Sometimes, a company in Dubai must take certain long-term assets and restore them after they have ended their useful life. An example of such an asset would be an oil rig or a nuclear power station. It’s fair for the environment and people that an oil rig or power plant, or similar, fulfills its purpose and is no longer helpful. It should be removed and restored as best as possible.
The United Arab Emirates has specific directions that require companies to take out the plant and then restore it after its end. In many territories, the legislation is identical, so companies with similar assets will have to pay the inevitable decommissioning costs.
Here is the issue:
How and when should Dubai audit firms account for these expenses?
It would be unfair not to account for these expenses when they occur. This is because the company was aware of these costs from the beginning. The financial statements provide the same rights to the financial audit teams and other users of the financial statements. They can also find out about any obligations and related expenses. IFRS also contains many rules regarding so-called “decommissioning provisions.”
What Their Rules Are:
IAS 37 Provisions and Contingent Liabilities and contingent Assets stipulates that internal auditors and financial audit preparers should recognize a provision when there is a liability. A present obligation arising out of past events
As earlier explained, a present obligation is created when an asset is built that will need to be removed after its practical life ends and the site’s restoration. An obligation can be imposed by legislation (legal obligation) or by valid expectations of third parties (constructive obligation)
Except for IAS37, the standard IAS 16 Property and Plant and Equipment stipulates that the initial estimate of costs involved in dismantling, removing, and restoring an item to its original condition be included. This means a company audit doesn’t recognize a decommissioning provision as part of your assets but in profit or loss.
Finally, the pronunciation IFRIC 1 Changes in Existing Restoration, Decommissioning, and Similar Liabilities refers to subsequent measurement and recognition of a provision.
IFRS Rules For Decommissioning
How Do Audit Firms in Dubai Normally Measure the Decommissioning Provision?
It is difficult, time-consuming, and fraught with uncertainties to measure the decommissioning provision. As such, company audit services should measure all expenses incurred after your asset ceases to be valid. This can occur 30, 40, or more years. No one can predict what will happen in the next five years or 30 years.
To estimate future costs, involve experts.
Auditing professionals in Dubai and UAE are competent, but they don’t know everything. Technical experts within a company should be able to do the job. Make sure they include at least:
What Operations And Processes Are Required To Remove/Restore?
How much are they expected to cost, with enough details? We don’t know the exact timing of the estimated costs. A nuclear power station or oil rig can be decommissioned in a year. However, it could take up to 10 years.
Adjust The Report By Studying It
Although technical experts can be great, they are not internal auditors or external auditors. We must understand how financial auditors calculated costs, including what they included in their report.
Ask questions such as: Is the cost of personal expenses included in today’s price? Did experts add inflation?
It is not a good idea to include the same risk twice in your calculations. Therefore, if your estimates are at current prices, you should use a real discount rate (excluding general inflation). An auditor can use a nominal discount rate if the estimates are exaggerated.
Some more questions to ask:
- Did experts consider the impact of technologies that are not yet available to them?
- Did they expect technical developments?
- Or did they assume the best of today’s technology?
Auditing specialists shouldn’t count on future developments that aren’t yet certain or available.
Which portion of these costs is related to the removal and reconstruction of buildings or constructions? What percentage is for repairing environmental and other damage caused by these operations?
This information is crucial for deciding when and how to acknowledge your provision.
Choose The Discount Rate To Reduce Your Cash Flow
IAS 37 states that you must select a pre-tax rate that reflects the current market assessment of time value and risks specific to the liability. There is not much guidance in IFRS regarding how to choose your discount rate for this case. There are many ways to choose the discount rate.
For instance, to extrapolate the yield at maturity when you expect to have decommissioning expenses, you can choose publicly traded bonds from the government and plot them on a yield curve.
