Asset retirement obligations, Section PS 3280: Early preparation will ease overall impact

The Public Sector Accounting Board (PSAB) recently issued Asset Retirement Obligations, Section PS 3280. Obtaining early understanding of this standard’s effects is important, as the impact on some public sector entities may be significant.

Public sector entities use a variety of tangible capital assets, which may require retirement. Examples include landfills, buildings containing asbestos and retirement of hospital equipment, such as X-ray or MRI machines.

To determine if this standard applies to a public sector entity, the following should be considered:

  1. Does the entity have a legal obligation to remove a tangible capital asset from service – in other words, retire the asset?
  2. Does the entity control the tangible capital asset that needs to be retired?

To determine if a legal obligation exists, the entity needs to review its contracts and agreements, as well as legislation. The entity should also consider if it has made a promise that would be considered legally enforceable.  

RECOGNITION AND MEASUREMENT

Once the entity determines that it has an asset retirement obligation, it needs to recognize and measure it. Timing of the recognition depends on whether the obligation is incurred on:

  • acquisition, construction or development of the tangible capital asset; or  
  • its normal use

The standard provides examples of the various past transactions, or events, to help with the application of the recognition criteria.

Measurement of the asset retirement obligation should result in the best estimate of the amount required to retire the asset. Costs would include those that are directly attributable to asset retirement activities and would be based on the legal requirements, such as those contained in agreements, contracts or legislation. Because asset retirement obligations tend to be long term in nature, a present value measurement technique is often the best method to estimate liability.

TRANSITIONAL PROVISIONS

The asset retirement obligations standard is effective on or after April 1, 2021. It includes three transitional provision options:

  • prospective application
  • retroactive application  
  • modified retroactive application

KEY TAKEAWAYS

  • Landfills are now in the scope of Section PS 3280. Effective April 1, 2021, Section PS 3270, Solid Waste Landfill Closure and Post-Closure Liability, will be withdrawn. Asset retirement obligations associated with landfills may be recognized earlier as the accounting treatment has changed.
  • Section PS 3280 is closely related to Section PS 3260, Liability for Contaminated Sites. Both standards deal with certain obligations associated with assets in productive use and those that are no longer in productive use. Boundaries between these two standards are clarified in Section PS 3280 and the accompanying Basis for Conclusions.
  • Obligations associated with asbestos removal arise on acquisition, construction or development of a tangible capital asset containing asbestos, and not on its disturbance.
  • Uncertainty about the timing of settlement of the asset retirement obligation does not remove that obligation from the scope of this standard, but will affect the measurement of the liability.

FURTHER INFORMATION

To learn more about Section PS 3280, access the Asset Retirement Obligations In Brief and Podcast. Further information on Section PS 3280 will be issued later in 2018 and will cover:

  • asset retirement obligations associated with landfills
  • the boundaries between this standard and Section PS 3260

 Visit the FRAS Canada Asset Retirement Obligations project page to learn more about the history of this project and to access the consultation documents and responses. 

CONTACT

Joanna Chrzanowski, CPA, CA
Principal, Public Sector Accounting Board