IFRIC INTERPRETATIONS

CHAPTER 40
 DECOMMISSIONING LIABILITY
•IFRIC 1 defines decommissioning
liability as an obligation to dismantle,
remove and restore an item of property,
plant, and equipment as required by law
or contract.
•The decommissioning liability is
capitalized as cost of the property and
initially recognized at present value.
ILLUSTRATION:
An entity extracts natural gas and oil in the Philippine Deep.

At the beginning of the current year, the entity constructed

a drilling platform for Php. 25,000,000 and is required by the
Philippine Law to remove and dismantle the platform at the
end of the useful life of 10 years. The straight line method is
used in depreciating the drilling platforms.

The entity has estimated that such decommissioning will

cost Php. 5,000,000.

Based on a 12% discount rate, the PV of 1 for 10 years is

0.322.

Thus the PV of the decommissioning liability is Php.

5,000,000 times 0.322 or Php. 1,610,000.
Journal Entries for current year
Jan. 1 Drilling platform 26,610,000
Cash 25,000,000
Decommissioning liability 1,610,000

Dec. 31Depreciation 2,661,000

Accumulated depreciation 2,661,000
(26, 610, 000/ 10 years)

31 Interest expense 193,200

Decommissioning liability 193,200
(12% x 1,610,000)
Changes in decommissioning liability
a. A decrease in decommissioning
liability is deducted from the cost
of the asset.
b. An increase in decommissioning
liability is added to the cost of
the asset.
 ILLUSTRATION:
On January 1, 2019, the plant of Seaoil Company is 10 years old.
The cost of the plant is Php. 12,000,000 with accumulated
depreciation of Php. 4,000 ,000.

The plant has a useful life of 30 years and was depreciated using
the straight line with no residual value.

Because of the unwinding discount of 6% over 10 years, the

decommissioning liability showed a balance of Php. 1,800,000.

However, the entity has estimated that the net pv of the

decommissioning liability has decreased by Php. 800,000.
Jan.1 Decommissioning liability 800,000
Plant asset 800,000

Dec. 31Depreciation 360,000

Accumulated depreciation 360,000
Cost of plant 12,000,000
Reduction of decommissioning liability -800000
Net cost 11,200,000
Accumulated depreciation -4000000
Carrying amount 7,200,000
Depreciation for 2019 (7,200,000/ 20 years) 360,000

31 Interest expense 60,000

Decommissioning liability 60,000
Decommissioning liablity- Jan. 1, 2019 1,800,000
Reduction -800,000
Adjusted carrying amount- Jan, 1, 2019 1,000,000
Interest expense for 2019 (6% x 1,000,000) 60,000.00
 DISTRIBUTION OF NONCASH
ASSET TO OWNERS
•It is actually the payment of property
dividend to shareholders.
•IFRIC 17, paragraph 11, provides that an
entity shall measure a liability to
distribute noncash asset as a dividend to
its owners at the fair value of the asset to
be distributed.
Settlement of dividend payable
IFRIC 17, paragraph 14, provides that
when an entity settles the dividend
payable, the difference between the
carrying amount of the dividend
payable and the carrying amount of the
asset distributed shall be recognized as
gain or loss on distribution of property
dividend.
Measurement of noncash asset distributed
Paragraph 15A of PFRS 5 provides that an
entity shall measure a noncurrent asset
classified for distribution to owners at the
lower of carrying amount and fair value less
cost to distribute.
Carrying amount of the asset at the end of the reporting period
>
Fair value less cost to distribute
= Impairment Loss
ILLUSTRATION:
On Dec. 31, 2019, an entity declared a property
dividend of equipment payable on March 1,
2020.

The carrying amount of the equipment is Php.

3,000,000 and the fair value is Php. 3,500,00
on Dec 31, 2019.

However, the fair value less cost to distribute

the equipment is Php. 3,800,000 on March 1,
2020.
Journal Entries
1. To recognize the dividend payable on the date of
declaration on Dec. 31, 2019:
Retained earnings 3,500,000
Dividend Payable 3,500,000

2. The carrying amount of the equipment of Php.

3,000,000 is not adjusted because this is lower than
the fair value of Php. 3,500,000 on Dec. 31, 2019.
The equipment is measured on Dec. 31, 2019 at
carrying amount of Php. 3,000,000.
3. To recognized the increase in dividend payable on
the date of settlement on March 1, 2020:
Retained earnings 300,000
Dividend payable 300,000
Fair value- March 1, 2020 3,800,000
Fair value- December 31, 2019 3,500,000
Increase in dividend payable 300,000

4. To record he settlement of the dividend payable on

March 1, 2020.
Dividend Payable 3,800,000
Equipment 3,000,000
Cash on distribution of property dividend 800,000
 EXTINGUISHMENT OF FINANCIAL
LIABILITY
•An equity swap is the issuance of share capital
by the debtor to the creditor in full or partial
payment of an obligation.
•IFRIC 19 provides that the equity instrument
issued to extinguish a financial liability shall be
measured at the following amounts in the order
of priority:
a. Fair value of equity instrument issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
ILLUSTRATION:
An entity showed the following data at year end:
Bonds payable 5,000,000
Accrued interest payable 500,000

The entity issued share capital with a total par

value of Php. 2,000,000 and fair value of Php.
4,500,000 in full settlement of the bonds
payable and accrued interest.

On the other hand, the fair value of the bonds

payable is Php. 4,700,000.
Fair value of shares issued is used
Bonds payable 5,000,000
Accrued interest payable 500,000
Share capital 2,000,000
Share premium 2,500,000
Gain on extinguishment of debt 1,000,000
Fair value of shares issued 4,500,000
Par value of shares issued 2,000,000
Share premium 2,500,000
Bonds payable 5,000,000
Accrued interest payable 500,000
Carrying amount of bonds payable 5,500,000
Fair value of shares issued 4,500,000
Gain on extinguishment of debt 1,000,000
Fair value of bonds payable is used
Bonds payable 5,000,000
Accrued interest payable 500,000
Share capital 2,000,000
Share premium 2,700,000
Gain on extinguishment of debt 800,000
Fair value of bonds payable 4,700,000
Par value of shares issued 2,000,000
Share premium 2,700,000
Bonds payable 5,000,000
Accrued interest payable 500,000
Carrying amount of bonds payable 5,500,000
Fair value of bonds payable 4,700,000
Gain on extinguishment of debt 800,000
Carrying amount of bonds payable is used
Bonds payable 5,000,000
Accrued interest payable 500,000
Share capital 2,000,000
Share premium 3,500,000
Carrying amount of bonds payable 5,500,000
Par value of shares issued 2,000,000
Share premium 3,500,000
 MEMBERS’ SHARES IN COOPERATIVE
ENTITIES
Members’ shares in cooperative entities may be
classified as equity or liability depending on the terms
and conditions of the financial instrument.

Members’ shares in cooperative entities are classified

as equity if the member did not have a right to request
for redemption under either of the following
conditions:
a. If the entity has a unconditional right to refuse
redemption of the members’ shares.
b. If redemption is unconditionally prohibited by law,
regulation or the entity’s charter.