IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 1 applies to changes in the MEASUREMENT of any existing ‘decommissioning, restoration or similar liability‘ that is both:

  • recognized as part of the cost of PPE under IAS 16 or as part of the cost of a Right of Use (RoU) asset as per IFRS 16; AND
  • recognized as liability under IAS 37.

IFRIC 1 Effective Date

An entity shall apply this Interpretation for annual periods beginning on or after 1 September 2004.

Earlier application is ‘ENCOURAGED’.

If an entity applies the Interpretation for a period beginning before 1 September 2004, it shall disclose that fact.

IFRIC 1 – Issue

Under IAS 16, the cost of PPE INCLUDES estimate of ‘the costs of dismantling and removing the item and restoring the site‘ on which it is located.
IAS 37 INCLUDES Requirements for ‘Measurement of such decommissioning, restoration and similar liabilities‘.
It also requires that such provisions are REVIEWED at each ‘reporting date‘ and adjusted to reflect the best estimate of the expected outcome.
IFRIC 1 provides GUIDANCE on how to account for the effect of Subsequent Changes in the ‘Measurement of decommissioning, and restoration provision‘.
‘Carrying Amount’ of provision Might need to change in order to reflect,
(a) Unwinding of the discount; AND
(b) Change in estimate including the following:
– Timing of the cash-flows
– Size of the cash-flows; OR
– Discount Rate

IFRIC 1 – Consensus

1. Change in Estimate

(a) Increase in Provision for Decommissioning and Restoration Cost
Cost Model
Increases Carrying Amount of asset.
The ‘asset needs to be tested for impairmentAs Per IAS 36.

Revaluation Model
Decreases ‘Revaluation Surplus’ to the extent of credit balance.
Further increase in provision is debited to P&L.
(b) Decrease in Provision for Decommissioning and Restoration Cost
Cost Model
Decreases Carrying Amount of the asset to the extent of the debit balance.
Further decrease in provision is credited to P&L.

Revaluation Model
It is ‘CREDITED’ in the following order:
– P&L account to the extent of reversal of revaluation deficit on the asset that was previously recognized in the P&L account.
– Revaluation surplus to the extent that revaluation surplus does NOT exceed the carrying amount of asset.
– P&L account.
(c) Other Concepts
Cost Model
The adjusted depreciable amount of the asset is depreciated over its remaining useful life.

Revaluation Model
(i) Change in provision is an ‘Indication’ that the asset May have to be revalued in order to ensure that the carrying amount does NOT differ materially from the fair value of the asset at the end of reporting period.
(ii) Change in Revaluation Surplus arising from a change in the Liability is separately identified and disclosed.

2. Unwinding of Discount

It is recognized in the P&L as ‘Finance Cost’. Capitalization As Per IAS 23 is NOT PERMITTED.

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