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POLICY
FIN-05-025
Municipality of the County of Kings
Asset Retirement Obligations
DRAFT
Policy Category
Finance
Most Recent Amendment
-
First Council Approval
TBD
Future Review Date
Approval + 5 Years
1. Purpose
The Municipality of the County of Kings recognizes accounting for Asset Retirement Obligations
as a relevant determinate of an asset's full life cycle cost to the Municipality. Asset Retirement
Obligations, which result from acquisition, construction, development, or normal use of Tangible
Capital Assets, must be predictable, likely to occur, and unavoidable.
This Policy establishes the accounting treatment for Asset Retirement Obligations such that
users of the financial report can discern information about these assets and their end-of-life
obligations. The principal issues in accounting for AROs is the recognition and measurement of
these obligations.
2. Scope
This Policy applies to the Municipality as a Government Reporting Entity as defined from time to
time by the Public Sector Accounting Board (PSAB) related to the boards, commissions,
agencies and other organizations deemed to be controlled by the Municipality, and includes:
-
Assets with legal title held by the Municipality;
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Assets controlled by the Municipality; and
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Assets that have not been capitalized or recorded as Tangible Capital Assets for financial
statement purposes.
3. Definitions
3.1 Accretion Expense: the increase in the carrying amount of a liability for Asset Retirement
Obligations due to the passage of time;
3.2 Asset Retirement Cost: the estimated amount required to retire a Tangible Capital Asset;
3.3 Asset Retirement Obligation (ARO): a legal obligation associated with the retirement of
a Tangible Capital Asset as defined by PSAB from time to time;
3.4 Materiality (Material): judged in relation to the reasonable prospect of its significance in
the making of assessments and judgments by the users of financial statements. Materiality
is a matter of professional judgment in the circumstances. An item would be considered
Material if it could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
POLICY
FIN-05-025
3.5 Tangible Capital Asset (TCA): non-financial asset having physical substance that: are
held for use in the production or supply of goods and services, for rental to others, for
administrative purposes or for the development, construction, maintenance, or repair of
other Tangible Capital Assets; have useful economic lives extending beyond an
accounting period; are to be used on a continuing basis; and are not for sale in the
ordinary course of operations.
3.6 Promissory Estoppel: the principle that a promise made without consideration may
nonetheless be enforced to prevent injustice if the promisor should have reasonably
expected the promisee to rely on the promise and the promisee did actually rely on the
promise to their detriment.
4. Policy Statements
Application
4.1 The Municipality shall determine TCA retirement obligations from various sources,
including but not limited to: government legislation, contracts, court judgments, lease
arrangements, or a legally enforceable obligation under the doctrine of Promissory
Estoppel.
4.2 The legal obligations associated with retirement of TCAs controlled by the Municipality will
be recognized as a liability in the financial records of the Municipality, in accordance with
Public Sector Accounting Standard PS3280 Asset Retirement Obligations. The
Municipality shall adopt PS3280 for fiscal years beginning on and after April 1, 2022.
Recognition
4.3 A liability for AROs shall only be recognized when, as at the financial reporting date, all the
following criteria have been met:
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there is a legal obligation to incur retirement costs in relation to a tangible capital
asset;
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the past transaction or event giving rise to the liability has occurred;
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it is expected that future economic benefits will be given up; and
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a reasonable estimate of the amount can be made.
4.4 The estimate of the liability should be based on requirements in existing agreements,
contracts, legislation or legally enforceable obligations, and technology expected to be
used in asset retirement activities.
4.5 The estimate of a liability should include costs directly attributable to asset retirement
activities. Costs should also include post-retirement operation, maintenance and
monitoring that are an integral part of the retirement of the TCA.
Directly attributable costs include, but are not limited to, payroll and benefits, equipment
and facilities, materials, legal and other professional fees, and overhead costs directly
attributable to the asset retirement activity.
4.6 Upon initial recognition of a liability for an ARO, the Municipality shall recognize an Asset
Retirement Cost by increasing the carrying amount of the related TCA by the same
amount as the liability.
POLICY
FIN-05-025
4.7 Where an obligation relates to an asset which is no longer in service, and not providing
economic benefit, or relates to an item not recorded by the Municipality as an asset, the
Asset Retirement Cost shall be expensed upon initial recognition of the liability.
4.8 The capitalization thresholds established in policy FIN-05-012 Tangible Capital Assets
shall be applied to AROs to be recognized.
4.9 Recorded AROs should be limited to those obligations that are considered Material to the
Municipality's consolidated financial statements and a risk-based approach for evaluating
AROs should be considered in circumstances where assets are of a comparable nature
and have similar characteristics.
Subsequent Measurement
4.10 Each fiscal year, existing AROs shall be assessed for any changes in expected cost, term
to retirement, or any other changes that may impact the estimated obligation. In addition,
any new obligations identified shall be assessed.
4.11 Revisions to the timing, amount of the originally estimated cash flows, or discount rate,
should be treated as a change in accounting estimate and recorded as part of the cost of
the related TCA.
4.12 Period-to-period changes in the liability for AROs due to the passage of time shall be
recorded as an Accretion Expense.
4.13 The capitalized Asset Retirement Costs shall be amortized in a rational and systemic
manner, consistent with the amortization method of the underlying asset, over the useful
life of the TCA.
Presentation and Disclosure
4.14 Financial statement disclosure should include the following information:
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a general description of the liability for an ARO and the associated TCA (or a
component thereof);
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the amortization method used for the Asset Retirement Costs;
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the basis for the estimate of the liability, including the estimated total undiscounted
expenditures, the time period over which the undiscounted expenditures are to be
incurred, the estimated timing of settlement of these expenditures and the discount
rate used;
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a reconciliation of the beginning and ending aggregate carrying amount of the liability
showing separately the changes attributable to:
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the liability incurred in the current period;
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the liability settled in the current period;
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the change resulting from the passage of time, i.e., Accretion Expense; and
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revisions in estimated cash flows;
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how any requirements for financial assurance and funding associated with AROs, if
legally required, are being met;
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when a reasonable estimate of the amount of an ARO cannot be made, that fact and
the reasons therefor; and
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the estimated recoveries.
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FIN-05-025
4.15 When determining the level of detail to disclose, the Municipality should consider the
usefulness of the information to readers in assessing the nature and extent of the liability
for AROs.
5. Responsibilities
5.1
Council will:
5.1.1
ensure the Municipality has a current and comprehensive Policy for AROs; and
5.1.2
review and amend this Policy as required.
5.2
The Municipal Treasurer will:
5.2.1
implement and administer this Policy; and
5.2.2
identify and propose revisions to this Policy.
6. Amendments
Date
Amendments