IFRIC 5 – Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

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Date of Issuance: December 2004

Minor amendments made to this IFRIC till date due to issuance of other standards such as:

• IFRS 9 – Financial instruments. This standard was issued in October 2010
• IFRS 10 – Consolidated Financial statements and IFRS 11 – Joint arrangements. This standard was issued in May 2011

Background and reason behind the issuance of this interpretation:

The purpose of this interpretation was to provide guidance with regards to the importance, structure and features of funds associated with the decommissioning of an asset like a manufacturing plant, restoration of a site after decommissioning of an asset or environmental rehabilitation.

This IFRIC is developed to provide guidance on the following issues:

• How a contributor should take in to account its interest in the funds relating to decommissioning, in its financial statements
• How a contributor should take in to account the contributions which are made in addition to its existing contribution, for example, in the event of bankruptcy of another contributor.

Conclusion:

The Accounting solution for recognizing the contributors’ interest in decommissioning fund in the contributors’ own financial statements:

1. The contributor should recognize the obligation on its part to pay for the costs associated with decommissioning as a liability unless when the contributor has no obligation to pay for the costs associated with decommissioning even if funds are unable to pay for all the decommissioning costs.

2. The contributor should consider whether it can control or jointly control, or has significant influence regarding the funds with reference to IFRS 10, IFRS 11 and IAS 28. If the contributor indeed has control or can cause significant impact with regards to the funds with reference to the standards mentioned above, then in such a scenario the contributor should account its interest in the fund in line with the requirements of the standard mentioned above in the paragraph.

3. If a situation occurs where the contributor does not possesses any control or joint control, and also is not in a position to have significant influence with regards to the funds then in that scenario the contributor should recognize its right to receive reimbursement from the decommissioning funds as a reimbursement asset as per the requirements of IAS 37. The reimbursement should be recorded at an amount which is lower of:

a) The amount of the obligation relating to decommissioning recognized by the contributor and
b) The share of net resources with regards to the fund attributable to the contributors

Accounting solution for obligations relating to additional or extra contributions

If a contributor is to make a contribution in addition to the one it has already made, possibly due to other contributors going bankrupt or if the value of the assets pertaining to the fund decreases to a level that they are insufficient to meet the fund’s reimbursement obligation. In this scenario the will be recognized as a contingent liability as per the requirements of IAS 37. The contributor should recognize a liability if it is probable that an additional contribution will be made by the contributor.

Effective date
This interpretation is applicable to accounting period starting from or after January 1, 2006.

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