Asset Retirement Obligations Have Arrived. Here’s What You Need to Know.

What is PS 3280 in Canada?

PS 3280 is a new accounting standard  regarding Asset Retirement Obligations (ARO). Public sector entities reporting under Canadian public sector accounting standard (PSAS), including all Canadian municipalities, must implement this new standard starting for fiscal years beginning on or after April 1, 2022.

Previously, municipalities did not recognize common asset retirement obligations, such as the obligation to retire an underground fuel storage tank or a building with asbestos. Now, municipalities are required to recognize these obligations where there is a legal obligation associated with the retirement of the tangible capital asset.

 

4 Steps to Implementing PS 3280 Regarding Asset Retirement Obligations

 

 Step 1 - Build a Team

Before you identify and review assets, assemble a cross-functional assessment team. Consider including:

  • Finance and accounting personnel

  • Public works or environmental services managers/foremen

  • Engineers

  • Legal counsel

  • Councillors or Directors

The people involved with day-to-day municipal operations may be able to offer additional insights unavailable to finance and department personnel. This may include information about assets missing from existing listings, current asset lifespans based on actual usage, and the retirement/decommissioning activities required for certain assets.

Step 2 - Identify Assets

Include all assets owned, either actively in use or retired, in the initial identification process. The earlier you can identify assets, the better. This will help avoid any last-minute assessments that may be incomplete due to lack of time or resources.

Next, identify which of these assets should be subject to an in-depth assessment or review.  Not all assets will have a retirement obligation or require decommissioning activities. (e.g. you will likely consider a 1980-consturcted building for review before a 2010 constructed building). Including too many assets in an annual assessment will create inefficiencies and slow down the process.

Step 3 - Identify Your Legal Obligation

A critical component of PS 3280 is the requirement for legal obligation to exist. While there will still be a requirement to report other sorts of liabilities, PS 3280 provides guidance only where there is a legal obligation to retire/decommission the tangible capital asset at the end of its useful life.

For each asset identified, the assessment team will need to determine where the legal obligation originates from (e.g. provincial regulation, legal contract, promissory estoppel), and what decommissioning activities will be required.  

Commonly held assets that may contain a legal obligation include:

  • Buildings constructed prior to 1990

  • Storage tanks (Fuel tanks / Septic tanks)

  • Solid waste facilities (e.g., landfills)

  • Sewage facilities

  • Computer equipment (costs to appropriately dispose of hardware including personal information)

  • Leasehold improvements (e.g., restoration clause in lease agreement)

  

Asset Retirement Obligation Decision Tree

Step 4 - Quantify, Calculate, and Record

The last step of the process is to quantify the cost of the obligation, calculate the present value of the liability, and to record it in the accounting records.

Projected remediation costs should come from professional judgement and be based on the best estimates available. You should be able to support the estimate with other evidence (e.g. recent similar activities, publicly available cost estimates, or quotes received.) For all estimates, be prepared to provide support to your auditor! Support for the cost estimate may eventually require third-party consultation, which may be costly and unbudgeted. It’s best to keep Council/Board members involved in this process.

After determining the cost estimates, the next step is to calculate the liability’s present value. This requires the assessment team to estimate the cost at the time of the asset’s retirement and record the present value of the future costs. This may be a complex calculation. The earlier the calculations are performed, the more they can be discussed and revied both internally with the assessment team, as well as with your auditor. The present value will be the final cost that is recorded into the accounting records.

 

Tips and Best Practices for Implementing PS 3280

“We advise clients to document all their work, and to ensure that documentation is flexible so it can be used in other procedures. If possible, collaborate with other municipalities to learn additional tips and potentially share costs,” says Danny On, CPA and Senior Manager at Metrix Group.

Be forward thinking! Each year the standard requires the liabilities to be updated and remeasured. Determine how you will update the estimate and formalize the procedure in a policy. This will help support the estimates each year and your auditor will be scrutinizing how the liabilities have been identified, measured, and updated.  

Get started sooner rather than later. This is a significant assessment and leaving it to 2023 may not leave enough time and resources to complete. Reach out to Jeff Alliston (Jalliston@metrixgroup.ca) to find out how we can help your organization adopt the new PS 3280 Asset Retirement Obligations so your books are up-to-date and up to current standards.

 

About Metrix Group

With five offices throughout Alberta, Metrix Group has over sixty years experience providing accounting and related services to credit unions, rural gas co-operatives, municipalities, school boards, and non-profits. We also serve small to medium sized owner-operated businesses across agriculture, manufacturing, and technology.   

Laurie Willier