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05-010 Asset Retirement Obligation Policy_2024Approval Date: Approval Authority: Effective Date: Next Review Date: Department: Last reviewed: Revision Date/s: Schedules : COUNCIL AND BY-LAW Policy 5-010: Asset Retirement Obligations Policy Sept9,2024 Council, By-Law# January 1, 2023 2028 Finance 2024 1.0 Policy Statement 1.1 An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible capital asset. 1.2 The accounting treatment for AROs are stipulated in this policy so that users of the financial report can discern information about tangible capital assets, and their end-of- life obligations. The principal issues in accounting for AROs is the recognition and measurement of these obligations. 1.3 The Town of Tillsonburg accounts for and reports on AROs in compliance with the Public Sector Accounting Board (PSAB) Handbook, section 3280. 2.0 Definitions "Accretion Expense" shall mean the increase in the carrying amount of a liability for asset retirement obligations due to the passage of time. "Asset Retirement Activities" shall include all activities related to an asset retirement obligation. These may include , but are not limited to: • Decommissioning or dismantling a tangible capital asset that was acquired, constructed , developed , or leased ; ASSET RETIREMENT OBLIGATIONS POLICY PAGE 1 OF 6 • Remediation of contamination of a tangible capital asset created by its normal use; • Post-retirement activities such as monitoring; and • Constructing other tangible capital assets to perform post-retirement activities. "Asset Retirement Cost" shall mean the estimated amount required to meet the asset retirement obligations. "Asset Retirement Obligation" shall mean the legal obligation associated with the retirement of a tangible capital asset. "Controlled Asset'' shall mean an asset that is owned or controlled, directly or indirectly, by the Town. "Council" shall mean the Council of the Town of Tillsonburg, herein also referred to as Town Council. "Town of Tillsonburg" herein is also referred to as the Town. "Public Sector Accounting Board (PSAB)" shall mean the board created to serve the public interest by establishing accounting standards for the public sector in addition to providing guidance for financial and other performance information. "Retirement of a Tangible Capital Asset" shall mean the permanent removal of a tangible capital asset from service. This term encompasses sale, abandonment or disposal in some other manner, but not Its temporary idling. "Tangible Capital Asset (TCA)" shall mean a non-financial asset having physical substance that is held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, repair or maintenance of other tangible capital assets; has a useful economic life extending beyond one year; is to be used on a continuing basis; and is not for sale in the ordinary course of operations. "Useful Life" shall mean the total period during which a Tangible Capital Asset is in use or is available to be used. 3.0 Purpose 3.1 Existing laws and regulations require public sector entities to take specific actions to retire certain Tangible Capital Assets at the end of their useful lives. This includes activities such as removal of asbestos and retirement of landfills. Other obligations to retire Tangible Capital Assets may arise from contracts, court judgements, or lease arrangements. 3.2 The legal obligation, including obligations created by promises made without formal consideration, associated with the retirement of Tangible Capital Assets controlled by the Town, will be recognized as a liability on the statements of the Town, in accordance with PS3280, and take effect January 1, 2023. ASSET RETIREMENT OBLIGATIONS POLICY PAGE 2 OF 6 Asset Retirement Obligations result from acquisition, construction, development or normal use of the asset. These obligations are predictable, likely to occur and are unavoidable. Asset Retirement Obligations are separate and distinct from contaminated sites liabilities. The liability for contaminated sites is normally resulting from unexpected contamination exceeding the environmental standards. Asset Retirement Obligations are not necessarily associated with contamination. 4.0 Scope 4.1 This Policy applies to all departments, boards and agencies falling within the reporting entity of the Town, that possess asset retirement obligations including: • Assets with the legal title held by the Town • Assets controlled by the Town • Assets reported in any entities that are consolidated with the Town for financial statement purposes • Assets that have not been capitalized or recorded as a Tangible Capital Asset for financial statement purposes 5.0 Roles and Responsibilities 5. 1 General Responsibilities for All Departments 5.1.1 Communicate with Finance Department on Asset Retirement Obligations, and any changes in asset condition or retirement timelines. 5.1.2 Assist in the preparation of cost estimates for Asset Retirement Obligations. 5.1.3 Inform Finance Department of any legal or contractual obligations at inception of any such obligation. 5.2 Council 5.2.1 Ensure, through administration, that policies and procedures are in place to provide for the recording and reporting of the Town's Asset Retirement Obligations. 5.3 Finance 5.3.1 Responsible for administration and compliance monitoring of this Policy. 5.3.2 Establish procedures for use as guidelines in compliance with this Policy. 5.3.3 Reporting Asset Retirement Obligations in the financial statements of the Town and other statutory financial documents. 5.3.4 Managing processes within the Town's financial and asset management systems. ASSET RETIREMENT OBLIGATIONS POLICY PAGE30F6 5.3.5 Investigating issues of retirement of assets and the calculations of the related retirement obligations and working with departments to resolve such issues. 6.0 Recognition 6.1 A liability should be recognized when, as at the financial reporting date: • there is a legal obligation to incur retirement costs in relation to a Tangible Capital Asset; • the past transaction or event giving rise to the liability has occurred; • it is expected that future economic benefits will be given up; and • a reasonable estimate of the amount can be made. 6.2 A liability for an Asset Retirement Obligation cannot be recognized unless all of the criteria in Section 6.1 are satisfied. 6.3 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. 6.4 The estimate of the liability should include costs directly attributable to asset retirement activities. Costs would include post-retirement operation, maintenance and monitoring that are an integral part of the retirement of the Tangible Capital Asset. 6.5 Directly attributable costs would include, but are not limited to, payroll and benefits related to retirement activities, equipment and facilities, materials, legal and other professional or contracted fees, and overhead costs directly attributable to the asset retirement activity. 6.6 Upon initial recognition of a liability for an Asset Retirement Obligation, the Town will recognize an Asset Retirement Cost by increasing the carrying amount of the related Tangible Capital Asset ( or component thereof) by the same amount as the liability. Where the obligation relates to an asset which is no longer in service, and not providing economic benefit, or to an item not recorded by the Town as an asset, the obligation is expensed upon recognition. 6. 7 A capitalization threshold of $10,000 will be applied to the Asset Retirement Obligations to be recognized. 7 .0 Scope of Applicability 7 .1 A decision tree outlining the scope of applicability is illustrated below: ASSET RETIREMENT OBLIGATIONS POLICY PAGE 40F 6 I Is there a present obligation associated with I Nn the asset retirement or remediation? I Yes ... Does the obllgatlon result from acquisition, construction, development or normal use of a s Yes ~ No ! Is there a legal obligation to No _I Environmental I No lnrur asset retirement costs I standard exists I associated with a tangible !Yes capital asset controlled by the public sector entity? Contamination exceeds Nn I environmental standard Yes Yes The public sector entity Nn Is directly responsible or accepts responsibility ' lves ' ASSET RETIREMENT See LIABIUTY FOR See OBUGATIONS,Sectlon CONTAMINATED SITES, LIABRlTES, PS 3280, applies Section PS 3260 Section PS 3200 8.0 Subsequent Measurement 8.1 The Asset Retirement Costs will be allocated to Accretion Expense in a rational and systemic manner (straight-line method) over the Useful Life of the Tangible Capital Asset ( or component thereof). 8.2 On an annual basis, the existing Asset Retirement Obligations will 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 will also be assessed. 9.0 Presentation and Disclosure 9.1 The liability for Asset Retirement Obligations will be disclosed in the Town's financial statements. 10.0 Retention Policy 10.1 All documents shall be retained in accordance with the Town of Tillsonburg's Records Retention By-law 2024-062. 11.0 Review of Asset Retirement Obligations Policy and Procedures ASSET RETIREMENT OBLIGATIONS POLICY PAGE50F6