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IFRIC 5 IFRIC Interpretation 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds This version includes amendments resulting from IFRSs issued up to 17 January 2008. IFRIC 5 Rights to Interests arising from Dssioning, Restoration and Environmental Rehabilitation Funds was developed by the International Financial Reporting Interpretations Committee and issued by the Internat ional Accounting Standards Board in December 2004. The Basis for Conclusions was amended to reflect the revision ofPresentation of Financial Statements in September 2007. © IASCF 2383 IFRIC 5 C ONTENTS paragraphs IFRIC INTERPRETATION 5 RIGHTS TO INTERESTS ARISING FROM DECOMMISSIONING, RESTORATION AND ENVIRONMENTAL REHABILITATION FUNDS REFERENCES BACKGROUND 1–3 SCOPE 4–5 ISSUES 6 CONSENSUS 7–13 Accounting for an interest in a fund 7–9 Accounting for obligations to make additional contributions 10 Disclosure 11–13 EFFECTIVE DATE 14 TRANSITION 15 APPENDIX Amendment to IAS 39 Financial Instruments: Recognition and Measurement BASIS FOR CONCLUSIONS © 2384 IASCF IFRIC 5 IFRIC Interpretation 5 Rights to Interests arising froDecommissioning, Restoration and Environmental Rehabilitation Funds (IFRIC 5) is set out in paragraphs 1–15 and the Appendix. IFRIC 5 is accompanied by a Basis for Conclusions. The scope and authority of Interpretations are set out in paragraphs 2 and 7–17 of the Preface to International Financial Reporting Standards. © IASCF 2385 IFRIC 5 IFRIC Interpretation 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds References 8S • I Accounting Policies, Changes in Accounting Estimates and Errors 7 2S • I Consolidated and Separate Financial Statements 8 2S • I Investments in Associates 1 3S A• I Interests in Joint Ventures 7 3S • I Provisions, Contingent Liabilities and Contingent Assets 9 3S • I Financial Instruments: Recognition and Measurement (as revised in 2003) 2 1 - C •I S Consolidation—Special Purpose Entities (as revised in 2004) Background 1 The purpose of decommissioning, restor ation and environmental rehabilitation funds, hereafter referred to as ‘decommissioning funds’ or ‘funds’, is to segregate assets to fund some or all of the costs of decommissioning plant (such as a nuclear plant) or certain equipment (such as ca rs), or in undertaking environmental rehabilitation (such as rectifying pollution of water or restoring mined land), together referred to as ‘decommissioning’. 2 Contributions to these funds may be volu ntary or required by regulation or law. The funds may have one of the following structures: () fundsthatareestablishedbyasinglecontributortofundits own decommissioning obligations, whether for a particular site, or for a number of geographically dispersed sites. () fundsthatihedwithlconiutorstofindther individual or joint decommissioning obligations, when contributors are entitled to reimbursement for decommissioning expenses to the extent of their contributions plus any actual earnings on those contributions less their share of the costs of administering the fund. Contributors may have an obligation to make additional contributions, for example, in the event of the bankruptcy of another contributor. () fundsthatihedwithlconiutorstofindther individual or joint decommissioning obligations when the required level of contributions is based on the curren t activity of a contributor and the benefit obtained by that contributor is based on its past activity. In such cases there is a potential mismatch in the amount of contributions made by a contributor (based on current ac tivity) and the value realisable from the fund (based on past activity). © 2386 IASCF IFRIC 5 3 Such funds generally have the following features: (a) the fund is separately administered by independent trustees. (b) entities (contributors) make contributions to the fund, which are invested in a range of assets that may includ e both debt and equity investments, and are available to help pay the contributors’ decommissioning costs. The trustees determine how contributions are invested, within the constraints set by the fund’s governing documents and any applicable legislation or other regulations. (c) the contributors retain the obligation to pay decommissioning costs. However, contributors are able to obtain reimbursement of decommissioning costs from the fund up to the lower of the decommissioning costs incurred and the contributor’s share of assets of the fund. (d) the contributors may have restricted access or no access to any surplus of assets of the fund over those used to meet eligible decommissioning costs. Scope 4 This Interpretation applies to accounti ng in the financial statements of a contributor for interests arising from decommissioning funds that have both of the following features: (a) the assetsareadministeredseparately(eitherbybeing heldinaseparate legal entity or as segregated assets within another entity); and (b) a contributor’s right to access the assets is restricted. 5 A residual interest in a fund that extends beyond a right to reimbursement, such as a contractual right to distributions once all the decommissioning has been completed or on winding up the fund, may be an equi ty instrument within the scope of IAS 39 and is not within the scope of this Interpretation. Issues 6 The issues addressed in this Interpretation are: (a) how should a contributor account for its interest in a fund? (b) when a contributor has an obligation to make additional contributions, for example, in the event of the bankruptcy of another contributor, how should that obligation be accounted for? ©IASCF 2387 IFRIC 5 Consensus Accounting for an interest in a fund 7 The contributor shall recognise its obligation to pay decommissioning costs as a liability and recognise its interest in thefund separately unless the contributor is not liable to pay decommissioning costs even if the fund fails to pay. 8 The contributor shall determine whet her it has control, joint control or significant influence over the fund by reference to IAS 27, IAS 28, IAS 31 and SIC-12. If it does, the contributor shalaccount for its interest in the fund in accordance with those Standards. 9 If a contributor does not have control, joint control or significant influence over the fund, the contributor shall recognisethe right to receive reimbursement from the fund as a reimbursement in accordan cewithIAS37. Thisreimbursement shall be measured at the lower of: (a) the amount of the decommissioning obligation recognised; and (b) the contributor’s share of the fair value of the net assets of the fund attributable to contributors. Changes in the carrying value of the right to receive reimbursement other than contributions to and payments from the fund shall be recognised in profit or loss in the period in which these changes occur. Accounting for obligations to make additional contributions 10 When a contributor has anobligation to make potential additional contributions, for example, in the event of the bankruptcy of another contributor or if the value oftheinvestmentassetsheldbythefunddecreasestoanextentthattheyare insufficient to fulfil the fund’s reimburs ement obligations, this obligation is a contingent liability that is within te scope of IAS 37. The contributor shall recognise a liability only if it is probable that additional contributions will be made. Disclosure 11 A contributor shall disclose the nature of its interest in a fund and any restrictions on access to the assets in the fund. 12 When a contributor has an obligation tomake potential additional contributions that is not recognised as a liability (see paragraph 10), it shall make the disclosures required by paragraph 86 of IAS 37. 13 When a contributor accounts for its in terest in the fund in accordance with paragraph 9, it shall make the disclosure s required by paragraph 85(c) of IAS 37. © 2388 IASCF IFRIC 5 Effective date 14 An entity shall apply this Interpretation for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies this Interpretation to a period beginning before 1 January 2006, it shall disclose that fact. Transition 15 Changes in accounting policies shall be accounted for in ac cordance with the requirements of IAS 8. © IASCF 2389 IFRIC 5 Appendix Amendment to IAS 39Financial Instruments: Recognition and Measurement The amendment in this appendix shall be apied for annual periods beginning on or after 1 January 2006. If an entity applies this Interpre tation for an earlier period, the amendment shall be applied for that earlier period. * * * * * The amendment contained in this appendix whthis Interpretation was issued in 2004 has been incorporated into IAS 39 as issued on and after 16 December 2004. © 2390 IASCF IFRIC 5 BC Basis for Conclusions on IFRIC Interpretation 5 This Basis for Conclusions accompanies, but is not part of, IFRIC 5. The original text has been marked up to reflect the revision oPresentation of Financial Statements in 2007: new text is underlined and deleted text is struck through. Introduction BC1 This Basis for Conclusions summarises the IFRIC’s considerations in reaching its consensus. Individual IFRIC members gave greater weight to some factors than to others. Background (paragraphs 1–3) BC2 The IFRIC was informed that an increasing number of entities with decommissioning obligations are contributing to a separate fund established to help fund those obligation s. The IFRIC was also informed that questions have arisen in practice over th e accounting treatment of in terests in such funds and that there is a risk thadivergent practices may deve lop. The IFRIC therefore concluded that it should provide guidanceto assist in answering the questions in paragraph 6, in particular on the accounti ng for the asset of the right to receive reimbursement from a fund. On the issue of whether the fund should be consolidated or equity accounted, the IFRIC concluded that the normal requirements of IAS 27 Consolidated and Separate Financial Statemen, SIC-12 Consolidation—Special Purpose Entities, IAS 28 Investments in Associates or IAS 31 Interests in Joint Ventures apply and that there is no need for interpretative guidance. The IFRIC published its proposed In terpretation on 15 January 2004 as D4 Decommissioning, Restoration and Environmental Rehabilitation Funds. BC3 Paragraphs 1–3 describe ways in which entities might arrange to fund their decommissioning obligations. Those that are within the scope of the Interpretation are specified in paragraphs 4–6. Scope (paragraphs 4 and 5) BC4 D4 did not precisely define the scope because the IFRIC believed that the large variety of schemes in operation woul d make any definition inappropriate. However, some respondents to D4 disagreed and commented that the absence of any definition made it unclear when the Interpretation should be applied. As a result, the IFRIC has specified the scope by identifying the features that make an arrangement a decommissioning fund. It has also described the different types of fund and the features that may (or may not) be present. BC5 The IFRIC considered whether it should issue a wider Interpretation that addresses similar forms of reimbursement, or whether it should prohibit the application of the Interpretation to other situations by analogy. The IFRIC rejected any widening of the scope, deciding instead to concentrate on the matter © IASCF 2391 IFRIC 5 BC referred to it. The IFRIC also decided th at there was no reason to prohibit the application of the Interpretation to ot her situations by analogy and thus the hierarchy of criteria in paragraphs 7–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors would apply, resulting in similar accounting for reimbursements under arrangements that are not decommissioning funds, but have similar features. BC6 The IFRIC considered comments from respondents that a contributor may have an interest in the fund that extends beyondits right to reimbursement. In response, the IFRIC added clarificatio n that a residual interestinafund,suchasa contractual right to distributions once all the decommissioning has been completed or on winding up the fund, ma y be an equity inst rument within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Basis for Consensus Accounting for an interest in a fund (paragraphs 7–9) BC7 The IFRIC concluded that the contributor should recognise a liability unless the contributor is not liable to pay decommissioning costs even if the fund fails to pay. This is because the contributor remains liable for the decommissioning costs. Additionally, IAS 37 Provisions, Contingent Liabil ities and Contingent Assets provides that: (a) when an entity remains liable for expenditure, a provision should be recognised even where reimbursement is available; and (b) if the reimbursement is virtually certain to be received when the obligation is settled, then it should be treated as a separate asset. BC8 In concluding that the contributor should recognise separately its liability to pay decommissioning costs and its interest in the fund, the IFRIC also noted the following: (a) There is no legally enforceable ri ght to set off the rights under the decommissioning fund against the decommissioning liabilities. Also, given that the main objective is reimbursement, it is likely that settlement will not be net or simultaneous. Accord ingly, treating these rights and liabilities as analogous to financial assets and financial liabilities would not result in offset because the offset criteria in IAS 32 Financial Instruments: Disclosure and Presentation are not met. (b) Treating the decommissioning oblig ation as analogous to a financial liability would not result in derecognition through extinguishment. If the fund does not assume the obligation for decommissioning, the criteria in IAS 39 for derecognition of financial liabilities through extinguishment are not met. At best, the fund acts like an in-substance defeasance that does not qualify for derecognition of the liability. (c) It would not be appropriate to treat decommissioning funds as analogous to pension funds, which are presented net of the related liability. This is * In August 2005, IAS 32 was amended as IAS 32 Financial Instruments: Presentation. 2392 ©IASCF IFRIC 5 BC because, in allowing a net presentation for pension plans in IAS 19 Employee Benefits, the International Accounting Standards Board’s predecessor organisation, IASC, stated that it believed the situation is ‘unique to employee benefit plans and [it did] not intend to permit this net presentation for other liabilities if th e conditions in IAS 32 and IAS 39 are not met’ (IAS 19, Basis for Conclusions paragraph BC68I). BC9 As to the accounting for the contributor’s interest in the fund, the IFRIC noted that some interests in funds would be within the scope of IAS 27, IAS 28, IAS 31 or SIC-12. Asnotedinpara graph BC2, the IFRIC concluded that, in such cases, the normal requirements of those Standards would apply and there is no need for interpretative guidance. BC10 Otherwise, the IFRIC conc luded that the contributor ha s an asset for its right to receive amounts from the fund. The right to receive reimbursement froma fund and amendment to the scope of IAS 39 BC11 The IFRIC noted that under existing IFRSs, there are two forms of rights to reimbursement that would be accounted for differently: (a) A contractual right to receive reimbursement in the form of cash. This meets the definition of a financial asse t and is within the scope of IAS 39. Such a financial asset would be classifi ed as an available-for-sale financial asset (unless accounted for using the fair value option) because it does not meet the definitions of a financial asset held for trading, a held-to-maturity investment or a loan or receivable. * (b) A right to reimbursement other than a contractual right to receive cash. Thisdoesnotmeetthedefinitionofafinancialassetandiswithinthe scope of IAS 37. BC12 The IFRIC concluded that both these forms of reimbursement have economically identical effects. Therefore accounting for both forms in the same way would provide relevant and reliable information to a user of the financial statements. However, the IFRIC noted that this did no t appear possible under existing IFRSs because some such rights are within the scope of IAS 39, and others are not. Therefore, it asked the Board to amend the scope of IAS 39 to exclude rights to reimbursement for expenditure required to settle: (a) a provision that has been recognised in accordance with IAS 37; and (b) obligations that had been originally recognised as provisions in accordance with IAS 37, but are no longer provisions because their timing or amount is no longer uncertain. An example of such a liability is one that was originally recognised as a provisio n because of uncertainty about the * An interest in a decommissioning fund would not meet the definition of held for trading because it is not acquired or incurred principally for the purpose of selling or repurchasing it in the near term, nor of a held-to-maturity investment because it does not have fixed or determinable maturity. In addition, an interest in a fund is excluded from the definition of loans and receivables in IAS 39 since it is ‘an interest ac quired in a pool of assets that are not loans and receivables’. ©IASCF 2393 IFRIC 5 BC timing of the cash outflow, but su bsequently becomes another type of liability because the timing is now certain. BC13 This amendment was approved by the Board and is set out in the Appendix of IFRIC 5. As a result, all such rights to reimbursement are within the scope of IAS 37. BC14 The IFRIC noted that paragraph 53 of IAS 37 specifies the accounting for rights to receive reimbursement. It requires this right to reimbursement to be separately recognised when it is virtually certain that reimbursement will be received if the contributor settles the obligation. The IFRIC also noted that this paragraph prohibits the recognition of an asset in excess of the recognised liability. For example, rights to receive reim bursement to meet decommissioning liabilities that have yet to be recognised as a provision are not recognised. Accordingly, the IFRIC concluded that when the right to reimbursement is virtually certain to be re ceived if the contributor settles its decommissioning obligation, it should be measured at the lower of the amount of the decommissioning obligation recognised and the reimbursement right. BC15 The IFRIC discussed whether the reimbursement right should be measured at: (a) the contributor’s share of the fair value of the net assets of the fund attributable to contributors, taking into account any inability to access any surplus of the assets of the fund over eligible decommissioning costs (with any obligation to make good potential defaults of other contributors being treated separately as a contingent liability); or (b) the fair value of the reimbursement right (which would normally be lower than (a) because of the risks involved, such as the possibility that the contributor may be required to make good defaults of other contributors). BC16 The IFRIC noted that th e right to reimbursement re lates to a decommissioning obligation for which a provision wo uld be recognised and measured in accordance with IAS 37. Paragraph 36 of IAS 37 requires such provisions to be measured at ‘the best estimate of the ex penditure required to settle the present obligation at the balance sheet date end of the reporting period ’. The IFRIC noted that the amount in paragraph BC15(a)— ie the contributor’s share of the fair value of the net assets of the fund a ttributable to contributors, taking into account any inability to access any surplus of the assets of the fund over eligible decommissioning costs—is the best esti mate of the amount available to the contributor to reimburse it for expenditure it had incurred to pay for decommissioning. Thus, the amount of the asset recognised would be consistent with the amount of the liability recognised. BC17 In contrast, the IFRIC noted that the amount in paragraph BC15(b)—ie the fair value of the reimbursement right—would take into account the factors such as liquidity that the IFRIC believed to be difficult to measure reliably. Furthermore, this amount would be lower than that inparagraph BC15(a) because it reflects the possibility that the contributor may be required to make potential additional contributions in the event of default by other contributors. The IFRIC noted that its decision that the obligation to ma ke potential additional contributions * The amendment has been incorporated into the text of IAS 39 as published in this volume. 2394 ©IASCF IFRIC 5 BC should be treated as a contingent liability in accordance with IAS 37 (see paragraphs BC22–BC25) would result in double-counting of the risk of the additional contribution being required if the measure in paragraph BC15(b) were to be used. BC18 Consequently, the IFRIC concluded that the approach in paragraph BC15(a) would provide the most useful information to users. The asset cap BC19 Many respondents to D4 expressed concern about the ‘asset cap’ that is imposed by the requirement in paragraph 9. This asset cap limits the amount recognised as a reimbursement asset to the amount of the decommissioning obligation recognised. These respondents argued that rights to benefit in excess of this amount give rise to an a dditional asset, separate from the reimbursement asset. Such an additional asset may arise in a number of ways, for example: (a) the contributor has the right to benefit from a repayment of any surplus in the fund that exists once all the decommissioning has been completed or on winding up the fund. (b) the contributor has the right to benefit from reduced contributions to the fund or increased benefits from the fund (eg by adding new sites to the fund for no additional contributions) in the future. (c) the contributor expects to obtain benefit from past contributions in the future, based on the current and pl anned level of activity. However, because contributions are made before the decommissioning obligation is incurred, IAS 37 prevents recognition ofan asset in excess of the obligation. BC20 The IFRIC concluded that a right to benefit from a repayment of any surplus in the fund that exists once all the decommissioning has been completed or on winding up the fund may be an equity instrument within the scope of IAS 39, in which case IAS 39 would apply. However, the IFRI C agreed that an asset should not be recognised for other rights to receive reimbursement from the fund. Although the IFRIC had sympathy with the concerns expressed by constituents that there may be circumstances in which it would seem appropriate to recognise an asset in excess of the reimbursement right, it concluded that it would be inconsistent with paragraph 53 of IAS 37 (which requires that ‘the amount recognised for the reimbursement should not exceed the amount of the provision’) to recognise this asset. The IFRIC also noted that the circumstances in which this additional asset exists are likely to be limited, and appl y only when a contributor has restricted access to a surplus of fund assets that does not give it control, joint control or significant influence over a fund. The IFRIC expects that most such assets would not meet the recognition criteria in the Framework because they are highly uncertain and cannot be measured reliably. BC21 The IFRIC also considered arguments that there should not be a difference between the treatment of a surplus when a fund is accounted for as a subsidiary, joint venture or associate, and when it is not. However, the IFRIC noted that, under IFRSs, restrictions on assets in subsidiaries, joint ventures or associates do not affect recognition of those assets. Hence it concluded that the difference in © IASCF 2395 IFRIC 5 BC treatment between funds accounted for as subsidiaries, joint ventures or associates and those accounted for as a reimbursement right is inherent in IFRSs. The IFRIC also concluded that this is appropriate beca use, in the former case, the contributor exercises a degree of control not present in the latter case. Obligations to make additional contributions (paragraph 10) BC22 In some cases, a contributor has an obligation to make potential additional contributions, for example, in the eventof the bankruptcy of another contributor. BC23 The IFRIC noted that by ‘joining’ the fund, a contributor may assume the position of guarantor of the contributions of the other contributo rs, and hence become jointly and severally liable for the obligations of other contributors. Such an obligation is a present obligation of thecontributor, but the outflow of resources associated with it may not be probable . The IFRIC noted a parallel with the example in paragraph 29 of IAS 37, which st ates that ‘where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability.’ Accordingly, the IFRIC concluded that a liability would be recognised by the contributor only if it is probable that it will make additional contributions. The IFRIC noted that such a contingent liability may arise both when the contributor’s interest in the fund is accounted for as a reimbursement ri ght and when it is accounted for in accordance with IAS 27, IAS 28, IAS 31 or SIC-12. BC24 The IFRIC considered the argument that an obligation to make good potential shortfalls of other contributors is a financial instrument (ie a financial guarantee) as defined in IAS 32 and hence should b acecounted for in accordance with IAS 39. The grounds for this point of view are that the contributor has an obligation to deliver cash to the fund, and the fund has a right to receive cash from the contributor if a shortfall in contributions arises. However, the IFRIC noted that: (a) a contractual obligation to make good shortfalls of other contributors is a financial guarantee. Financial gu arantee contracts that provide for payments to be made if the debtor fails to make payment when due are excluded from the scope of IAS 39. (b) when the obligation is not contractual, but rather arises as a result of regulation, it is not a financial liability as defined in IAS 32 nor is it within the scope of IAS 39. BC25 Therefore, the IFRIC concluded that an obligation to make additional contributions in the event of specified circumstances should be treated as a contingent liability in accordance with IAS 37. Disclosure (paragraphs 11–13) BC26 The IFRIC noted that the co ntributor may not be able to access the assets of the fund (including cash or cash equivalents) for many years (eg until it undertakes the decommissioning), if ever. Therefore, the IFRIC concluded that the nature of the contributor’s interest and the restri ction on access should be disclosed. 2396 © IASCF IFRIC 5 BC The IFRIC also concluded that this disclosure is equally relevant when a contributor’s interest in a fund is accounted for by consolidation, proportional consolidation or using the equity meth od because the contributor’s ability to access the underlying assets may be similarly restricted. Effective date and transition (paragraphs 14 and 15) BC27 D4 proposed that the Interpretation should be effective for annual periods beginning on a date set at three months after the Interpretation was finalised. The IFRIC considered the view of some respondents that the Interpretation should apply from 1 January 2005 (an earlier date ) on the grounds that this is the date from which many entities will adopt IFRSs, and hence adopting the Interpretation at that time would promote comparability between periods. However, the IFRIC noted its general practice is to allow at least three months between finalising an Interpretation and its application, to enable entities to obtain the Interpretation and implement any necessary systems changes. In addition, the IFRIC considered the Board’s concern that the amendment to IAS 39 issued as part of the Interpretation would change the ‘stable platform’ of St andards that are in force for entities that will apply IFRSs for the first time in 2005. Therefore, the IFRIC decided to require that the Interpretation should be applied for annual periods beginning on or after 1 January 2006, with earlier application encouraged. BC28 The IFRIC observed that the implementation of the Interpretation is not expected to be problematic. Therefore, the IF RIC concluded that IAS 8 should apply. Respondents to D4 did not disagree with this conclusion. © IASCF 2397
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