IFRIC 5 applies to accounting in the financial statements of a contributor for interests arising from decommissioning, restoration and environmental funds (hereafter referred to as ‘decommissioning funds’) that have both of the
· The assets are administered separately (either by being held in a separate legal entity or as segregated assets within another entity)
· A contributor’s right to access the assets is restricted.
Residual interests in funds that extend beyond a right of reimbursement may be an equity instrument within the scope of IAS 39 Financial Instruments: Recognition and Measurement, and is scoped out of IFRIC 5.
Let me give you a brief, simple example to illustrate this extremely complex topic.
Let’s say your experts estimated the expenses to decommission the plant.
Their estimate is in the following table:
On top of that, the experts estimate the annual expenses of CU 100 to remove the radioactive waste caused by the plant’s operations during its useful life.
All expenses are stated in the real prices (20X1).
Based on recent economic development, you assume that the inflation rate will be 1.5% p.a. and the appropriate discount rate is 2%.
Calculate a provision to decommission the plant and recognize it in the financial statements.
Once we have our experts’ report, estimates of inflation and discount rate, we verified everything, etc., we need to:
Inflate the cash flows, because they are stated in the current prices; and
Discount them to a present value
Be careful, because you should not include the estimated expenses for removal of radioactive waste into the initial provision.
The reason is that the obligation arises when the plant is in operation and therefore, you need to recognize a relevant provision needs when a plant operates and produces radioactive waste (in profit or loss).
The initial measurement of a provision for decommissioning the plant is shown in the following table:
Year N. of years from 20X1 (A) Expenses (B) Expenses inflated at 1.5% p.a. (C) Discount factor at 2% p.a. (D) Present value (E)
20X31 30 400 625 0.552 345
20X32 31 500 793 0.541 429
20X33 32 600 966 0.531 513
20X34 33 550 899 0.520 468
20X35 34 250 415 0.510 212
Total n/a 2 300 3 698 n/a 1 967
Expenses inflated at 1.5% p.a. (C) = B * 1.015 to the power of (A)
Discount factor at 2% (D) = 1/(1.02 to the power of (A))
Present value (E) = (C)*(D)
The journal entry is:
Debit Property, Plant and Equipment (nuclear power plant): CU 1 967
Credit Provision for Decommissioning: CU 1 967
When there’s no change in estimates in the subsequent reporting period, you need to unwind the discount. Therefore, journal entry in 20X2 is:
Debit P/L – Finance Expenses: CU 39 (1 967*2%)
Credit Provision for Decommissioning: CU 39
Now, let’s say that in 20X3, your estimate of the discount rate changes to 1.8% and all the other estimates (cash flows) remain unchanged.
You need to recalculate the provision and account for its changes under IFRIC 1.
Just be careful, because now you are in 20X3, not in 20X1 and therefore, the number of years for discounting change (not for inflating the costs, as you still inflate from the date of your report).
The new table could look something like this:
Year N. of years from 20X3 (A) Expenses (B) Expenses inflated at 1.5% p.a. (C from previous table) Discount factor at 1.80% p.a. (D) Present value (E)
20X31 28 400 625 0.607 379
20X32 29 500 793 0.596 473
20X33 30 600 966 0.586 566
20X34 31 550 899 0.575 517
20X35 32 250 415 0.565 234
Total n/a 2 300 3 698 n/a 2 169
You can see that the revised provision of CU 2 169 is different from the currently recognized provision.
Assuming you use cost model for your power plant, you need to recognize the change in the cost of a plant.
Before we recognize this change in line with IFRIC 1, we must not forget to unwind the discount for 20X3, too:
Debit P/L – Finance Charges: CU 40 ((1967+39)*2%)
Credit Provision for Decommissioning: CU 40
Then, we can recognize the change in the provision:
Debit PPE (Nuclear power plant): CU 123 (2 169 – (1 967+39+40))
Credit Provision for Decommissioning: CU 123
Finally, when a company starts decommissioning – i.e. removing the plant and restoring the site, then all expenses are charged against the provision:
Debit Provision for Decommissioning: CU XXX
Credit Cash/Bank Account/Suppliers: CU XXX