Accounting for changes to decommissioning liability

Facts of the case:
An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started operating on April 1, 2XX1. The plant has a useful life of 40 years. Its initial cost was Rs.1,20,000 which included an amount for decommissioning costs of Rs.10,000, which represented Rs.70,400 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 March 31. On March, 2X11, value of the decommissioning liability has decreased by Rs.8,000. The discount rate has not yet changed.

Issue/Query:
How the entity will account for the above changes in decommissioning liability in the year 2X11, if it adopts cost model?

Response:
The company shall reduce the cost of the asset and the decommissioning liability.

Basis for Response:
1. Paragraph 3 of Appendix A Changes in Existing Decommissioning, Restoration and Similar Liabilities to Ind AS 16 Property, Plant and Equipment states as under:
“This Appendix addresses how the effect of the following events that change the measurement of an existing decommissioning, restoration and similar liability should be accounted for:
a. A change in the estimated outflow of resources embodying economic benefits (eg cash flows) required to settle the obligation;
b. A change in the current market-based discount rate as defined in paragraph 47 of Ind AS 37 (this includes in the time value of money and the risks specific to the liability); and
c. An increase that reflects the passage of time (also referred to as the unwinding of the discount).”

2. The querist has not stated the reasons for the reduction in liability. In absence of details, it is assumed that the reduction is due to change in the estimate outflow of resources embodying economic benefits (eg cash flows) required to settle the obligation.

3. Paragraph 5 of Appendix A to Ind AS 16 states as under:
“If the related asset is measured using the cost model:
a. Subject to (b), changes in the liability shall be added to, or deducted from, the cost of the related asset in the current period.
b. The amount deducted from the cost of the asset shall not exceed its carrying amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised immediately in profit or loss.
c. If the adjustment results in an addition to the cost of an asset, the entity shall consider whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the entity shall test the asset for impairment by estimating its recoverable amount, and shall account for any impairment loss, in accordance with Ind AS 36.”

4. Therefore, the reduction in the decommissioning liability shall be reduced from the cost of the asset as on 31 March 2X11.