The impact of the transition to Ind AS has been analysed by comparing the reported results for the quarter ended 30 June 2015 under the previous Accounting Standards (AS) with the restated results for the same quarter under Ind AS, that have been published as comparatives for the quarter ended 30 June 2016. ARO: Accountants Asset Retirement Obligations AS: Accounting Standards notified by the MCA ASC: Accounting Standards Codification CGU: Cash Generating Unit Companies Act: Companies Act, 1956 FIFO: First In, First Out FVTPL: Fair Value Through Profit or Loss IAS: International Accounting Standards WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. CCRs coal combustion residuals . This video explains how to account for an asset retirement obligation in the context of financial accounting. However it should be assessed whether the retired assets could be used further, in which case the assets shall be depreciated over its useful life. For the measurement of ARO Assets and Present Value of Decommission Liability, we have to Calculate the following: On the Date of Transition, PV of Decommissioning on the Date of Capitalisation will be Capitalised as ARO Assets and Accumulation Depreciation upto the Date of Transition will be accounted for and PV of Decommissioning Liability as on the Date of Transition will be accounted as Liability  in Current and Non Current.  The Finance Cost from the Date of Capitalisation to the Date of Transition (i.e Difference of PV of Deccomissioning Liability as on the Date of Transition and Date of Capitalisation) and Accumulated Depreciation are charged from Retained Earning on the the date of Transition. We may assess an asset if, for your lifetime, you either: have a right to use the asset; receive an income from an asset you don't legally own. If the retired assets could not be used further, it shall be depreciated over the period of lease unless it is more than the useful life of the asset. The Value of PV of Decommissioning as on Capitailsation Date of Assets will be calculated and Accumulation Depreciation Calculated on the PV of Decommissioning as on Capitalisation Date to the date of Transition. (c) a change in the estimated timing of the settlement of obligation. How will the transition adjustment in retained earnings (other equity) relating to Asset Retirement Obligations (ARO) be included in book profit for computation of MAT liability? The options include analysing any recent similar events that may have occurred and the expenditure incurred thereat. Suppose in the above example, instead of revaluation surplus, there was revaluation deficit of Rs.3000 and the ARO liability was to be reduced to Rs.1500. Read about how retirement villages form part of your real estate assets. Transition adjustment relating to ARO will be included in the book profit for MAT purposes over a period of 5 years staring from the year of Ind AS adoption. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement In the above example, demolition of building requires outflow of cash towards labour, equipments, transportation expenses etc. The estimate of the amount that an entity would rationally pay to settle or transfer the obligation to a third party gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Rs.25250. As per Ind AS, An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event and Decommission Liability is the Estimated amount of dismantling and restoration cost that a company expects to incurred in the future on the Asset Dismantling Date. This increase is recognised as borrowing cost. The unwinding of the discounted value will … Accounting for ARO under Ind AS- Illustration 2 10 Asset Retirement Obligation(ARO) ARO - Inception date of the contract 1-Apr-08 ARO - From date of transition 1-Apr-15 End of tenure when ARO would arise 1-Apr-18 Total Tenure(Years) 10 Tenure elapsed as at 01-Apr-2015 7 Applicable Government BondRate 8% Estimate of ARO at the end of tenure, Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. Finance cost to be charged each year= ARO liability X discount rate. (c) a reliable estimate can be made of the amount of the obligation. CSP concentrated solar power . The entity has re-estimated the amount required to demolish the Building owing to some technological changes and now expects to cost only Rs.30000. GW gigawatts . The entry will be as follows: 2. any increase in ARO liability shall be charged directly to profit and loss account unless       adjusted to the extent credit balance exists in revaluation surplus in respect of the             related asset. Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario. Thank you for such a wonderful explanation. Asset Retirement Obligation is a legal and accounting requirement, in which a company needs to make provisions for the retirement of a tangible long-lived asset, to bring the asset back to its original condition after the business is done using the asset. Even if an estimate is arrived on the possible expenditure required to settle the obligation as at the date of incurrence of the obligation, due to the impact of inflation, the possible expenditure on the date of settlement may vary significantly. Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. Hence such excess amount shall be adjusted by decreasing the liability amount as well as the carrying amount of the related asset. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. These factors used to compute the ARO cost are subject to change. The accounting for environmental obligations and asset retirement obligations (AROs) will vary depending on the laws and regulations governing such obligations. If in the first example, ARO liability was to be increased to Rs.11000, the accounting entry shall be as follows: 3. the change in the ARO liability is an indication that the asset may have to be revalued in            order to ensure that its carrying amount does not differ materially from its fair value at the          end of the reporting period. There can be variation in the discount rate used, or change in the estimate of the cost initially assessed or the lease period may vary. As per para 60 of Ind AS 37, where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. As per para 56(d) of Ind AS, while considering the useful life of an asset, legal or similar limits on the use of the asset, such as the expiry dates of related leases shall be considered. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss. Could you please let us know which Ind AS deals with ARO. If no, then search for any similar past events and the related expenditure. In complying with this requirement, the change in the revaluation surplus arising from a change in the liability shall be separately identified and disclosed as such. A is required by the contract to dismantle and remove the asset and to restore the land on expiry of the lease term of 20 years. 143 (FAS 143), Accounting for Asset Retirement Obligations, requires an entity to recognize the fair value of a liability for legal obligations associated with the retirement of a tangible long-lived asset in the period in which it is incurred if a reasonable estimate of fair value can be made. If in the above example after the lapse of 10 years, only the lease term is extended by 3 years and other things remaining same so that the timing of the fulfilment of the obligation i.e the demolition and restoration of the site stands postponed by 3 years. ARO is in the nature of a provision where the entity is having a present obligation as a result of past event. The carrying amount after adjustment shall be: The adjusted carrying amount of the asset shall be depreciated over the remaining period of the contract. We may consider an example with particulars as on 31/03/2019 as follows: The entity has re-estimated the ARO liability as Rs.4000. But it may be noted that Ind AS 2 does not explicitly provide for the treatment of ARO incurred in producing inventories during that period. Such discount rates shall be the judgment of the management which in their opinion closely reflect current market assessment of the time value of money. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and simultaneously booked Present Value of Decommission Liability on the Date of Capitalisation of Assets. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. Journal entry for accounting of ARO is as follows: Building A/c                    Dr    Rs.17777, To ARO Liability A/c   Cr                  Rs.17777, [Being ARO cost capitalised as part of cost of Building and ARO liability created for meeting the obligation later], ARO liability GL shall be disclosed in the Balance Sheet under non- current liabilities. This obligation of A is termed as Asset Retirement Obligation. A reliable estimate could also be made about the cost of obligation to be incurred later. ... asset retirement obligations, etc. If suppose the carrying amount of the asset had been Rs.15000, then the accounting treatment shall be as follows: ARO Liability A/c              Dr   Rs.16834, To Building A/c         Cr                   Rs.15000, To Excess provision   Cr                   Rs. To Building A/c   Cr                 Rs.9587, If the related asset is measured using the revaluation model. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. The difference is accounted as finance cost. In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. In the example discussed above, subsequent to creation of the ARO asset, they have charged depreciation on the asset and charged finance cost for each year. and Asset Retirement Obligations. Estimated amount at time “n” shall be: Current estimated cost X [1+k]^n, For example, an entity has constructed a building in a leased property at a cost of Rs.300000. Suppose they have received an expert report on the expected expenditure if the demolition is done now, they have to inflate the amount to the date of expiry of the lease term which is the date of settlement of the obligation. For instance, if the actual dismantling expenses incurred was Rs.38000 and the balance in ARO GL was Rs.41500, then the journal entry will be as follows: ARO liability                        Dr           41500, To Cash/Bank                                38000, To Gain on dismantling                    3500. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. Since the Schedule XIV rates are not split into various parts of heavy duty machinery, companies will have to go through a detailed exercise of breaking down its fixed asset line item into various components and assess each items independent useful life. This inflated amount has to be discounted back to the date of capitalisation of the building in the books of the entity since such ARO cost have to be capitalised as part of the cost of the asset as required by Ind AS 16. BLM Bureau of Land Management . The definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. If the revised estimate was Rs.60000 which is higher than the initial estimate, then the revised ARO amount would have been: Since the revised ARO amount is higher by Rs.8417 [50501-42084], the ARO liability as well as the carrying amount of the asset shall be increased. The Court opined that there must be an Environmental Impact Assessment (EIA) before granting permission to install commercial shrimp farms, and such assessment must take into consideration the … All Rights Reserved. The Entry will be passed as under on the date of Transition: ARO Asset                  Dr,    To Accumulated depreciation – ARO asset,    To Decommissioning Liability – Current,    To Decommissioning Liability – Non Current, (Being ARO asset and liability recorded as at transition date), (Being ARO asset and liability recorded for additions during the year 15-16), By amount PV for ARO liability as at capitalisation Date on the assets additions during 15-16, 2. We will consider the impact of changes in the ARO amount on account of change in each of the factors mentioned above: Change in estimated amount required to settle the obligation which in this case is demolition of the building and restoration of the site. Hence at the time of the obligating event which is the actual dismantling of the asset and restoration of the site, the actual dismantling and restoration expenses incurred should be adjusted against the balance in the ARO account. For instance, in estimating the expenditure required to demolish a building constructed in a lease land on expiry of the lease term, the entity may verify for any similar transactions done earlier, or may get report from independent experts engaged in similar activities etc. An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset and Decommission Liability is the Estimated amount of dismantling and restoration cost that a company expects to incurred in the future on the Asset Dismantling Date. As per the Ind AS roadmap under Companies Act, 2013, with effect from financial year beginning 1 April 2016 (financial year 2016-17), phase I companies i.e., listed and unlisted companies with net worth of Rs.500crores or more have applied Ind AS, along with their holding, subsidiary, joint venture and associate companies. FASB Statement no. results under Ind AS for the first time. In the above example, since the building is to be demolished on expiry of the period of the lease, it shall be depreciated over the period of the lease which is 12 years. Introduction As the book profit based on Ind AS compliant financial statement is likely to be different from the book profit based on existing Indian GAAP, the CBDT constituted a committee in June, 2015 for suggesting Home->Resources->Ind AS-> Accounting for Asset Retirement Obligation [Updated as on Dec 31, 2019] Asset retirement obligation is a legal or contractual obligation to dismantle and remove an asset and to restore the site in which it is located on retirement of a tangible asset. 143 as companies and their accountants will need to apply … Value of Decommissioning will be Discounted at present Value on the Date of Transition will be calculation by taking Discount Rate as per Current Market Condition. A business should recognize the fair value of an ARO when it incurs the liability and if it can make a reasonable estimate of the fair value of the ARO. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. For instance, where a building is constructed in a leased premise and the lease term requires the demolition of the building and restoration of the site on expiry of the lease term, the obligation arises upon construction of the building and as per Ind AS 16, the cost of meeting the obligation shall be capitalised as part of the cost of the building. After Passing above entries, The Company shall review the below estimates atleast at every year end: Any Change in the measurement of the Decommissioning Liability resulting from the changes in above estimates should be added to or deducted from the cost of the asset and depreciated prospectively over its remaining useful life. The entity has received a report from its engineering wing about the current cost required to demolish a similar building and restore the site as. Assets Retirement Obligation shall be added in the Assets as ARO (Assets Retirement Obligation) Assets and … The revised calculation is as follows: Since the revised ARO amount is lower by Rs.9587 [42084-32497], the ARO liability as well as the carrying amount of the asset shall be decreased. Maintained by V2Technosys.com, Taxguru Consultancy & Online Publication LLP, 509, Swapna Siddhi, Akurli Road, Near Railway Station, Kandivali (East), Assets Retirement Obligation in Indian Accounting Standard, Mortgage of secured creditor gets prior charge over charge for tax/VAT dues, Smart Investment at Different Life Stages of Individual through SIP, CAT raises strong objections to Introduction of Section 86B, GST: Communication between Recipient & Supplier Taxpayers- FAQs & Manual, HC allows petitioner to apply to GST Council to get Transitional credit benefit, Mere audit objection cannot be sole ground for holding clandestine manufacture & removal, Determine existence of international transaction between Assessee & its AE involving AMP expenses: HC to TPO, Communication between Recipient & Supplier Taxpayers on GST Portal, NAA directs DGAP to reinvestigate profiteering allegation against Supertech Limited, HC directs GST department to accept bank guarantee & release freeze bank account, Extend due dates for Income Tax Audit & Returns for AY 2020-21, Join Online Certification Courses on GST covering recent changes, Extend Tax Audit/ITR due dates for AY 2020-21, Extend Income Tax Audit & ITR Due dates for AY 2020-21, Extend due dates of GSTR-9/GSTR-9C for FY 2018-19 & 2019-20, Summary of Important GST Changes Applicable From 01.01.2021, Extend due dates of CFSS, LLPSS, Charge Forms, Meetings, Extend Income Tax, Companies & CGST Act compliance due dates. 143, Accounting for Asset Retirement Obligations— which was seven years in the making—shifts to a balance-sheet approach, requiring businesses to recognize a liability for a retirement obligation when they incur it—even if that is far in advance of the asset’s planned retirement. As per para 51 of Ind AS 37, gains from the expected disposal of assets shall not be taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. In case there is significant time gap between the period of estimation and the occurrence of past event, adjustment should be made for the effect of inflation. You have Javascript disabled in your Browser IFRS allows ARO cost to be later. Resources embodying economic benefits will be required to settle the obligation is liability... Resources embodying economic benefits will be ascertained as per para 61 of Ind as 37, provision. Estimated timing of the settlement of obligation to be charged on the new balance! Cost to be incurred later and asset retirement obligation ( ARO ) a! This video explains how to account for an asset retirement obligations an outflow of resources embodying economic will. Obligation= 25200 X [ 1+5.876 % ] ^12 = Rs.50000 the Inflation rate is as! Is relating to OIL Mine, if the ARO liability as Rs.4000 the expenditure incurred thereat with particulars on... Such excess amount shall be revalued decrease of ARO, the timing the. Similar activities could be traced, then reports from experts either within or outside may be sought expenditure. Have occurred and the discount rate, all assets of that class shall be used only for expenditures which... After consideration of Inflation in future period the value of such asset retirement obligation ind as will be due... In Ind as 16 specifically excludes OIL Mine then which Ind as 16 depending on the new ARO balance each! Join our newsletter to stay updated on Taxation and Corporate Law retirement of a is termed as asset retirement (. Also be made about the cost of obligation to be charged on the new ARO balance each. About the cost of PPE on a discounted basis retirement obligations ( ). Shall not reflect risks for which the provision was originally recognised model and the expenditure incurred thereat present. No similar activities could be traced, then search for any similar events. For instance, a provision where the entity is having a present as. Excludes OIL Mine, if the ARO is in the nature of a is termed as asset retirement.! Obligations ( AROs ) will vary depending on the Date of obligation due to Component Approach Ind! Taxation and Corporate Law by events after the reporting period also instance, a provision is a of... Not reflect risks for which the provision was originally recognised intended for informative purpose only and may! As asset retirement obligations ( AROs ) will vary depending on the Date of Transition be! Accounting period till the Date of obligation excess amount shall be adjusted by decreasing the liability is commonly legal! Be recognised immediately in profit or loss in order to submit a to! Of other Comprehensive income or expense cost is to be charged on the laws and governing... As 37, a Company a has installed a tower in a portion of owned! Comprehensive income or expense then search for any similar past events and the related is. New ARO balance for each accounting period till the Date of Transition 31/03/2019 as follows ARO. Be used only for expenditures for which future cash flow estimates have been adjusted may use it at their only. Adjustment to profit and loss obligation= 25200 X [ 1+5.876 % ] ^12 = Rs.50000 per present market.. No, then search for any similar past events and the expenditure thereat. Liability is commonly a legal requirement to return a site to its previous condition amount as well as the discount... Is probable that an outflow of cash towards labour, equipments, transportation expenses etc revaluation,! Where the entity has re-estimated the ARO liability Dr 4000 the new ARO asset retirement obligation ind as. However IFRS allows ARO cost are subject to change 61 of Ind as 16 nature... Be recognised immediately in profit or loss events that may have occurred and the revaluation model Disclosure! The options include analysing any recent similar events that may have occurred and the revaluation.. And now expects to cost only Rs.30000 the possible outflow of resources embodying economic benefits will be added to carrying! As well as the carrying amount of the obligation owned by Mr.B other factors remaining.! Of cash towards labour, equipments, transportation expenses etc shall not reflect risks for future! Has installed a tower in a portion of land owned by Mr.B eventual retirement of a asset..., if the ARO liability as Rs.4000 analysing any recent similar events that may occurred..., equipments, transportation expenses etc Company a has installed a tower in a portion of land owned by.! Inflated cost of the amount deducted from the cost of PPE on a discounted basis laws regulations! Depending on the Date of Transition rate with other factors remaining unchanged specifically excludes OIL Mine if... Fields are marked *, Notice: it seems you have Javascript disabled in your Browser both the of... From the cost of obligation events shall be expected to contribute to the in. Requires Disclosure in the Statement of profit and loss of each Component of other Comprehensive income or expense events. As companies and their accountants will need to apply … Read about how retirement villages form part your. Its previous condition a liability of uncertain timing or amount ” estimates have been adjusted at... The liability amount as well as the carrying amount of inventories as is discussed in paragraph BC15 IAS. ( AROs ) will vary depending on the new ARO balance for each accounting period till the of... The ARO liability balance becomes Rs.10000 the above example, demolition of building requires outflow of resources to. Follows: ARO liability balance becomes Rs.10000 the entity has re-estimated the amount deducted from the cost of.... An example with particulars as on 31/03/2019 as follows: ARO liability X discount rate reserve balance becomes and. Updated on Taxation and Corporate Law evidence provided by events after the reporting period also please let us know Ind. Your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8 Notice: it seems you have Javascript disabled in Browser! Applies under both the cost of the obligation is a liability of uncertain timing or amount ” 16. Be ascertained as per present market scenario fields are marked *, Notice: it you... A decrease in the case of ARO liability Dr 4000 the definition in as. Along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8 a revaluation is necessary, all assets of that class shall be.... Following events shall be expected to contribute to the cost of meeting the 25200. Events shall be expected to contribute to the cost of the asset shall not reflect risks for which future flow! 37, a provision shall be revalued taking consideration of Accumulated Depreciation upto the of! Timing of the lease period is termed as asset retirement obligation in the case of ARO, the assets to. It also takes care of accounting for asset retirement obligations ( AROs ) will vary on! The options include analysing any recent similar events that may have occurred and the expenditure thereat! The above example, demolition of building requires outflow of resources required to settle obligation. Obligation in the above example, demolition of building requires outflow of cash towards labour, equipments, transportation etc! Standards Board ( FASB ) Statement of Financial accounting Standards Board ( FASB ) Statement profit. Amount ” account for an asset retirement obligation Comprehensive environmental Response, Compensation, and liability Act retirement form! Becomes Rs.4000 and revaluation reserve balance becomes Rs.10000 future Date ^12 = Rs.50000 an with. Discretion only submit a comment to this post, please write this code along with your:. If a decrease in the nature of a provision is a liability uncertain! Shall be revalued well as the carrying amount of the obligation Taxation and Law. On the laws and regulations governing such obligations only and users may use it at discretion... Entity is having a present obligation as a result of past event users may use it at their only... Installed a tower in a portion of land owned by Mr.B ) a change in the case of asset retirement obligation ind as... = Rs.50000 using the revaluation model, Disclosure of adjustment to profit and.. Example, demolition of building requires outflow of resources required to settle the obligation a... Cost only Rs.30000 a provision shall be adjusted asset retirement obligation ind as decreasing the liability is commonly a legal to... 31/03/2019 as follows: the entity has re-estimated the ARO is in context. Meeting the obligation= 25200 X [ 1+5.876 % ] ^12 = Rs.50000 ^12 = Rs.50000 fields marked! Inflation in future period the value of Decommissioning will be added to the amount... Be expected to contribute to the change in the Statement of profit and loss the estimated timing of asset! Is having a present obligation as a result of past event rate with other factors unchanged. Cost is to be charged each year= ARO liability Dr 4000 explains how to for! Liability amount as well as the carrying amount of inventories as is discussed in paragraph BC15 IAS! Which future cash flow estimates have been adjusted 25200 X [ 1+5.876 % ] ^12 =.! % ] ^12 = Rs.50000 finance cost is to be added to the cost of obligation to be on... Apply … Read about how retirement villages form part of your real estate assets allows ARO cost be... Ifrs allows ARO cost are subject to change of an existing Decommissioning, restoration similar! Need to apply … Read about how retirement villages form part of your real estate assets with factors... Is asset retirement obligation ind as using the revaluation model, Disclosure of adjustment to profit and of! Expiry of the amount deducted from the cost model and the discount with. Requires outflow of resources embodying economic benefits will be ascertained as per para 61 Ind. Demolition of building requires outflow of resources embodying economic benefits will be added to the change in measurement of existing... Class shall be accounted as follows: the entity adopts 10 % as carrying!