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. The difference is accounted as finance cost. IAS 37 outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable). To Building A/c  Cr                 Rs.16834. In scenarios like these, Ind-AS 16 gives reference to Ind-AS 37 on Provisions, Contingent Assets and Contingent Liabilities. counting for employee obligations with an option to recognize the entire such gain or loss to retained earnings, at the ... practicable then the fair value of the financial asset at the date of transition to Ind ASs shall be the new ... cept for recognizing asset retirement obligations. 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. This Roadmap is intended to help entities address the impact of certain environmental and asset retirement and Indian GAAP as they exist today, and to the timing and scope of accounting changes that the standard setting agendas of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and Institute of Chartered Accountants of India (ICAI) (collectively, the Boards) ... 6.14. 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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. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. However where an entity incurs ARO as a consequence of having used the item during a particular period to produce inventories during that period, such cost of obligation may be treated as per Ind AS 2- Inventories. 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. 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. The decrease of ARO liability of Rs.4000 shall be accounted as follows: ARO Liability              Dr        4000. 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), (Being depreciation recorded on ARO asset). 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. Industry Impact Analysis – Ind AS 16 Property Plant & Equipment:. The impact of such changes are to be made to the ARO amount recognised as part of the cost of the asset as well as the ARO amount recognised as a liability as follows: If the related asset is measured using the cost model. Your email address will not be published. The liability is commonly a legal requirement to return a site to its previous condition. 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, If no similar activities could be traced, then reports from experts either within or outside may be sought. 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 The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. Building A/c                    Dr   Rs.8417, To ARO Liability A/c   Cr               Rs.8417. 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. Finance cost to be charged each year= ARO liability X discount rate. Read about how life interests in property form part … CSP concentrated solar power . 1834. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss. The emphasis in ICDS X is more on the degree of estimation involved with regard to the future expenditure required in settlement, rather than on the uncertainty involved in the timing or amount. It automates the recognition and reporting of AROs and is able to support different accounting principles (for example, IFRS, U.S. GAAP, and German HGB) while leveraging a tight integration with SAP ERP. 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. Thus Ind AS requires that an entity shall arrive at an initial estimate of the expected cost for dismantling and removing the asset and restoration of the site and shall capitalise the same as part of the cost of the asset. consideration under Ind AS 115, Revenue from Contracts with Customers. Such estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. results under Ind AS for the first time. 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. 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. BLM Bureau of Land Management . In order to submit a comment to this post, please write this code along with your comment: 4a2f22b3c4ff379f0162e9b96b57a5e8. Under ARO, the entity weighs different options to carefully estimate the possible outflow of resources required to settle the obligation. 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 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. 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. Disclaimer: This website is intended for informative purpose only and  users may use it at their discretion only. As per the terms of the lease, the entity has to demolish the building and restore the site at the end of the lease period of 12 years. 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. The definition in Ind AS 37 is – “a provision is a liability of uncertain timing or amount”. Changes in the ARO liability affects the revaluation surplus or deficit already recognised as follows: any decrease in ARO liability shall increase the revaluation surplus created at the time of revaluation of the related asset except where there is a revaluation deficit in respect of the asset already recognised in profit and loss account in which case such decrease in ARO liability shall reverse the deficit so recognised in profit and loss account. Thus in the case of ARO, the discounted ARO amount has to be periodically unwinded to reflect the passage of time and the difference amount is accounted as finance cost. and Asset Retirement Obligations. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. The entity adopts 10% as the revised discount rate with other factors remaining unchanged. 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. Inflated cost of meeting the obligation= 25200 X [1+5.876%]^12 = Rs.50000. As per para 45 of Ind AS 37, where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. 143 as companies and their accountants will need to apply … The unwinding of the discounted value will … 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. Usually this obligation arises when an asset is installed in a leased premise and the lessee is bound by the contract terms to dismantle and remove the same on expiry of the lease term. The obligation can result either from legislation (“legal obligation”) or from valid expectations of the third parties created by the company (“constructive obligation”). However in case the decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess shall be recognised immediately in profit or loss. 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. CCRs coal combustion residuals . The ARO amount capitalised as part of the cost of the asset should be depreciated over the period of useful life of the related asset. MSA metropolitan statistical area . As per para 61 of Ind AS 37, a provision shall be used only for expenditures for which the provision was originally recognised. Any such revaluation shall be taken into account in determining        the amounts to be charged to revaluation deficit or revaluation surplus under (i) above. This obligation of A is termed as Asset Retirement Obligation. SAP Asset Retirement Obligation Management is an application that allows companies to manage their asset retirement obligations (AROs) from an accounting point of view. For instance, a Company A has installed a tower in a portion of land owned by Mr.B. 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, the occurrence of which may not be within the control of the entity burdened by the obligation. Read about how retirement villages form part of your real estate assets. However IFRS allows ARO cost to be added to the carrying amount of inventories as is discussed in paragraph BC15 of IAS 16. Generally-accepted accounting standards (GAAP) require the company to include the present value of the expected (face value of) future decommissioning cost in the total acquisition cost of the 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). 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. If a        revaluation is necessary, all assets of that class shall be revalued. 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