How Decommissioning and Restoration Obligations Are Measured and Updated under IAS 37 / IAS 16 / IFRIC 1 and ASC 410

Decommissioning, dismantling, and restoration obligations (often called asset retirement obligations — AROs) arise when an entity must restore a site or remove long-lived assets at the end of their use. Under IFRS (IAS 37, IAS 16, IFRIC 1) and US GAAP (ASC 410-20), the liability is recognized at present value, with a corresponding asset retirement cost (ARC) capitalized into the related asset’s carrying amount. Subsequent accounting splits into accretion/unwinding of the discount in profit or loss and depreciation of the capitalized ARC over the asset’s useful life.

Both frameworks seek to portray the full cost of owning and using long-lived assets by recognizing unavoidable end-of-life cash outflows from day one.

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How decommissioning obligations arise

Typical sources include: oil & gas wells, mines, offshore platforms, nuclear facilities, wind farms, leased retail stores requiring make-good, and industrial equipment requiring hazardous removal. A legal obligation can be statutory, contractual, or constructive (IFRS) when past practice or published policies create valid expectations.

The obligation is recognized when the entity becomes obligated and the amount can be reliably estimated (IFRS) or when it is probable and reasonably estimable (US GAAP). For many assets, this is at initial construction/installation.

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Initial recognition and measurement

IFRS (IAS 37, IAS 16):

• Measure the provision at the present value of expected cash outflows using a pre-tax discount rate reflecting the time value of money and risks specific to the liability.

• Recognize a decommissioning provision and add an equal ARC to the cost of the related PPE.

US GAAP (ASC 410-20):

• Recognize an ARO at fair value using a credit-adjusted risk-free rate; record a corresponding asset retirement cost as part of PPE.

• The rate is locked in by layer at initial recognition (and for each subsequent measurement event).

Illustrative entry at inception (both frameworks):

• Debit: Property, Plant & Equipment – ARC 1,000,000

• Credit: Asset Retirement Obligation / Provision 1,000,000

The ARC is depreciated over the asset’s useful life; the liability is increased each period for the passage of time.

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Subsequent measurement — accretion, depreciation, and changes in estimates

Accretion / Unwinding of discount:

• IFRS: Recognize unwinding of the discount as finance cost → increases the provision.

• US GAAP: Recognize accretion expense in P&L → increases the ARO.

Depreciation:

• Depreciate the ARC on a systematic basis (usually straight-line) over the asset’s useful life, together with the underlying PPE.

Changes in estimates:

• IFRS (IFRIC 1): Re-measure the provision for changes in timing, amount, or discount rate. Adjust the carrying amount of the related asset for the full change (increase/decrease). If the related asset is fully depreciated, record the change in P&L.

• US GAAP: Apply a layering approach. For changes in cash flow estimates, recognize a new ARO layer using the current credit-adjusted risk-free rate; accrete each layer separately. Decreases may reduce the liability and the carrying amount of the asset; if the asset is fully depreciated, record the reduction in P&L.

Example — year-end accretion and depreciation:

• Debit: Finance Cost / Accretion Expense 60,000

• Credit: ARO / Provision 60,000

• Debit: Depreciation Expense – ARC 50,000

• Credit: Accumulated Depreciation – PPE 50,000

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Practical estimation mechanics

Cash flow estimation: identify decommissioning activities (removal, transportation, remediation, site restoration), expected timing, and inflation assumptions. Under IFRS, discount using a pre-tax rate consistent with risk profile; under GAAP, embed credit risk in the credit-adjusted risk-free rate. Avoid double-counting risk by aligning cash flow vs discount rate techniques.

Tax effects: deferred taxes often arise because the liability is recognized for accounting before tax deduction; recognize DTA/DTL under IAS 12 / ASC 740 consistent with the underlying entries.

Foreign currency: remeasure the liability per IAS 21 / ASC 830 when denominated in a foreign currency, with gains/losses in P&L; under IFRS, the offsetting asset is not retranslated unless it meets separate criteria.

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 37, IFRIC 1, IAS 16)	US GAAP (ASC 410-20)
Initial measurement	Present value using pre-tax discount rate	Fair value using credit-adjusted risk-free rate
Subsequent interest	Unwinding recognized as finance cost	Accretion expense recognized in P&L
Estimate changes	Remeasure provision; adjust asset carrying amount	New layers for revisions; each uses its own rate
Discount rate updates	Re-estimate rate each reporting date if market rates change	Original layer’s rate fixed; new layers get new rates
Asset fully depreciated	Further increases to liability → P&L	Similar outcome; reductions may hit P&L if no asset basis
De-recognition	On settlement, derecognize liability; differences → P&L	Same principle

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Worked example — initial estimate and later revision

Day 1: Expected decommissioning in 10 years = 1,600,000; discount rate 5%. PV ≈ 981,000.

• Dr PPE – ARC 981,000

• Cr ARO / Provision 981,000

Year 1:

• Accretion (5% × 981,000) = 49,050

  • Dr Finance Cost / Accretion 49,050

  • Cr ARO / Provision 49,050

• Depreciation of ARC (10-year SL) = 98,100

  • Dr Depreciation Expense 98,100

  • Cr Accumulated Depreciation 98,100

End of Year 2 — estimate increases to 1,900,000; 8 years remaining:

• IFRS: Re-measure PV using current market rate (say 4.5%). New PV of remaining outflows = 1,377,000. Carrying liability before change ≈ 1,080,000 → increase 297,000.

  • Dr PPE – ARC 297,000

  • Cr Provision 297,000

• US GAAP: Create a new layer for the incremental cash flows using the current credit-adjusted risk-free rate; accrete each layer separately going forward.

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Presentation and disclosures

Balance sheet: ARO/provision split between current (portion due within 12 months) and non-current. The ARC is included in the carrying amount of PPE.

Income statement: Accretion/unwinding presented within finance costs; depreciation within operating expenses. Gains/losses on settlement recognized in P&L.

Disclosures (both frameworks):

• Nature and timing of obligations and underlying assets.

• Reconciliation (roll-forward) of opening to closing liability: additions, accretion, revisions, settlements, FX.

• Key assumptions: cash flow timing, inflation, discount/credit-adjusted rates, and sensitivity.

Example roll-forward (USD):

Movement in ARO / Provision	Amount
Opening balance	1,030,000
Accretion / Unwinding	54,000
Revisions to estimates	310,000
Settlements	(40,000)
FX and other	(6,000)
Closing balance	1,348,000

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Journal entries summary

1) Initial recognition:

• Dr PPE – Asset Retirement Cost xx

• Cr ARO / Decommissioning Provision xx

2) Periodic accretion / unwinding:

• Dr Accretion Expense / Finance Cost xx

• Cr ARO / Provision xx

3) Depreciation of ARC:

• Dr Depreciation Expense xx

• Cr Accumulated Depreciation – PPE xx

4) Change in estimates:

• IFRS:

  • Dr / Cr PPE – ARC xx

  • Cr / Dr Provision xx

• US GAAP (layer):

  • Dr / Cr PPE – ARC (for revised layer) xx

  • Cr / Dr ARO (new layer at current rate) xx

5) Settlement of obligation:

• Dr ARO / Provision xx

• Cr Cash xx

• Dr / Cr Gain or Loss on Settlement xx

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Impact on financial performance and ratios

• EBITDA: unaffected by accretion/unwinding (below EBITDA) but reduced by depreciation of ARC.

• Leverage: higher due to added non-debt liabilities (AROs/provisions).

• ROA/ROCE: may decline as ARC increases asset base and adds depreciation.

• Earnings volatility: estimate updates and discount-rate movements can be material, especially for long-dated obligations.

Investors often examine the ARO/provision roll-forward and sensitivity to discount rates to gauge cash flow risk at end-of-life.

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Operational considerations

• Build a central register of obligations by site/asset with cash flow timing, inflation, and probability overlays.

• Align engineering estimates and environmental studies with accounting models; document approvals and version control.

• Under US GAAP, track layers distinctly and accrete each using its own rate.

• Under IFRS, reassess discount rates at each reporting date in accordance with IFRIC 1 and adjust the asset when appropriate.

• Coordinate with tax for deductible timing and deferred tax effects; monitor leases for make-good clauses (IFRS 16 / ASC 842 linkages).

Robust estimation and transparent updates ensure decommissioning obligations faithfully represent unavoidable end-of-life costs under both IFRS and US GAAP.

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