Perspectives on PS3280 Asset Retirement Obligations

Perspectives on

PS 3280 Asset

Retirement

Obligations

September 2022

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Table of contents

Introduction ............................................................................................................................. 3

Overview of PS 3280 ............................................................................................................... 4

Timing of recognition of retirement obligations .......................................................................... 5

Lease arrangements ................................................................................................................ 8

Timing of cash flows .............................................................................................................. 10

Discounting the cash flows..................................................................................................... 12

Calculating the asset retirement obligation ............................................................................. 14

Solid waste landfills ............................................................................................................... 16

Transitional provisions ........................................................................................................... 19

Other topics ........................................................................................................................... 21

Perspectives of PS 3280 Asset Retirement Obligations 3

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Introduction

PS 3280 Asset Retirement Obligations is a complex accounting

standard which requires the application of professional judgement and

will result in significant changes to the financial statements of public

sector entities. Asset retirement obligations are an estimate which will

need to be derived from available information and will require public

sector entities to make judgments and assumptions leveraging

available data and the insights of their team members.

This guide provides KPMG’s perspective on key implementation issues and technical interpretations of

the guidance in PS 3280. It provides insights into challenges public sector entities are likely to face as

they implement PS 3280 for the first time and establish a process for the review of the obligation at each

f inancial reporting date. This guide aims to help management and other stakeholders by providing a guide

to key matters arising from implementation of the standard.

Perspectives of PS 3280 Asset Retirement Obligations 4

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Overview of PS 3280

Definitions

– Asset retirement activities include all activities related to an asset retirement obligation.

– An asset retirement obligation is a legal obligation associated with the retirement of a tangible capital asset.

Recognition

– An asset retirement obligation is recognized when there is a legal obligation to incur retirement costs in

relation to a tangible capital asset; the past transaction or event giving rise to the liability has occurred; it

is expected that future economic benefits will be given up; and a reasonable estimate of the amount can

be made.

– The asset retirement obligation is recognized as a liability with an increase to the carrying amount of the

related tangible capital asset in the same amount as the liability.

– The asset retirement cost is allocated to expense in a rational and systematic manner over the useful life

of the tangible capital asset.

– The asset retirement cost is added to the cost base of a f ully amortized tangible capital asset and

amortized over the revised estimate of the remaining useful life.

– The asset retirement cost is expensed for an unrecognized tangible capital asset or a tangible capital

asset no longer in productive use.

Measurement

– The estimate of a liability should include costs directly attributable to asset retirement activities.

– In periods subsequent to initial measurement, revisions to either the timing, amount of the original

estimate of the undiscounted cash flows or discount rate are recognized as part of the tangible capital

asset. The passage of time is recognized as accretion expense.

Recoveries

– A recovery related to asset retirement obligations should be recognized when the recovery can be

appropriately measured, a reasonable estimate of the amount can be made and it is expected that

f uture economic benefits will be obtained.

– A recovery should not be netted against the liability.

Transitional provisions

– PS 3280 applies to fiscal years beginning on or after April 1, 2022.

– PS 3280 can be applied using retroactive application, modified retroactive application or

prospective application.

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Timing of recognition of

retirement obligations

When should asset retirement obligations be

recognized for assets under construction –

when the construction is complete, when the

asset is put into use, or as the asset is being

constructed?

KPMG’s perspective

PS 3280 notes that an asset retirement obligation can be

incurred due to the acquisition, construction or

development of a tangible capital asset or normal use of

a tangible capital asset. There is no further specific

guidance on the precise timing of recognition.

Public sector entities will need to determine what activity

creates the obligation and record the obligation when

that activity occurs. For example, consider the scenario

where a hazardous material is used as insulation in a

building under construction and a provincial regulation

requires it to be removed in a prescribed manner when

the building is demolished. In this case, the asset

retirement obligation is linked to the installation of the

hazardous material and the obligation is recognized as

the hazardous material is put into the building. However,

if there is an x-ray machine that through its normal use

creates radiological contamination, the obligation would

be recorded as the asset is used and the radiological

contamination is created.

Due to a catastrophic event (e.g. flood, forest

fire), a public sector entity is required to

dispose of tangible capital assets earlier

than expected. Does the occurrence of the

catastrophic event impact the asset

retirement obligations?

KPMG’s perspective

Catastrophic events are unexpected and unrelated to the

normal use of tangible capital assets in the operations or

the construction or acquisition of tangible capital assets.

As a result, costs associated with catastrophic events

are out of scope for PS 3280.

However, a catastrophic event may impact the

assumptions used to calculate the asset retirement

obligation. For example, if fire partially damages a

building with asbestos, the public sector entity may

decide to demolish the entire building earlier than it had

originally anticipated. The earlier retirement date would

be adjusted for in the calculation of the retirement

obligation at period-end.

Certain tangible capital assets are fundamental

to operations and will never be retired (e.g.

small local government with one water

treatment plant). Instead, routine repairs and

maintenance will be performed on the asset.

Would an asset retirement obligation need to

be recognized for these assets?

KPMG’s perspective

Certain tangible capital assets may be critical to a public

sector entity’s operations, and due to the significant

replacement cost, it may be prohibitive for the entity to

f ully retire the asset in the short-term. This particularly

could arise for certain tangible capital assets which are

historical in nature or of cultural relevance. However,

depreciable assets have a finite life and, at some point

in the future, they will deteriorate to the point where they

cannot be repaired and must be replaced. The entity

may take the approach of replacing components of the

Perspectives of PS 3280 Asset Retirement Obligations 6

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asset over time to spread the replacement cost over

multiple years. In such cases, the following guidance

should be applied to each significant component of

the asset.

When applying the PS 3280 guidance, the public sector

entity should first consider the recognition criteria to

identify all in-scope retirement obligations. The scoping

analysis should be performed without considering the

estimated timing of the retirement activities, which is a

measurement issue. In other words, the timing of the

retirement activities does not impact whether there is

an in-scope retirement obligation.

If in-scope retirement activities are identified, the public

sector entity will then need to es timat e the liability,

which includes determining the timing of the cash flows.

PS 3280 only requires that the timing of the cash flows

is estimated; perfect information about timing is not

required. A public sector entity should consider all

available information it has about the timing of the cash

f lows, including the asset’s condition, asset management

plans, multi-year capital budgets and the basis on

which the asset’s useful life was determine for

amortization purposes.

It may be the case that discounting the cash flows

results in an immaterial asset retirement obligation

liability because the cash flows are expected to occur far

into the f uture. The public sector entity should still record

the liability since over time the liability will increase as

the retirement activities become more imminent.

In addition to recording the liability, public sector entities

are also required to disclose the estimated total

undiscounted expenditures and the time period over

which the undiscounted expenditures are expected to

be incurred. As a result, even if the liability recorded is

immaterial, the analysis above will be required to ensure

the f inancial statement disclosures are complete.

A public sector entity decides that it will

voluntarily perform certain retirement activities.

In what circumstances would an asset

retirement obligation be recognized?

KPMG’s perspective

PS 3280 requires a legal obligation to incur retirement

costs in relation to a tangible capital asset. If a public

sector entity voluntarily chooses to perform certain

retirement activities or performs retirement activities as

part of its normal asset retirement practices, but there is

no legal agreement, contract or legislation obligating it to

perf orm the activities, then the retirement costs are

outside the scope of PS 3280. While such obligations

would not be assessed under PS 3280, they should be

considered under PS 3200 Liabilities.

Retirement obligation within the scope of PS 3280 may

occur f rom a government’s own legislation (e.g. local

government passes bylaws requiring the disposal of

certain hazardous materials in a prescribed manner) or

promissory estoppel (a promise conveyed to a third party

that imposes a reasonable expectation of performance

upon the promisor). Although these originate from with

the entity, they are still legally enforceable acts that the

entity is required to perform when retiring the assets.

Legislation exists that requires the public

sector entity to perform retirement activities

only when a specific event occurs. For example,

asbestos only needs to be cleaned up and

disposed when it is disturbed. Should the

asset retirement obligation be recorded when

the asset is acquired, constructed or developed,

or when the specific event noted in the

legislation occurs?

KPMG’s perspective

A liability for an asset retirement obligation can be

incurred due to the acquisition, construction or

development of a tangible capital asset, or normal use

of a tangible capital asset. The public sector entity needs

to identify what is the event that gives rise to the legal

obligation to incur the retirement costs.

For example, when a public sector entity acquires a

building with asbestos, it is known with certainty at the

time of purchase that the asbestos will need to be

cleaned up and disposed at some point in the future.

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It is a matter of timing rather than of fact that the

asbestos will need to be cleaned up and disposed.

The purchase of the building is the past event or

transaction creating the legal obligation and the asset

retirement obligation is recorded when the building

is acquired.

Another example is hazardous waste that results from

the normal operations of a machine. The legal

regulation may only require the hazardous waste to be

cleaned up when it occurs. At the time the machine is

acquired, no hazardous waste has occurred and there

is no obligation for remediation. Therefore, no asset

retirement obligation is recorded upon acquisition of

the machine. When the machine is put into use and

hazardous waste occurs, the event obligating the

public sector entity to clean-up the hazardous waste

has occurred and the remediation liability is recorded.

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Lease arrangements

A lease agreement has a specific end date

and requires the tangible capital assets to be

restored to their original state at the end of

the lease term. In practice, the lease will be

renewed for additional terms for the

foreseeable future. Does an asset retirement

obligation need to be recognized?

KPMG’s perspective

The lease agreement signed by the lessee and lessor is

legally binding and can be enforced in a court of law. As

a result, if the lease agreement states that there is a

legal obligation for the lessee to return the assets to their

original state, this represents a legal obligation that

would be within the scope of PS 3280.

Uncertainty about the timing of retirement activities

creates estimation uncertainty and is a measurement

issue. It does not preclude the lessee from recognizing

the asset retirement obligation. PS 3280 notes that it is

extremely rare that a reasonable estimate of the liability

cannot be made.

The timing of the retirement activities is usually linked to

the lease’s end date per the agreement unless there is

persuasive evidence that an alternative retirement date

is more appropriate. To identify an alternative retirement

date, the lessee could consider renewal clauses, historical

renewal practices with the lessor f or other assets, or

correspondence from the lessor indicating the desire to

renew at the end of the lease term. The more material or

significant the related liability, the more persuasive the

evidence needs to be for the alternative retirement date.

Consistency with the assumptions applied for recognition

of the leased asset is also important. A different set of

assumptions cannot be used for the asset retirement

obligation than for the asset itself.

In the absence of sufficient evidence for an alternative

retirement date, the lessee should use the lease end

date in the lease agreement. If at the end of the lease

term the lease is renewed, the lessee would adjust the

assumptions used to measure the liability would be

updated for the change in timing of the retirement

activities.

A lease agreement states that the lease will be

terminated when one party provides written

notice to the other and requires the leased

asset to be restored to its original state when

the lease is terminated. How would the timing

of the end of lease costs be estimated?

KPMG’s perspective

In this scenario, the lease agreement is a legal contract

that obligates the lessee to incur certain costs at the end

of the lease term. The recognition criteria in PS 3280 are

met and a liability needs to be recorded. The issue is the

measurement of the liability and specifically when the

cash flows will occur.

Since the lease agreement does not specify the lease

end date, the lessee will need to review other available

informaton which may include operating plans for the

leased asset, the leased asset’s remaining useful life, past

practices for similar assets, as well as communications

with the other party. The public sector entity may discuss

the expected lease end date with the lessor to determine

if the lessor has any imminent intentions to terminate the

lease. Based on the available information, the lessee will

need to make its best estimate of the expected timing of

the cash f lows. In subsequent periods, the liability is

updated for any new information received about the

lease termination date.

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The lease agreement is silent on who is

responsible for the asset retirement activities.

Who should recognize the asset retirement

obligation – the lessee or the lessor?

KPMG’s perspective

The asset retirement obligation is recorded by the party

that has the legal obligation to incur the costs.

If the lease agreement does not require the lessee to

incur the costs, and there is no other legal agreement,

contract or legislation creating the obligation for the

lessee, no asset retirement obligation is recorded as a

true legal obligation does not exist.

If the liability is not assumed by the lessee, generally,

the liability is recorded by the owner of the assets or

the lessor assuming the recognition criteria in PS 3280

are met.

Land has an indefinite life and is not retired. Is a

land lease agreement that requires the removal

of tangible capital assets on the land at the end

of the lease term within scope of PS 3280?

KPMG’s perspective

Land has an indefinite life and is not retired. However, in

this scenario, the asset retirement obligation is related to

the tangible capital assets on the land, and not the land

itself. The land lease agreement is a legal contract that

obligates the lessee to incur certain costs at the end of

the lease term. The recognition criteria in PS 3280 are

met and a liability needs to be recorded for the costs

associated with removing the tangible capital assets on

the land.

A public sector entity has entered into a land

lease agreement as the lessor. There are

buildings on the land, and at the end of the

lease term, there is no requirement for the

buildings to be demolished or otherwise retired

by the lessee. The buildings are owned and

operated by the lessee. Should the public

sector entity (lessor) include the buildings in

its assessment of tangible capital assets with

potential retirement obligations when

implementing PS 3280?

KPMG’s perspective

In this scenario, the public sector entity should first

review the lease agreement and consider past practices

in similar situations to verify that the lessee does in fact

have no liability for the building’s retirement costs. The

public sector entity may also engage in discussions with

the lessee to confirm that they intend to abandon the

building on the site at the end of the lease term.

If it is determined that the lessor is required to incur the

costs for the building’s retirement, then the public sector

entity will need to determine whether the recognition

criteria in PS 3280 are met and an asset retirement

obligation liability should be recognized. For example, if

the buildings have no asbestos and there are no other

legally required retirement activities, then even though

retirement costs may be incurred in the future, no asset

retirement liability is recognized under PS 3280 because

the retirement activities are not legally required.

However, if the buildings have asbestos that the public

sector entity will need to remove at a future date, then

an asset retirement obligation liability will need to be

recognized.

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Timing of cash flows

A public sector entity does not have asset

management plans or asset condition reports

that identify when assets will be replaced or

retired. Even though there are estimated useful

lives being used to amortize the tangible capital

assets, the assets will likely be used for longer

than the remaining useful life. How can the

timing of cash flows for retirement activities

be estimated?

KPMG’s perspective

PS 3280 requires use of the best available information to

estimate the asset retirement obligation. At each financial

reporting date, the estimate is reviewed and updated for

any new inf ormation that has become available.

In the absence of asset management plans, asset

condition reports and accurate remaining useful lives for

assets, the public sector entity can consider:

– Historical practices for similar assets – For example,

a similar asset may have been retired ten years after

the end of the useful life used for amortization

purposes. This may provide a basis for estimating

that the asset being assessed will last an additional

ten years af ter its current useful life.

– Similar assets owned by similar organizations – A

public sector entity could obtain information from

other similar organizations about the remaining useful

life of a similar asset. The public sector entity should

evaluate the inf ormation received to ensure it is

relevant and reliable.

– Internal asset condition assessments – The public

sector entity could inquire with the individuals within

its organization about the repairs and maintenance

practices and how long it is expected the asset can

be used in the operations. The expertise of the

individuals providing the information should be

considered to ensure the assessment is reliable.

If the inf ormation available is considered insufficient to

create a reasonable estimate for the timing of the cash

f lows, the public sector entity may need to get an

external expert to assist with evaluating the remaining

life of the asset.

The public sector entity could also choose to apply the

useful life used for amortization purposes as an initial

estimate of the timing of the retirement activities until

other inf ormation is available.

The lack of information about the timing of the cash

f lows would not preclude the public sector entity from

recording the liability.

As part of the PS 3280 implementation project,

the public sector entity identifies that some of

the useful lives of tangible capital assets are

inaccurate. What is the appropriate accounting

treatment for the change in useful life of the

assets? Should the adjustment be recorded

through a prior period restatement or

prospectively?

KPMG’s perspective

The public sector entity should first evaluate whether the

dif ference in the useful life is due to an error or a change

in estimate. Generally, if the useful life is being refined

based on new information or analysis that is available

because of the PS 3280 implementation project then

the change in useful life is considered a change in

estimate and the impact is recorded prospectively. The

amortization expense recognized for the assets in prior

Perspectives of PS 3280 Asset Retirement Obligations 11

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periods is not restated. Instead, the impact of the new

useful lives on amortization expense is recognized

prospectively.

For example, a building costs $1,000,000 and is

amortized over 20 years with amortization expense of

$50,000 per year. After five years, the net book value

is $750,000. As part of the PS 3280 implementation

project, the remaining useful life is revised from 15 years

to 25 years. In each subsequent year, the annual

amortization expense is revised to $30,000 ($750,000

divided by 25 years), and there is no restatement to adjust

the $250,000 of amortization previously recognized.

Even though an asset has an in-scope legal

obligation, the public sector entity will never

pay cash to retire the asset. Does an asset

retirement obligation need to be recorded?

KPMG’s perspective

PS 3280 requires that all four of the recognition criteria

are met to recognize an asset retirement obligation.

One of these criteria is that future economic benefits

(e.g. cash or other assets) will be given up for the

retirement activities. If this criterion is not met, no liability

is recorded.

For example, a local government may have pipes in the

ground that have asbestos. Although there are legal

requirements requiring asbestos to be cleaned up and

disposed when the pipes are removed, the local

government has built a major road over the pipes and

will never dig up the road to remove the pipes.

Therefore, no costs will be incurred for the asbestos

and no asset retirement obligation is recorded. In this

situation, the local government would need to ensure

it monitors its plans for the road to ensure there are

no changes that would result in the pipes needing to

be removed.

Can capitalized retirement costs be amortized

over a different useful life than the related

tangible capital asset?

KPMG’s perspective

Canadian public sector accounting standards directs

public sector entities to capitalize the costs directly

attributable to the acquisition, construction, development

or betterment of tangible capital assets. PS 3280 is

consistent with this concept and notes that retirement

costs are no different from other costs that have or will

be incurred to use the tangible capital asset for its

intended purpose. Further, determining the period over

which a tangible capital asset should be amortized is

based on its usage or service potential and is not based

on the nature of the costs incurred for the asset.

Therefore, capitalized retirement costs should be

amortized over the same remaining useful life as other

capitalized costs for the tangible capital asset.

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Discounting the cash flows

PS 3280 recommends, but does not require,

discounting of the cash flows for retirement

activities. When should a public sector entity

apply discounting?

KPMG’s perspective

PS 3280 notes that a present value technique is often

the best available technique with which to estimate an

asset retirement liability when the cash flows required to

settle or otherwise extinguish the liability are expected to

occur over extended future periods. However, there is no

requirement for a public sector entity to use a present

value technique. Public sector entities are also not

required to consistently apply discounting across all

assets. In other words, it may be applied to certain

assets and not others.

Some public sector entities are choosing not to discount

the cash f lows when there is significant uncertainty

about the timing of the cash flows. Under this view,

discounting the cash flows introduces additional

estimation uncertainty into the estimate of the liability

over and above the uncertainty around the timing of the

cash flows. This results in a liability that is even less

representative of the cash flows that will be expended in

the f uture period to retire the asset.

Public sector entities will need to determine their

approach to discounting cash flows as part of their asset

retirement obligation policy. The policy should clearly

articulate whether all or some retirement obligations will

use a present technique and, if some retirement

obligations will not be discounted, the parameters used

to make this decision. The use of specific parameters to

determine the discounting approach is important to

ensure different retirement obligations are calculated

using a consistent approach.

What is the appropriate discount rate to use?

KPMG’s perspective

The discount rate should reflect the time value of money

and the risks specific to the liability for asset retirement

obligations, for which future cash flow estimates have

not already been adjusted. Assumptions inherent in the

cash flows and the discount rate should be internally

consistent. For example, if the cash flows include the

ef f ect of inflation then the discount rate should also

incorporate the same inflation assumptions.

Public sector entities should not automatically assume that

the discount rate used in other accounting policies such as

employee future benefit plans will be the same rate used

f or asset retirement obligations. The assumptions used in

these discount rates (e.g. duration, risk or nature of the

cash flows) may be significantly different from those used

in the asset retirement obligations.

Determining the appropriate discount rate will require

prof essional judgement. Public sector entities should

consider including guidance in their asset retirement

policies for how the appropriate discount rate will be

determined.

One approach to determining the discount rate is to

consider what the interest rate would be if the public

sector entity borrowed an amount similar to the total

undiscounted retirement costs, with the same principal

repayments as the cash outflows for the retirement

activities, and with the same extinguishment date of the

debt as for the asset retirement liability. This approach

may be more appropriate if the public sector entity is

likely to borrow to fund the retirement costs.

Another approach is to consider the opportunity cost to

the public sector entity of setting aside an amount of

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cash equal to the undiscounted retirement costs for a

similar time span as the retirement obligations. In other

words, how much could the public sector entity earn if it

invested cash to fund the asset retirement obligations.

This approach may be more appropriate if the public

sector entity is likely to self-fund the retirement costs.

Should the discount rate be updated at each

reporting period date?

KPMG’s perspective

PS 3280 requires the carrying amount of the liability to

be reassessed at each financial reporting date and

updated for new information that becomes available over

the usef ul life of the tangible capital asset. This includes

revisiting estimates and assumptions made at the

implementation date to ensure they are still reasonable.

From a practical perspective, the public sector entity

should consider how persuasive the evidence is that the

discount rate has changed from the initial estimate and

how significant the impact of the change is on the

liability. If the change in the discount rate is simply the

substitution of one estimate with another that is no more

evidence-based then the discount rate could be left

unchanged. However, if the change in the discount rate

is due to changes in risks or the timing of cash flows,

then updating the discount rate results in a better

estimate of the liability.

Public sector entities should also consider materiality. If

a change in the discount rate does not result in a

significant change in the liability, then there could be an

argument to leave the discount rate unchanged. Public

sector entities should work collaboratively with their

auditors to determine whether the impact on the liability

is material.

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Calculating the asset

retirement obligation

During scoping, the public sector entity noted

that there is a 50% likelihood that an asset has

an asset retirement obligation. Should only 50%

of the cash flows be included in the liability?

KPMG’s perspective

Public sector entities may not have sufficient evidence to

conclude with certainty that an asset has an associated

retirement obligation and an assessment based on

likelihood may need to be applied. However, once it

has been determined that an asset is likely to have a

retirement obligation and is in scope of PS 3280, the

estimated liability is not reduced by the likelihood factor.

An asset either does or does not have retirement

obligations. Theref ore, it would not be appropriate to

reduce the liability by 50% on the premise that there is a

50% likelihood that the asset has a retirement obligation.

However, if for example the assessment is that 50% of

a building’s square footage has a related retirement

obligation, then the liability would only be determined for

50% of the building’s square footage.

What types of retirement activities should be

included in the retirement obligation?

KPMG’s perspective

PS 3280 requires costs directly attributable to asset

retirement activities that meet the recognition criteria to

be included in the estimate of the liability. Directly

attributable costs can include payroll and benefits,

equipment and facilities, materials, legal and other

prof essional fees and overhead costs. It also includes

post-retirement operation, maintenance and monitoring

that are an integral part of the tangible capital asset’s

retirement and the cost of tangible capital assets

acquired as part of the asset retirement to the extent

that those assets have no alternative use.

Only costs related to the nature and extent of asset

retirement obligations in accordance with legal

agreements, contracts, legislation or promissory

estoppel should be included in the liability. For example,

there are legal requirements for the disposal of asbestos

but not necessarily any legal requirements for the

demolition of a building at the end of its life. Therefore,

the costs associated with the disposal of the asbestos

would be included in the liability but not the demolition

costs. The exception might be if demolition is selected

as the method by which the asbestos retirement

obligation is most likely to be fulfilled. In this case, the

demolition is the mode used to fulfill the legal obligation

to dispose of the asbestos in the prescribed manner and

the demolition costs could be included in the liability.

Should inflation be included in the calculation

of the asset retirement obligation?

KPMG’s perspective

There is no prescriptive guidance in PS 3280 about

inclusion of inflation in the calculation of the asset

retirement obligation and public sector entities will need

to apply professional judgement to determine whether

inflation should be included. Generally, including inflation

in the calculation may provide a better estimate of the

f uture cash expenditures that will be incurred.

Public sector entities should ensure that inflation is not

inadvertently double counted in the liability. For example,

if the cost estimate received from a third-party already

includes the impact of inflation then an additional

inflation factor should not be included. Further, inflation

Perspectives of PS 3280 Asset Retirement Obligations 15

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assumptions in the cash flows and discount rate should

be consistent.

Where adjustments are applied for inflation, public sector

entities should also consider whether the consumer price

index (“CPI”), the Engineering News-Record (“ENR”)

construction cost index or another index is the most

appropriate estimate of inflation. For example, the ENR

construction cost index may be more relevant if the

retirement activities are similar to construction activities.

The CPI index may be more relevant if the retirement

activities include the purchase of consumer good

and services.

What types of overhead costs can be included

in the asset retirement obligation?

KPMG’s perspective

PS 3280 requires only overhead costs directly

attributable to the legally required retirement activities to

be included in the asset retirement obligation. Some

prof essional judgement will need to be applied to

determine what overhead costs can be included in the

obligation. Public sector entities should consider which

overhead costs are unavoidable when carrying out the

retirement activities. For example, legal fees incurred to

obtain permits to perform the retirement activities would

be directly associated and unavoidable costs which

should be included in the obligation. Costs related to

accounting for asset retirement obligations and costs of

engaging experts to estimate the asset retirement costs

are not directly attributable to the retirement activities

and would be expensed as incurred.

A public sector entity has a tangible capital

asset with a retirement obligation. This asset

is componentized in the financial records for

amortization purposes. How should the

retirement obligation be allocated to the

components?

KPMG’s perspective

The asset retirement obligation should be allocated to

only those components with associated retirement

obligations to ensure the retirement costs are amortized

over the same useful life as the component to which it

relates. A reasonable allocation basis should be used

where specific identification of the obligation to the

component is not possible. For example, retirement

costs for asbestos in a building could be allocated to

its components based on square footage or based on

proportion of carrying value. Public sector entities should

ensure only those components with associated

retirement obligations are allocated a portion of the

retirement costs. For example, if the roof of a building

is a separate component and has no asbestos, no

retirement cost should be allocated to the roof.

Perspectives of PS 3280 Asset Retirement Obligations 16

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Solid waste landfills

PS 3270 Solid Waste Landfill Closure and

Post-Closure Liability has been withdrawn

and replaced with PS 3280 Asset Retirement

Obligations. What is the impact on the solid

waste landfill liability recorded in the financial

statements?

KPMG’s perspective

Under PS 3270, public sector entities accounted for the

solid waste landfill liability based on usage of the site’s

capacity. A proportionate amount of the estimated total

closure and post-closure costs was recorded as a

liability and expensed based on the portion of the total

estimated capacity of the site used. This resulted in the

f ull liability for the costs being recognized at the end of

the site’s life.

Under PS 3280, public sector entities are directed

to account for the liability when the past event or

transaction occurs which obligates it to incur the costs.

This can be either the acquisition, construction or

development of the site or normal use of the site. Public

sector entities will need to evaluate the solid waste

landf ill closure and post-closure activities to determine

whether they are related to the acquisition, construction

or development of the site or its normal use. For

example, if the environmental approval requires that a

f inal cover and vegetation is put in place irrespective of

the landf ill site usage, then the related liability will be

recorded when the approval is received. Alternatively,

if the closure activity relates to only the portion of the

site that is in use, the liability would be recorded as

additional portions of the site are used.

The implementation of PS 3280 will result in the solid

waste landfill liability being recorded earlier in the site’s life

rather than incrementally based on usage. The higher

liability results in a higher tangible capital asset cost if

the site is in productive use, which must be amortized

over the site’s remaining useful life. The aggregate

amount of retirement costs recognized for the site will not

vary between legacy accounting under PS 3270 and PS

3280. However, the timing of expense recognition will

change. Higher expenses will be recognized earlier in a

site’s useful life under PS 3280, and lower expenses in

the later years of the site’s life relative to PS 3270.

Since PS 3280 has general guidance related to all asset

retirement obligations, applying its principles to solid

waste landfills may require more professional judgement.

Case study

Case facts

Construction of a solid waste landfill starts on January 1,

2022 and the landf ill begins accepting waste on

January 1, 2023. The landf ill will stop accepting waste

on December 31, 2032. The landfill’s capacity is 100,000

tons which will be used evenly over the site’s life.

The estimated closure costs related to the final cover and

vegetation in 2033 is $100,000. The site’s environmental

approval requires that a final cover and vegetation be put

in place regardless of the landfill site’s use.

The estimated closure costs in 2033 related to completion

of facilities for monitoring and recovering gas are $250,000.

The liability for closure costs is incurred when the site

starts accepting waste.

The post-closure period is five years (January 1, 2035

to December 31, 2039) and costs $10,000 per year.

Environmental approval requires the same closure and

post-closure activities regardless of site use. The liability

for post-closure costs is incurred when the site starts

accepting waste.

Assume all cash outflows are incurred at year-end and

the discount rate is 3%.

Perspectives of PS 3280 Asset Retirement Obligations 17

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Summary of cash flows

December 31

2033 2034 2035 2036 2037 Total

Closure cost

– cover and

vegetation

$100,000 - - - - $100,000

Closure cost

– f acilities for

monitoring

$250,000 - - - - $250,000

Post

-closure costs $10,000 $10,000 $10,000 $10,000 $10,000 $50,000

Total

$360,000 $10,000 $10,000 $10,000 $10,000 $400,000

Application of PS 3270

On December 31, 2023, the present value of the closure

and post-closure costs are $295,533 and 10% of the

site’s capacity has been used (10,000 tons out of a total

of 100,000 tons). The liability and expense recognized is

$29,553 ($295,533 x 10%).

On December 31, 2024, the present value of the closure

and post-closure costs are $304,398 and 20% of the

site’s capacity has been used (20,000 tons out of a total

of 100,000 tons). The incremental liability and expense

recognized is $31,327 (($304,398 x 20%) - $29,553).

The total liability recorded is $60,880 ($304,398 x 20%).

Application of PS 3280

On December 31, 2023, the present value of the closure

and post-closure costs are $295,533, which equals the

liability recognized. The tangible capital asset recognized

is $258,233 (amount capitalized on January 1, 2023

of $286,925 less one year’s worth of amortization of

$28,692). A total expense for 2023 of $37,300 is

recognized comprised of $28,692 of amortization expense

and $8,608 of accretion expense (difference between the

liability of $286,925 as at January 1, 2023 and the liability

of $295,533 as at December 31, 2023).

On December 31, 2024, the present value of the closure

and post-closure costs are $304,398, which equals the

liability recognized. The tangible capital asset recognized

is $229,541 (amount capitalized on January 1, 2023 of

$286,925 less two years’ worth of accumulated

amortization of $57,384). A total expense for 2024 of

$37,557 is recognized comprised of $28,692 of

amortization expense and $8,865 of accretion expense

(dif ference between the liability of $295,533 as at

December 31, 2023 and the liability of $304,398 as

at December 31, 2024).

Perspectives of PS 3280 Asset Retirement Obligations 18

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Comparison between PS 3270 and PS 3280

Year end

Liability Expense

PS 3280 PS 3270 Difference PS 3280 PS 3270 Difference

2023 $295,533 $29,553 $265,980 $37,300 $29,553 $7,747

2024 $304,398 $60,880 $243,518 $37,557 $31,327 $6,230

2025 $313,530 $94,059 $219,471 $37,825 $33,179 $4,646

2026 $322,936 $129,175 $193,761 $38,098 $35,115 $2,983

2027 $332,624 $166,312 $166,312 $38,381 $37,138 $1,243

2028 $342,603 $205,561 $137,042 $38,671 $39,250 $(579)

2029 $352,881 $247,017 $105,684 $38,971 $41,455 $(2,484)

2030 $363,468 $290,774 $72,694 $39,279 $43,757 $(4,478)

2031 $374,372 $336,935 $37,437 $39,597 $46,160 $(6,563)

2032 $385,603 $385,603 - $39,924 $48,669 $(8,745)

2033 $37,171 $37,171 - $11,568 $11,568 -

2034 $28,286 $28,286 - $1,115 $1,115 -

2035 $19,135 $19,135 - $849 $849 -

2036 $9,709 $9,709 - $574 $574 -

2037 - - - $291 $291 -

Total $400,000 $400,000 -

Perspectives of PS 3280 Asset Retirement Obligations 19

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Transitional provisions

How would PS 3280 be applied under each of

the three transitional provisions?

Retroactive approach

The retroactive approach is based on the guidance in PS

2120 Accounting changes. In this approach, PS 3280 is

applied as though it has been in effect since the date

obligation first occurred and is based on historical

assumptions applicable at that point in time. The public

sector entity has the option to restate prior years or make

a cumulative adjustment in the current year for the impac t

of the change in prior years through an adjustment to the

cumulative surplus / deficit or through operating results.

Prospective approach

The prospective approach can take three forms based

on the circumstances of the specific situation:

1. Asset retirement obligations where the event giving

rise to the obligation (i.e. acquisition, construction,

development or normal use of the asset) occurred

on or af ter April 1, 2022.

2. Asset retirement obligations where the event giving

rise to the obligation arose prior to April 1, 2022 and

the obligation has not been previously recognized.

3. Asset retirement obligations where the event giving

rise to the obligation arose prior to April 1, 2022 and

the previously recognized obligation requires

adjustment in applying this standard.

In all three scenarios, the valuation and accounting of

the asset retirement obligation is completed at the time

PS 3280 is adopted. Under the prospective approach,

public sector entities apply PS 3280 as of the year of

adoption without considering previous years. If an asset

retirement obligation already exists, it is adjusted for any

changes resulting from adoption of PS 3280.

Assuming there are no previous asset retirement

obligations recorded, the prospective approach involves

recognition of an asset and liability equal to the present

value of the expected outflows; amortization of the asset

over its remaining useful life; and accretion of the liability

over the life of the asset where discounting is applied to

arrive at the f uture obligation.

The prospective approach does not require any

adjustment to the opening deficit / surplus to implement

PS 3280 but results in higher future expenses due to

higher amortization costs if the asset is still in productive

use. If the asset is no longer in productive use, or if the

asset was never recognized by the public sector entity

the change in the liability is recognized with a

corresponding expense in the current year.

Modified retroactive approach

In the modified retroactive approach, the public sector

entity removes any existing asset retirement obligation

and associated costs recognized to date from its

f inancial statements as at the beginning of the year of

adoption. Subsequently, a liability for any existing

asset retirement obligations, adjusted for accumulated

accretion to that date, is recorded. This would amount to

the present value of the liability at the beginning of the

year. An asset retirement cost is capitalized as an

increase to the carrying amount of the related tangible

capital asset. The value of the asset is calculated as the

value on the date the obligation existed from (i.e. asset

acquisition date). Accumulated amortization represents

the amortization that would have been recorded had this

standard been in effect. An adjustment to opening

accumulated surplus is required. If the asset is no longer

in productive use, the public sector entity should

recognize the liability with a corresponding adjustment

to opening accumulated surplus.

Perspectives of PS 3280 Asset Retirement Obligations 20

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The impact of asset retirement obligations for fully

amortized assets can be recorded in one of three ways:

1. Though opening accumulated surplus with no

restatement of the asset’s useful life: The asset

and liability are recorded as of the date the

obligation first existed. The asset is amortized, and

the liability is accreted, based on the original useful

life of the asset resulting in the asset being fully

amortized and the liability value being the future

obligation as of the adoption date.

2. Through opening accumulated surplus with

restatement of the asset’s useful life: The asset

and liability are recorded as of the date the

obligation first existed. The asset is amortized, and

the liability is accreted, based on the revised useful

life of the asset. This method results in better

matching of the expense to the future economic

benef its derived from the asset.

3. On a prospective basis: The present value of the

f uture cash flows is recorded as an asset and liability

as of the date PS 3280 is adopted. Amortization and

accretion expense are recognized based on the

revised remaining useful life of the asset. There is

no adjustment to opening accumulated surplus.

Case study

Case facts

A public sector entity purchases a building with asbestos

f or $15 million on July 1, 2017. The remaining useful life

of the building is 15 years and at the end of its life, the

building will be demolished. Legislation requires the

public sector entity to remove the asbestos from the

building prior to demolition. The public sector entity

adopts PS 3280 for the year ended December 31, 2023

at which time management estimates that the asbestos

removal will cost $1.5 million. The public sector entity

has a discount rate of 3% and its policy is to amortize

buildings on a straight-line basis over its useful life.

The following table presents the annual asset and

liability balances, and the related expense if PS 3280

was applied from July 1, 2017. The July 1, 2017 asset

and liability balances represent the present value of the

f uture outflows at that date.

Date Asset Liability Amortization expense Accretion expense

July 1, 2017

$962,793

-

December 31, 2017

$930,700

$977,128

$32,093

$14,335

December 31, 2018 $866,514 $1,006,442 $64,186 $29,314

December 31, 2019

$802,328

$1,036,635

$64,186

$30,193

December 31, 2020

$738,141

$1,067,734

$64,186

$31,099

December 31, 2021

$673,955

$1,099,766

$64,186

$32,032

December 31, 2022

$609,769

$1,132,759

$64,186

$32,993

December 31, 2023

$545,583

$1,166,742

$64,186

$33,983

December 31, 2024 $481,397 $1,201,744 $64,186 $35,002

December 31, 2025

$417,210

$1,237,797

$64,186

$36,052

December 31, 2026

$353,024

$1,274,931

$64,186

$37,134

December 31, 2027

$288,838

$1,313,179

$64,186

$38,248

December 31, 2028

$224,652

$1,352,574

$64,186

$39,395

December 31, 2029

$160,466

$1,393,151

$64,186

$40,577

December 31, 2030

$96,279

$1,434,946

$64,186

$41,795

December 31, 2031

$32,093

$1,477,994

$64,186

$43,048

December 31, 2032

-

$1,500,000

$32,093

$22,006

Total

$962,793

$537,207

Perspectives of PS 3280 Asset Retirement Obligations 21

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Retroactive approach

In the retroactive approach, an asset and liability of

$962,713 are recognized on July 1, 2017. The

comparative balances in the financial statements for

2022 are restated to reflect this on adoption of PS 3280

in 2023. The impact of amortization and accretion

expense from 2017 to 2021 would be adjusted through

opening accumulated surplus when restating the

2022 balances.

In 2022, the asset is $609,769, the liability is $1,132,759,

amortization expense is $64,186 and accretion expense

is $32,993. The impact of accretion and amortization for

remaining prior years of $452,810 is adjusted through

opening accumulated surplus.

Prospective approach

In the prospective approach, a liability of $1,132,759 is

recognized which represents the present value of the

f uture obligation at the beginning of 2023. An asset of

$1,132,759 is also recognized without any adjustment

f or amortization. The asset is amortized over the

building’s remaining useful life of ten years and the

liability is accreted over the same time period to arrive

at the f uture obligation. There is no adjustment to

accumulated surplus to implement PS 3280 but there

are higher future expenses since the asset is still in

productive use.

Modified retroactive approach

In the modified retroactive approach, the December 31,

2022 balance would represent the 2023 opening amount

f or the liability. Therefore, the liability on adoption of

PS 3280 would be $1,132,759. The asset cost base is

value on the building’s acquisition date of $962,793.

Accumulated amortization on the asset cost is

$353,023, which represents the amortization expense

f rom the acquisition date to December 31, 2022. The

dif ference between the net book value of the asset and

the liability of $522,989 is adjusted through opening

accumulated surplus.

Subsequent to the initial implementation, the annual

amortization expense and accretion expense is

recognized.

Is there a preferred transition approach?

KPMG’s perspective

There is no pref erred transition approach. Each public

sector entity will need to consider the asset retirement

cost information it has available and the financial

reporting impacts of each option to determine which

transitional approach is most appropriate for them.

Measurement of the obligation can be viewed differently

depending on the transition method selected.

Public sector entities that consolidate into senior

governments or parent entities may receive prescriptive

guidance on which transitional provision to apply to

make the consolidation process easier and/or to ensure

consistency in the implementation of PS 3280 amongst

similar organizations.

Is restatement of prior year comparative

balances in the financial statements required in

the year that PS 3280 is adopted?

KPMG’s perspective

Restatement of prior year comparative balances is

required under the retroactive and modified retroactive

transitional approaches unless the public sector entity

does not have sufficient information to restate the prior

year balances. Generally, it is expected that most

public sector entities will have enough information to

restate the prior year comparative balances. Under

the prospective approach, the impacts of adopting

PS 3280 are recognized in the year of adoption and

theref ore, there is no restatement of prior year

comparatives required.

Perspectives of PS 3280 Asset Retirement Obligations 22

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