IFRIC Interpretation 5 - Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds References (detailed review)

Objective

The objective of this interpretation is to prescribe the guidelines for the accounting treatment of contributors’ interest in restoration, decommissioning and environmental rehabilitation funds in the financial reports of the contributor and how the contributor will account for the additional contribution which may become payable as a result of bankruptcy of or default by the other contributors.

Reference Standards

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 28 Investments in Associates and Joint Ventures

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

SIC-12 Special Purpose Entities (revised 2004)

Background

1. Normally certain entities maintain restoration, decommissioning and environmental rehabilitation funds, the objective of maintaining such funds is to accumulate resources in the fund which will later be used to pay all or partial decommissioning costs of certain assets (like nuclear manufacturing facility) or to restore the rigged land (explored for oil or other natural resources) to its original condition, or performing environmental rehabilitation (which may include purifying the pollution of water or cleaning of contaminated environment). These funds are termed as ‘decommissioning funds’ for the purpose of this interpretation.

2. The entity may make contribution to this restoration, decommissioning and environmental rehabilitation fund on voluntary basis or if it is required by a certain law or regulation. These funds may be structured in the following ways:

a) The fund can be set up by a individual contributor to meet its own future decommissioning liabilities, either for a specific site, or in respect of more than one geographically dispersed locations.

b) The fund can be set up by a multiple (more than one) contributors to meet their joint or individual decommissioning liabilities, and each contributor has the right to get reimbursement in respect of cost of decommissioning but only up to the amount of respective contributions made by contributor including any returns thereon after deducting the allocated administration costs of the fund. Such funds may require the contributors to make extra or additional contributions, as a result of bankruptcy of or default by the other contributors.

c) The funds which are set up by a multiple (more than one) contributors to meet their joint or individual decommissioning liabilities, in which contribution level required from a contributor is determined on the basis of the current activity of the contributor and contributor can get benefit (reimbursement) from the fund on the basis of its past activity. In case of these funds with such attributes, there would be a mismatch between the amounts of contributions which the contributor have made (based on the current activity of the contributor) and the amount of benefit (reimbursement) from the decommissioning fund which is on the basis of its past activity.

3. These decommissioning funds are normally established with the following characteristics:

a) The fund is managed and administered separately, by independent nominated individuals (the trustees).

b) The participant entities (the contributors) normally make periodic contributions in to the fund, that are then invested by trustees of the fund in different class of assets such as investment in equity and debt instruments, to earn returns thereon which are also accumulated into the fund. These accumulated resources in the fund (the contributions by contributors plus return thereon) are then available to pay the decommissioning costs of the contributors. The contributions made in the fund are solely managed by trustees of the fund and these are invested as determined by the trustees, considering the limits placed by the governing charter of the fund and any relevant applicable laws and regulations.

c) The entities (contributors) are liable to settle the decommissioning expenses. However, the contributors will get reimbursement for the decommissioning expenses incurred from the decommissioning fund but reimbursement is limited to the amount lower of:

i) The decommissioning expenses incurred and

ii) The share of resources from the decommissioning fund attributable to the contributor

d) The participant entity (contributors) will have no access or limited access to the surplus resources of the decommissioning fund which are in excess of amounts required to settle the eligible decommissioning expenses of contributors.

Scope

The requirements of this Interpretation are applicable in the contributor’s financial statements for the accounting treatment of contributors’ interest in restoration, decommissioning and environmental rehabilitation funds which have the following two attributes as mentioned below:

a) The resources are held separately, in the form of a separate registered legal entity which is managed and administered, by independent nominated individuals (the trustees) or in the form of separate assets with the other entity and

b) The contributors have restricted access to the resources of the fund.

However, the residual interest in the resources of the fund which are left when whole of the decommissioning activity has been performed or completed and all reimbursement expenses has been met by the fund or at the time of winding up of the fund, such as distribution of remaining resources in the fund to the its contributors might be an equity instrument which is covered under IFRS 9 Financial Instruments and that is not dealt within the requirements of the Interpretation.

Issues

This Interpretation deals with the following issues:

a) How should the contributors’ interest in restoration, decommissioning and environmental rehabilitation fund (i.e. right to get reimbursement) will be accounted for in the financial statement of contributor and

b) How the contributor will account for the extra or additional contribution which may become payable as a result of bankruptcy of or default by the other contributors

Consensus

Accounting Treatment of contributors’ interest in a restoration, decommissioning and environmental rehabilitation fund:

1. The entity (contributor) is required to recognize its own obligation to settle the cost of decommissioning as a liability except when the entity is not obliged to settle or pay the costs of decommissioning even the fund does not pay the decommissioning costs. The contributors’ right to get reimbursement from the decommissioning fund will be recognize separately in the in its financial statements.

2. The contributor is required to assess whether it has control or can jointly control, or can exert significant influence over, the decommissioning fund as per the requirements of IFRS 10, IFRS 11 and IAS 28. If this is the case, the contributors’ interest in the decommissioning fund will be accounted for as per the requirements of such relevant Standards.

3. If the contributor assess that it neither has control nor can jointly control, or can exert significant influence over the decommissioning fund, then the contributor will account for its right to get reimbursement from the decommissioning fund as a ‘reimbursement asset’ as under IAS 37 Provision, Contingent Liability and Contingent Asset. This reimbursement will be recorded at an amount which is the lesser of:

a) The value of decommissioning liability recognized by contributor in its financial statements and

b) The share of resources from the decommissioning fund attributable to the entity (contributor)

4. Any changes to the carrying amount of the right to get reimbursement will be recognized in the statement of profit or loss in the accounting period in which those changes will take place. However, such changes do not include contributions to and payments from the decommissioning fund.

Accounting Treatment for the obligations to make extra or additional contributions

If the contributor is required to make extra or additional contributions which may become payable as a result of bankruptcy of or default by the other contributors, or if the value of the resources detained by the decommissioning fund decline to a level that those are not sufficient to meet the reimbursement obligations of the fund, this potential obligation will be treated as a contingent liability under IAS 37. However, if it is probable that contributor will have to make extra or additional contributions then it will be recognized as a liability.

Disclosure

The contributor is required to disclose the following:

a) The description of its interest in the decommissioning fund and any limitations on access to the resources of the fund;

b) The disclosures defined in and required by the paragraph 86 of IAS 37, if contributor may be obliged to make extra or additional contributions which are not currently recognized as a liability in the financial statements of the contributor;

c) The disclosures defined in and required by the paragraph 85(c) of IAS 37, if the contributor has accounted for its interest in the decommissioning fund as per the paragraph 4 above.

Effective date

The requirements of this Interpretation are applicable from annual accounting periods commencing on or after 1 January 2006. However, earlier application is permitted and encouraged.

The entity should give a separate disclosure, if it applies this Interpretation to an accounting period commencing before 1 January 2006.