Retrospective application IFRIC 1: Nuclear plant and decommissioning

These examples accompany, but are not part of, IFRIC 1.

Common facts

An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started operating on 1 January 2000. The plant has a useful life of 40 years. Its initial cost was CU120,0001; this included an amount for decommissioning costs of CU10,000, which represented CU70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5 per cent. The entity’s financial year ends on 31 December.

Example: Transition

The following example illustrates retrospective application of the Interpretation for preparers that already apply IFRSs. Retrospective application is required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, where practicable, and is the benchmark treatment in the previous version of IAS 8. The example assumes that the entity:

  1. adopted IAS 37 on 1 July 1999;
  2. adopts the Interpretation on 1 January 2005; and
  3. before the adoption of the Interpretation, recognised changes in estimated cash flows to settle decommissioning liabilities as income or expense.

On 31 December 2000, because of the unwinding of the discount (5 per cent) for one year, the decommissioning liability has grown from CU10,000 to CU10,500. In addition, based on recent facts, the entity estimates that the present value of the decommissioning liability has increased by CU1,500 and accordingly adjusts it from CU10,500 to CU12,000. In accordance with its then policy, the increase in the liability is recognised in profit or loss.

On 1 January 2005, the entity makes the following journal entry to reflect the adoption of the Interpretation:

Dr cost of asset1,500
Cr accumulated depreciation154
Cr opening retained earnings1,346

The cost of the asset is adjusted to what it would have been if the increase in the estimated amount of decommissioning costs at 31 December 2000 had been capitalised on that date. This additional cost would have been depreciated over 39 years. Hence, accumulated depreciation on that amount at 31 December 2004 would be CU154 (CU1,500 x 4/39 years).

Because, before adopting the Interpretation on 1 January 2005, the entity recognised changes in the decommissioning liability in profit or loss, the net adjustment of CU1,346 is recognised as a credit to opening retained earnings. This credit is not required to be disclosed in the financial statements, because of the restatement described below.

IAS 8 requires the comparative financial statements to be restated and the adjustment to opening retained earnings at the start of the comparative period to be disclosed. The equivalent journal entries at 1 January 2004 are shown below. In addition, depreciation expense for the year ended 31 December 2004 is increased by CU39 from the amount previously reported:

Dr cost of asset1,500
Cr accumulated depreciation115
Cr opening retained earnings1,385