The International Financial Reporting Interpretations Committee (IFRIC) released IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities to provide guidance on accounting. This is meant to guide those on accounting for changes in existing decommissioning, restoration and similar liabilities that are recognized both as part of the cost of an item of property, plant and equipment in accordance with IAS 16. IAS 16 “Property, Plant and Equipment” and as a liability in accordance with IAS 37. IAS 37 is titled “Provisions, Contingent Liabilities and Contingent Assets.”
To get down to the details of this, the IFRIC addresses accounting for:
1. a change the estimated outflow of resources embodying economic benefits (eg cash flows)
2. a change in the current market-assessed discount rate
3. an increase that reflects the passage of time (also referred to as the unwinding of the discount).
Because differing views and potentially differing ways of implementing these in practice exist in accounting for changes in decommissioning, restoration and similar liabilities, this guidance was necessary.
This IFRIC acknowledges that, under existing requirements, decommissioning, restoration and similar liabilities should be measured using a discount rate that is:
Changes in the liability resulting from changes that are caused by changes in discount rates or cash flows must be capitalized and then depreciated on a go-forward basis its life. Additionally, there is a requirement to unwind the discount in profit or loss as it occurs, and be classified as a finance cost.
The requirement of measurement using a current market-based discount rate sends an important message to everyone, not just those entities that are specifically affected by the IFRIC interpretation.
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