The International Financial Reporting Interpretations Committee (IFRIC) has released IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.
The Interpretation contains guidance on accounting for changes in existing decommissioning, restoration and similar liabilities that are recognised both as part of the cost of an item of property, plant and equipment in accordance with IAS 16 Property, Plant and Equipment and as a liability in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
More specifically, the Interpretation addresses accounting for (a) a change the estimated outflow of resources embodying economic benefits (eg cash flows); (b) a change in the current market-assessed discount rate; and (c) an increase that reflects the passage of time (also referred to as the unwinding of the discount).
Introducing the Interpretation, Kevin Stevenson, IFRIC Chairman, said:
The IFRIC was informed that differing views and potentially divergent practices exist in accounting for changes in decommissioning, restoration and similar liabilities, and it therefore agreed to a request to develop guidance.
The Interpretation confirms that, under existing requirements, decommissioning, restoration and similar liabilities should be measured using a current market-based discount rate.
In general, the Interpretation requires changes in the liability resulting from changes in cash flows or discount rates to be capitalised in full and depreciated prospectively over the life of the item to which they relate. It also requires the unwinding of the discount to be recognised in profit or loss as a finance cost as it occurs.
Noting that the Interpretation should help to ensure consistency in this difficult area, Mr Stevenson added:
The confirmation that provisions must be measured using a current market-based discount rate sends an important message to all entities—not just those directly affected by the Interpretation.
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