded frm the Cst f PP&E The fllwing csts shuld never be capitalized as part f PP&E (even if they relate t a prject that is capital in nature): Csts f pening a new facility, including but nt limited t: ribbn cutting ceremnies; celebratins at cmpletin f a prject; gifts t peple invlved in the prject; Csts f intrducing a new prduct r service, including but nt limited t: business develpment activities; staff training (including the develpment f training materials) change management activities; Csts f cnducting business in a new lcatin r with a new class f custmer, including but nt limited t: staff training; mving emplyees t a new lcatin; business develpment activities; general administratin and ther verhead csts (exceptin: direct salaries and benefits f individuals directly cntributing t the cnstructin f an asset, see sectin 1(a)(vi)); Csts t use r redeply an existing item f PP&E, including but nt limited t: 2 The Asset Retirement Obligatin is added t the cst f an asset by Crprate Accunting.
- 6 - Cst f mving an asset t a new lcatin; Cst f preparing an asset t serve an alternate purpse unless it increases the functinality f an asset (fr example, purging a pipeline t flw a different prduct n the pipeline); initial perating lsses, such as thse incurred while demand fr the item s utput builds up; Csts f relcating r rerganizing peratins; abnrmal amunts f wasted material, labur r ther resurces incurred in self-cnstructing an asset, including abnrmal amunts f rewrk. Nte that a certain amunt f wasted resurces and rewrk is expected and cnsidered nrmal as part f the cnstructin f any prject; nrmal waste and rewrk happens n every cnstructin prject and is likely t be cvered by the cntingency in a prject these csts can be capitalized as part f the prject; abnrmal rewrk is a relatively infrequent ccurrence it wuld result frm a specific incident that wuld likely directly result in a significant AFE Supplement as a result f the additinal csts t be incurred; and any time abnrmal waste r rewrk has been identified n a capital prject, please cntact Capital Assets t ensure it meets the definitin befre expensing the csts. If yu are unsure abut whether r nt csts are allwed t be capitalized, please cntact Capital Assets. Expenditure incurred after the initial cnstructin r purchase f an asset are assessed in accrdance with this Plicy in sectin 1(b) n Subsequent Csts. iii) Sftware In additin t general capitalizatin plicies, the fllwing plicies are specific t cmputer sftware: Cmputer sftware that is an integral part f a related item f PP&E is cnsidered PP&E and shuld be assessed using this Plicy. An example f sftware that is an integral part f the related asset is SCADA sftware, whereby the sftware is required t perate the asset. Cmputer sftware that is nt an integral part f a related item f PP&E is cnsidered t be an Intangible Asset. Expenditures t be excluded frm the cst f capitalized sftware are data migratin csts (cst f cnverting existing data int the frmat required t be used in new sftware cannt be capitalized, althugh the cst f the develpment f a tl t migrate the data can be capitalized), change management and prcess imprvement type csts that are required as a result f new sftware, and training csts (including the develpment f training material). Cst f writing reprts fr newly develped sftware can be capitalized if they are dne within ne year f the in-service date f the sftware. After that they are expensed. In additin, if sftware is classified as an Intangible Asset, the cst f investigating and selecting a sftware slutin cannt be capitalized. Capitalizatin f csts can nly cmmence nce the technlgy has been selected and the planning and design phase begins. Expenditures incurred after initial sftware develpment fr upgrades and enhancements are nly capitalized if they add significant additinal functinality t the sftware and are individually mre than $200,000. Please cntact Capital Assets t assess apprpriate cst treatment fr Intangible Assets.
iv) Clean up csts and warranty wrk - 7 - Csts incurred t remediate initial cnstructin defects (ften referred t as warranty wrk) r t cmplete cleanup activities n a cnstructin site (including painting, right f way cleanup) that are incurred in rder fr an asset t be in the cnditin necessary fr it t be capable f perating in the manner intended by management can be capitalized up t ne year past in-service date. Csts incurred mre than ne year after in-service date can nly be capitalized if they qualify fr capitalizatin withut reference t the riginal cnstructin prject. In sme instances, it may be apprpriate fr these effrts t be incurred mre than ne year past in-service date (fr example, pipeline right f way cleanup can take lnger than ne year) these csts must be reviewed n an individual basis t ensure they cntinue t meet capitalizatin criteria. Cntact Capital Assets fr authrizatin t capitalize csts mre than ne year after the in-service date f a prject. v) Spare Parts Spare parts are capitalized as part f PP&E when they meet the definitin f PP&E, are cnsidered a critical spare and are individually greater than $200,000. Otherwise, spare parts are treated in accrdance with the Materials Inventry Accunting and Financial Authrizatin Plicy. 3 vi) Linefill Linefill is cnsidered t be PP&E and is held at histrical cst. Temprary changes in cmpsitin are nt reflected in the value. vii) Brrwing Csts Pembina capitalizes brrwing csts that are directly attributable t the acquisitin r cnstructin f an item f PP&E. Pembina finances the cnstructin and acquisitin f PP&E centrally in its treasury and capital markets service units. As such, it is difficult t identify a direct relatinship between a particular brrwing and the cnstructin r acquisitin f PP&E. Since Pembina brrws funds generally and uses them t btain r cnstruct PP&E, Pembina capitalizes brrwing csts using the fllwing prcess: a capitalizatin rate is calculated as the weighted average f the brrwing csts applicable t the brrwings f the entity that are utstanding during the perid. This capitalizatin rate is a weighted average rate calculated n a mnthly basis based n the rates applicable n brrwings (credit facility, senir unsecured ntes, cnvertible debentures) utstanding during the perid; this capitalizatin rate is applied against expenditures n PP&E when the fllwing criteria are met 4 : the perid f time between starting t prepare the PP&E fr its intended use and the time that the PP&E is expected t be capable f perating in the manner intended by management is ne year r lnger; the expected cst f the PP&E is expected t be greater than $5,000,000; IDC is capitalized starting in the mnth when csts are first incurred n an eligible prject and cease in the mnth when the item f PP&E is in-service; 3 Refer t the Materials Inventry Accunting and Financial Authrizatins Plicy fr plicies gverning the recgnitin f spare parts inventry. 4 These criteria have been instituted under the assumptin that expenditure less than $5,000,000 r expenditures fr assets that are under develpment fr less than ne year are nt funded thrugh brrwing csts, but are funded thrugh perating prfit.
- 8 - the capitalizatin f IDC is suspended if a prject is nt underging active develpment fr an extended perid (lnger than 6 mnths); and if a prject is cancelled, related IDC is derecgnized and recrded as a finance cst. viii) Capitalizatin f G&A Pembina des nt capitalize any general administratin r verhead csts, with the exceptin f salaries and benefits f individuals directly invlved in the preparatin f an item f PP&E t be capable f perating in the manner management intended are capitalized as part f PP&E. Salaries and benefits are capitalized as part f PP&E using the fllwing prcess: a charge ut rate fr each emplyee is determined during an annual review and includes bth salaries and benefits (activity rate); and the charge ut rate is multiplied by the number f hurs an emplyee directly wrks n the preparatin f PP&E t be capable f perating in the manner management intended (as determined by emplyee timesheets) The fllwing grups are nt nrmally cnsidered t be directly invlved in the preparatin f an item f PP&E t be capable f perating in the manner management intended and shuld therefre nt charge their time t capital prjects when perfrming regular service and/r gvernance supprt t capital prjects: Capital Markets unit; Internal Audit team; Risk team; Accunting department; Tax team; Human Resurces department (exceptin: when hiring fr new prjects); Legal services unit (exceptin: when perfrming legal wrk fr new prjects); and Executives There may be instances where significant time frm members f these grups is directly attributable t a capital prject when these individuals are invlved in the design, develpment r cnstructin f an item f PP&E, and wuld be capitalized as part f PP&E. Please cntact Capital Assets fr guidance. Exceptin: When a supplier r partner is perfrming cnstructin activities n ur behalf and includes an verhead charge in their calculatin f the amunt payable by Pembina, this is included as a cst f the asset and shuld be treated as part f the capital cst. ix) Frnt End Engineering & Design Expenditures FEED expenditures are capitalized if they relate t an identifiable, specific prject that will result in the cnstructin f tangible PP&E and meet the capitalizatin criteria (prbable that future ecnmic benefits will flw t Pembina, cst can be measured reliably, greater than $200,000). In rder fr it t be prbable that future ecnmic benefits will flw t Pembina, the fllwing criteria must be satisfied: there is evidence which demnstrates the existence f a market fr the utput f the prject; The Investment Cmmittee has apprved the prject, as applicable; significant legal, regulatry and peratinal requirements related t the prject have been met r are reasnably expected t be met; and
- 9 - adequate technical, financial and ther resurces necessary t cmplete the prject are available r are reasnably expected t be btained. Where csts prir t the Final Investment Decisin ( FID ) f a prject are expected t be greater than $3.5 millin, dcumentatin must be kept n the decisin t capitalize taking int accunt the abve factrs. The capitalizatin decisin must be signed ff by the Business Unit Cntrller, the Business Unit Vice President, and the VP Cntrller, and cnfirmed n a quarterly basis until FID is reached. If, at any pint, it is n lnger prbable that the prject fr which FEED expenditures were incurred will prceed with develpment, the FEED expenses must be recrded as an expense (Operating Expense in the General Ledger), unless the engineering and design wrk perfrmed can be applied immediately t anther identifiable, specific prject. Fr prjects in which the lcatin f a prject is nt yet determined, csts directly related t lcatins that are n lnger cnsidered viable and prvide n nging benefit t any future lcatin must be reprted as an expense at the time the lcatin is n lnger cnsidered viable. When a prject is n hld, preliminary FEED expenditures must be recrded as an expense if the prject has been n hld fr mre than ne year. Exceptins must be apprved by Capital Assets. Nte: As dcumented in sectin 1(a)(ii), business develpment csts cannt be capitalized as part f FEED expenditure. x) PP&E fr which a prtin f the cst is recverable r where assets are purchased frm custmer at less than FMV: There are many instances whereby all r a prtin f the capital cst f PP&E are recvered frm a partner / custmer / gvernment. The fllwing instances are the mst cmmn f these transactins and reflect the accunting plicies related t them: Gvernment Grants: Pembina recrds Gvernment Grants related t PP&E by deducting the grant in arriving at the carrying amunt f the asset. The grant is then recrded in prfit r lss thrugh reduced depreciatin expense ver the life f the asset. Where significant, gvernment grants are separated frm capital expenditure in the statement f cash flws and are presented as a separate cash inflw. Any gvernment grant recrded as a credit against a related AFE must be reprted t Capital Assets s that the impact n cash flw can be determined. Asset cst shared by a partner in a jint peratin: When Pembina cnstructs r purchases an asset n behalf f a partner in a jint peratin, Pembina recrds its share f the assets cnstructed r purchased as PP&E and recrds the remaining share (the prtin f the asset wned by the jint peratin partner) as a receivable until payment has been received frm the jint peratin partner. Asset cst reimbursed by a custmer: When Pembina cnstructs r purchases an asset, remains the wner f that asset, cntrls the asset, and receives a payment frm a custmer fr a prtin r the entirety f the asset cst, this reimbursement is recrded as deferred revenue and is recgnized in revenue ver the term f the service cntract with the custmer. refer t Accunting Interpretatin Assets Purchased at less than FMV fr mre detail. Any asset cst reimbursement by a custmer shuld be reviewed with Capital Assets t ensure it meets all criteria utlined in the abve mentined Accunting plicy dcument. Asset cnstructed r purchased by a custmer and sld t Pembina fr a nminal amunt (less than Fair Market Value): When Pembina purchases an asset frm a custmer fr a nminal amunt and cntrls the asset, Pembina recgnizes the asset at its fair value and recrds deferred revenue which is then recgnized in revenue ver the term f the service cntract with the custmer.
- 10 - refer t Accunting Interpretatin Assets Purchased at less than FMV fr mre detail. Any asset cnstructed r purchased by a custmer and sld t Pembina fr a nminal amunt shuld be reviewed with Capital Assets t ensure it meets all criteria utlined in the abve mentined Accunting Interpretatin dcument. xi) Amunts paid t Third Parties t cnstruct assets nt wned by Pembina: Amunts paid t Third Parties t cnstruct assets nt wned, that are required as a result f the initial cnstructin f a Pembina wned asset, will be capitalized as a cst related t the Pembina cnstructed and wned asset. Example: Pembina pays a pipeline cmpany t build an intercnnectin frm their system t Pembina s newly cnstructed facility. Cst is added t the new facility cst as it is a cst that is directly attributable t the cnstructin f the new facility and required in rder fr the asset t be in the cnditin necessary fr it t be capable f perating in the manner intended by management. Fr amunts paid t a Third Party t cnstruct assets nt wned and nt assciated with the initial cnstructin f a Pembina wned asset, cntact Capital Assets s it can be reviewed t see if it meets Intangible Asset requirements r if it needs t be expensed. b) Subsequent Csts Csts incurred subsequent t the riginal cnstructin r purchase f an asset are capitalized as PP&E nly if the cst meets the definitin f an asset in sectin 2(a) abve and meets ne f the fllwing criteria: i) Cst is Incurred t Enhance the Service Ptential f an Asset Service ptential f an perating asset is enhanced when there is an upgrade r imprvement t the asset when cmpared t the service ptential f the asset at initial cnstructin (if asset cnstructed by Pembina) r purchase date (if asset purchased by Pembina). ii) Replacement f an Asset When an asset r a part f an asset is replaced, the cst f replacing such an item is capitalized as part f PP&E and carrying amunt f the asset replaced in derecgnized in accrdance with Sectin 3: Derecgnitin. iii) Regular Turnarund Csts When a regular majr inspectin, r turnarund (eg. based n hurs), is perfrmed as a cnditin f cntinuing t perate an item f PP&E, the cst f the turnarund is capitalized as part f PP&E. Any remaining carrying amunt f a previus turnarund is derecgnised in accrdance with Sectin 3: Derecgnitin. Csts f the day-t-day servicing (r repairs and maintenance) f an item f PP&E are recgnised in prfit and lss as incurred. refer t dcument Guidance: Classificatin Capital vs Expense as a guide t help determine whether r nt a cst is cnsidered t be capital r expense in nature. iv) Csts that have an element f bth maintenance (expense) and capital. When csts have an element f bth maintenance (expense) and capital, they shuld be split if the secndary cmpnent is mre than $200,000. If the abve threshld has nt been met, the csts shuld be reprted in accrdance with the primary nature f the expenditure.
c) Individual Csts vs Prject Csts - 11 - Csts must be assessed fr capitalizatin n an individual basis. If there are individual csts within a prject that d nt meet the criteria t be capitalized in accrdance with this Plicy, it must nt be capitalized as part f an verall prject. Example 1: A pipeline expansin is under cnstructin new pump statins and pipelines are being built t increase the capacity f the current pipeline system. As part f this prgram, repairs f an existing pipeline are required in rder t safely flw the new vlume and pressure capacities resulting frm the expansin, hwever, the repair des nt bring the pipeline abve the riginal licensed perating pressure capacity when the pipeline was first cnstructed by Pembina. The repair, even thugh it is necessary as a result f a capital expansin, des nt in itself meet the capitalizatin criteria and must be expensed. Example 2: A new gas plant is being built and the csts f cnstructin are being capitalized as part f PP&E. As a result f the new gas plant, new custmer cntracts are being develped and signed by business develpment persnnel. As well, staff are required t be trained in hw t use the new facility. Even thugh these csts are incurred as a direct result f the new capital facility, these csts are specifically nt allwed t be capitalized in accrdance with this Plicy and must be expensed. d) Csts Gverned by Other Cntracts Csts that are gverned by a Cst f Service Cntract, a Jint Operating Agreement, r ther similar agreement must be recgnized in accrdance with this Plicy with any differences in treatment tracked separately. 2. Depreciatin a) Depreciatin Methd Pembina applies the cst mdel t all classes f PP&E. PP&E is carried at cst less any accumulated depreciatin and any accumulated impairment lsses. All assets are designated a useful life, residual value, depreciatin methd and rate, which is typically based n asset class and system. In cases where an individual asset is determined t have a useful life that is significantly different than ther assets in the same system and/r asset class, the depreciatin methd and rate is assessed fr that asset individually. The depreciatin methd used and the useful life f the asset is set t reflect the perid ver which an asset, singularly r in cmbinatin with ther assets, is expected t prvide ecnmic benefit t Pembina. Useful life is defined as the lesser f the physical/functinal life f an asset r the ecnmic life f the asset. Typically, the useful lives f pipeline systems, facilities and ther infrastructure are based n the estimated life f the prven and prbable reserves surrunding the area cmpared t the physical life f the individual asset. Residual value is the estimated fair market value f the asset at the end f its useful life, and is typically cnsidered t be insignificant fr Pembina. Useful lives, depreciatin methds and rates, and residual values are reviewed and reassessed annually. Any changes are treated as a change in estimate and applied n a prspective basis frm the date f the change in estimate. Depreciatin cmmences the mnth fllwing the in-service date f an asset. Once the asset is in-service, if it becmes idle fr any reasn, it must cntinue t be depreciated unless the asset is being held fr sale.
- 12 - Depreciatin is included in prfit r lss. Depreciatin f perating assets is deducted frm Operating Margin t arrive at Grss Prfit. Depreciatin f administrative and crprate assets is deducted frm Grss Prfit and included as part f General & Administrative Expenses. b) Cmpnentizatin Each part f an item f PP&E that is significant in relatin t the ttal cst f the item is separated int its individual asset class and depreciated separately. A guideline t determine if a cmpnent f an item f PP&E is significant is if the cmpnent is mre than 10% f the ttal cst r $2 millin. Tax cmpnentizatin: Fr tax purpses, cmpnents f an item f PP&E that relate t different tax CCA classes are separated fr tax reprting purpses, regardless f the amunt r significance in relatin t the ttal cst f the item. Fr accunting purpses, these cmpnents cntinue t be depreciated in accrdance with the apprpriate asset class. 3. Derecgnitin The carrying amunt f PP&E is derecgnised n dispsal r when n future ecnmic benefits are expected frm its use r dispsal. a) Asset replacement When an asset is replaced, the carrying value f the item replaced is derecgnised. This includes a situatin when a turnarund is replacing previusly capitalized turnarund csts. When it is nt practicable t determine the carrying value f the asset replaced, the cst f the replacement asset is used as an indicatin f what the cst f the replaced item was at the time it was acquired r cnstructed, adjusted fr inflatin. On asset replacement, the carrying value f the asset replaced is reprted as accelerated depreciatin expense. b) Asset ut f Service When n future ecnmic benefits are expected frm an asset s use r dispsal, r an asset is placed ut f service, the carrying value f the asset is derecgnised. The carrying value f the derecgnised asset is reprted as accelerated depreciatin expense. c) Sale f an Asset When an asset is sld, the carrying value f the asset is derecgnised. The difference between the net dispsal prceeds and the carrying amunt f the item is recrded as a gain r lss n sale f assets as part f Other Incme and Expenses. 4. Impairment a) Cash Generating Units (CGUs) and Impairment Trigger Review Pembina has assigned all f its PP&E int CGUs fr impairment review and testing purpses. Pembina assesses at the end f each reprting perid (each quarter end), if there is any indicatin f an Impairment Trigger. refer t CGU Determinatin dcument fr dcumentatin surrunding the determinatin f CGUs; and refer t Impairment Trigger wrksheets cmpleted n a quarterly basis fr each CGU. If there are any impairment triggers identified, an impairment test is perfrmed whereby the recverable amunt f the CGU is cmpared with its carrying amunt in accrdance with IAS 36 Impairment f Assets.
b) Impairment Recgnitin - 13 - If an impairment test results in the carrying amunt f a CGU greater than its recverable amunt, an impairment lss is recrded in prfit r lss. c) Impairment Reversal If there is any indicatin that a previusly recrded impairment lss f a CGU may n lnger exist r may have decreased, the recverable amunt f the CGU is reassessed. If the recverable amunt is higher than the carrying value f the assets, the impairment lss is reversed t the lwer f the recverable amunt and the carrying amunt that wuld have been determined if n impairment lss had been recgnised. VI. COMPLIANCE Persnnel must cmply with this Plicy at all times. Any breaches f this Plicy may result in disciplinary actin up t and including terminatin f emplyment fr cause r terminatin f engagement, as well as ptential civil and criminal sanctins. Vilatins f this Plicy shuld be reprted in accrdance with Pembina s Whistleblwer Plicy. VII. REVIEWED AND APPROVED The Vice President, Cntrller is the executive respnsible fr this Plicy. This Plicy will be reviewed annually by the Vice President, Cntrller and submitted t the Disclsure Cmmittee fr apprval. Any material change t this Plicy must be submitted t the Disclsure Cmmittee fr apprval. This Plicy was last apprved by the Disclsure Cmmittee n July 26, 2018. VIII. RELATED POLICIES This Plicy perates in cnjunctin with the fllwing plicies and rules referenced herein: Whistleblwer Plicy Authrizatin fr Expenditure (AFE) Plicy Materials Inventry Accunting and Financial Authrizatin Plicy IX. SUPPORTING DOCUMENTS Rules and Cnventins in supprt f this Plicy may be created by the Accunting Plicy grup and apprved by the Vice President, Cntrller. X. REFERENCES The fllwing dcuments are referenced by this Plicy: Prject Delivery and Gvernance Lifecycle Framewrk Guidance: Classificatin Capital vs Expense Accunting Interpretatin Assets Purchased at less than FMV Capital Asset Accrual Guidance
- 14 - Appendix A Capitalizatin Limit fr Pembina Operated Jint Ventures The capitalizatin limits fr Jint Ventures that Pembina perates may be different than Pembina whlly wned cmpanies as the limits must be agreed t by bth Jint Venture partners. The fllwing Jint Ventures have a different capitalizatin limit than Pembina whlly wned entities: Veresen Midstream Limited Partnership: Any prject r cst that meets the capital recgnitin criteria in sectin 1(a) f this Plicy and is greater than $10,000 must be capitalized.