Directive on Accounting Standards: GC 3280 Asset Retirement Obligations

Note to reader

This document is part of the Appendix A of the Directive on Accounting Standards.

A. Primary PSAS reference

  • PS 3280 Asset Retirement Obligations

B. Effective date

  • April 1, 2022

C. Government of Canada Consolidated Financial Statements

  1. The Government of Canada (GC) has chosen to apply the modified retroactive transitional approach in accordance with PS 3280.68(b).
  2. Further to PS 3280.69-.71, in a case where a new law or regulation was put in place after an asset is constructed or bought, the retroactive treatment would only start at the point at which the law exists. Accordingly, the obligation is recognized, and any amortization begins at that point in time.

D. Recognition

  1. Further to PS 3280.08(b), the asset retirement obligations include, but are not limited to:
    1. Removal of asbestos and other similar hazardous material in buildings;
    2. Decommissioning of nuclear facilities;
    3. Decommissioning of underground storage tanks;
    4. Closure and post-closure obligations associated with mining activities;
    5. Closure and post-closure obligations associated with landfills;
    6. Closure and post-closure obligations associated with other works and infrastructure;
    7. Closure and post-closure obligations associated with waste storage facilities;
    8. Closure and post-closure obligations associated with oil and gas production facilities;
    9. Removal of leasehold improvements, notably costs associated in the restoration of the leased premises to their original state;
    10. Activities related to demilitarization or disarmament for all asset categories;
    11. Retirement activities linked to ships, boats, aircraft and other vehicles;
    12. Retirement activities linked to machinery and equipment; and
    13. Retirement activities linked to informatics.
  2. Further to PS 3280.23, if there is uncertainty regarding the existence of an asset retirement obligation, the government may have a contingent liability. Refer to GC 3300-3310 Contingent Liabilities and Loan Guarantees for the accounting treatment of contingent liabilities.
  3. Further to PS 3280.30, asset retirement obligations related to fully amortized assets in productive use should be capitalized at the time of initial recognition. This incremental asset is to be amortized and the related asset retirement obligation is to be accreted over the revised useful life of the asset.
  4. In accordance with PS 3280.31-.32, the asset retirement obligations associated with unrecognized tangible capital assets or those no longer in productive use would be expensed.
  5. The estimate of the liability should not be based on a future event, that is, whether the site will be divested. The retirement plan should be the action required under existing agreements, contracts, legislation or legally enforceable obligations. One should not record an obligation that arises solely from a plan to sell or otherwise dispose of a tangible capital asset.

E. Measurement

  1. Asset retirement obligations include:
    1. Post-retirement operation, maintenance and monitoring that are an integral part of the retirement of the tangible capital asset;
    2. Payroll and benefits, equipment and facilities, materials, legal and other professional fees, and overhead costs directly attributable to the asset retirement activity;
    3. Costs related to the nature and extent of the asset retirement obligation in accordance with the agreement, contract, legislation, or a legally enforceable obligation; and
    4. Construction of other tangible capital assets to perform retirement activities.
  2. Asset retirement obligations exclude:
    1. Costs related to the obligation created by waste or by-products;
    2. Routine replacement of a tangible capital asset;
    3. Renovations and other betterment costs; and
    4. Costs associated with assets under construction.
  3. In accordance with PS 3280.46-.48, present value is often the best technique with which to estimate a liability when the liability is expected to occur over future periods. Judgment will be required to determine if present value adjustments are significant, and therefore required. If required, the asset retirement obligation must be discounted to reflect its present value using the rate on the actual yield curve for zero-coupon Government of Canada bonds. This rate is published by the Bank of Canada. The undiscounted liabilities should also be adjusted for inflation. Subsequent to initial measurement, these estimates will need to be updated as new information is obtained.

F. Recoveries

  1. Further to PS 3280.60, the accounting treatment of recoveries will depend on the nature of the event. Further analysis should be done to determine if the recoveries are related to an asset or a contingent asset.
  2. Refer to GC 3320 Contingent Assets for the accounting treatment of contingent recoveries.

G. Disclosure

  1. Further to PS 3280.66, it may be required to disclose the nature of the liability and information about the potential effect on financial statements when a previous undisclosed liability becomes measurable.
  2. Information about the nature of liabilities that cannot be recognized may have to be disclosed in the notes together with the reason or reasons why a reasonable estimate cannot be made of the amount involved.
  3. The Office of the Comptroller General should be consulted when an amount cannot be reasonably estimated.

H. Departmental Financial Statements

  1. When a tangible capital asset is transferred to another government department, it is necessary to also transfer the related asset retirement obligation. In addition to the transfer of the asset’s historical cost and accumulated amortization in accordance with GC 3150 Tangible Capital Assets, the transferring department must transfer the balance of the asset retirement obligation to the receiving department. The resulting accounting treatment will not produce a gain or loss and there will be no impact at the government-wide level. Refer to GC 3420 Inter-entity Transactions for additional guidance on inter-entity transactions.
  2. When lease agreements are signed between Public Services and Procurement Canada (PSPC) and the landlord (third party), it is established that the related asset retirement obligation liability and associated asset would be recorded by PSPC.
  3. In a case where a department has a material leasehold improvement, the Office of the Comptroller General should be consulted if an off-book entry is required for Departmental Financial Statement purposes. This is anticipated to only be a concern for departments that have entity-level audited financial statements.

I. Other related references