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. 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.
For the measurement of ARO Assets and Present Value of Decommission Liability, we have to Calculate the following:
- Value of Decommissioning of Assets on the Date of Transition will be ascertained as per present market scenario.
- Then after consideration of Inflation in Future period The Value of Decommissioning will be Calculated.
- 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.
- 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.
- WDV of Assets Calculated after taking consideration of Accumulated Depreciation upto the Date of Transition.
Accounting Treatment:
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.
The Entry will be passed as under on the date of Transition:
ARO Asset Dr
Retained Earnings 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)
For the Year 15-16:
1. ARO Asset Dr
To Decommissioning Liability – Non Current
(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. Unwinding of discount on provisions – Finance Cost Dr
To Decommissioning Liability – Non Current
(Being interest expense recorded on ARO liability)
By Amount of Difference between the PV of Decommissioning assets as on the date of 31.03.16 and the Date of Capitalisation of Assets( in case of Addition) or Date of Transition ( in case of Opening Decommissioning Liability)
3. Depreciation Expense Dr
To Accumulated depreciation – ARO asset
(Being depreciation recorded on ARO asset)
By amount of Depreciation rate on the WDV of Assets as on the Date of Transition (in case of Opening ARO Assets) or the Date of Capitalisation ( in case of Addition).
Review of Estimates:
After Passing above entries, The Company shall review the below estimates atleast at every year end:
- Estimated amount of the Liability
- Discount Rate
- Estimated Timing
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.
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Thank you for such a wonderful explanation.
Could you please let us know which Ind AS deals with ARO.
Ind AS 16 specifically excludes OIL Mine, if the ARO is relating to OIL Mine then which Ind AS deals with it.
Thank You