CVM Resolution 125 Approves Consolidated Technical Interpretation ICPC 12 on Decommissioning, Restoration and Similar Liabilities

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000

Approves the Consolidation of Technical Interpretation ICPC 12 of the Accounting Pronouncements Committee - CPC, which deals with changes in decommissioning, restoration and other similar liabilities.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes public that the Board, in a meeting held on May 4, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6,404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10,139, of November 28, 2019, APPROVED the following Resolution:

Art. 1. It makes mandatory for open companies the Technical Interpretation ICPC 12, which deals with changes in decommissioning, restoration and other similar liabilities, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. CVM Deliberation No. 621, of December 22, 2009, is hereby repealed, from the effective date of this Resolution.

Art. 3. This Resolution enters into force on July 1, 2022.

Signed electronically by
Marcelo Barbosa
President

ANNEX “A”

ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL INTERPRETATION ICPC 12
CHANGES IN DECOMMISSIONING, RESTORATION AND OTHER SIMILAR LIABILITIES Correlation to International Financial Reporting Interpretations Committee – IFRIC 1

Index Item
CONTEXT 1
SCOPE 2
ISSUE 3
CONSENSUS 4 – 8
ILLUSTRATIVE EXAMPLES
Common facts EI1
Example 1: Cost model EI2 – EI5
Example 2: Revaluation model EI6 – EI12
Example 3: Transition EI13 – EI18

Context

Many entities have obligations to dismantle, remove and restore items of property, plant and equipment. In this Interpretation, these obligations are referred to as “decommissioning, restoration and other similar liabilities”. According to Technical Pronouncement CPC 27 – Property, Plant and Equipment, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, for which an entity incurs an obligation, when the item is acquired or as a consequence of having used the item over a specific period for purposes other than producing inventories during that period. Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets contains requirements on how to measure decommissioning, restoration and other similar liabilities. This Interpretation provides guidance on how to account for the effect of changes in the measurement of decommissioning, restoration and other similar liabilities.

Scope
2. This Interpretation is applicable to changes in the measurement of any decommissioning, restoration or other similar liability that:
(a) is recognized as part of the cost of an item of property, plant and equipment, in accordance with CPC 27 – Property, Plant and Equipment, or as part of the cost of a right-of-use asset in accordance with CPC 06; and (b) is recognized as a liability in accordance with Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets. For example, a decommissioning, restoration or other similar liability may exist for the decommissioning of a factory, rehabilitation of environmental damage in mining industries or removal of equipment.

Issue
3. This Interpretation deals with how the effect of the following events that change the measurement of a decommissioning, restoration or other similar liability should be accounted for:
(a) change in the estimated outflow of resources embodying economic benefits (for example, cash flows) required to settle the obligation; (b) change in the current market-based discount rate, as defined in item 47 of Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets (this includes changes in the time value of money and specific risks of the liability); and (c) increase that reflects the passage of time (also referred to as the unwinding of the discount).

Consensus
4. Changes in the measurement of decommissioning, restoration and other similar liabilities that result from changes in the estimates of the amount or timing of the outflow of resources embodying economic benefits required to settle the obligation, or a change in the discount rate, are accounted for in accordance with items 5 to 7.

If the related asset is measured using the cost method:
(a) subject to item (b), changes in the liability will be added to/deducted from the cost of the related asset in the current period; (b) the amount deducted from the cost of the asset will not exceed its carrying amount. If the reduction in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in profit or loss; (c) if the adjustment results in an addition to the cost of the asset, the entity considers whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If there is such an indication, the entity tests the asset for impairment by estimating its recoverable amount and accounts for any impairment loss in accordance with Technical Pronouncement CPC 01 – Impairment of Assets.
If the related asset has been measured using the revaluation method (when legally possible):
(a) changes in the liability alter the revaluation reserve previously recognized for that asset, such that:
(i) the reduction in the liability is (subject to item (b)) recognized in other comprehensive income and increases the revaluation reserve in equity, but is recognized in profit or loss to the extent that it reverses a previous revaluation reduction on the asset that was previously recognized in profit or loss; (ii) the increase in the liability is recognized in profit or loss, except that recognized in other comprehensive income and reduces the revaluation reserve in equity up to the limit of any existing credit balance in the reserve with respect to that asset; (b) if a reduction in the liability exceeds the carrying amount that would have been recognized had the asset been recorded in accordance with the cost method, the excess will be recognized immediately in profit or loss; (c) a change in the liability is an indication that the asset may need to be revalued (if legally permitted) to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Any revaluation will be taken into account in determining the amounts to be recognized in profit or loss or other comprehensive income in accordance with item (a). If revaluation is necessary, all assets of that class will be revalued; (d) Technical Pronouncement CPC 26 – Presentation of Financial Statements requires disclosure in the statement of comprehensive income of each component of other comprehensive income or expense. In complying with this requirement, the change in the revaluation reserve resulting from a change in the liability will be identified and disclosed separately as such.

The adjusted depreciable amount of the asset is depreciated over its useful life. Therefore, once the related asset has reached the end of its useful life, all subsequent changes in the liability are recognized in profit or loss as they occur. This applies to both the cost method and the revaluation method.
The periodic unwinding of the discount shall be recognized in profit or loss as a financing cost as it occurs. The capitalization provided for in Technical Pronouncement CPC 20 – Borrowing Costs is not permitted.

Illustrative examples
These examples accompany, but do not form part of, the Interpretation.

Common facts
EI1 An entity owns a nuclear power plant and a corresponding decommissioning liability. The nuclear power plant began operations on January 1, 2000. The plant has a useful life of 40 years. Its initial cost was $120,000; this included the value of decommissioning costs of $10,000 which represented $70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5 percent. The entity's financial year ends on December 31.

Example 1: Cost model
EI2 On December 31, 2009, the plant is 10 years old. Accumulated depreciation is $30,000 ($120,000 x 10/40 years). Due to the unwinding of the discount (5%) over 10 years, the decommissioning liability has grown from $10,000 to $16,300.

EI3 On December 31, 2009, the discount rate has not changed. However, the entity estimates that, as a result of technological advances, the present value of the decommissioning liability has decreased by $8,000. Consequently, the entity adjusts the decommissioning liability from $16,300 to $8,300. On this date, the entity makes the following entry to reflect the change:

$ $
Dr Decommissioning liability 8,000
Cr Cost of asset 8,000

EI4 After this adjustment, the carrying amount of the asset is $82,000 ($120,000 – $8,000 – $30,000), which will be depreciated over the remaining 30 years of the asset's life, resulting in a depreciation expense for the next year of $2,733 ($82,000 ÷ 30). The financing cost of the discount unwinding for the next year will be $415 ($8,300 x 5%).

EI5 If the change in the liability had resulted from a change in the discount rate, instead of a change in estimated cash flows, the accounting for the change would have been the same, but the financing cost for the next year would have reflected the new discount rate.

Example 2: Revaluation model
EI6 The entity adopts the revaluation method cited in Technical Pronouncement CPC 27 – Property, Plant and Equipment, whereby the plant is revalued frequently enough so that the carrying amount does not differ materially from fair value. The entity's policy is to eliminate accumulated depreciation at the date of revaluation against the gross carrying amount of the asset.

EI7 When accounting for revalued assets to which decommissioning liabilities correspond, it is important to understand the basis of the valuation obtained. For example:
(a) if an asset is valued based on discounted cash flow, some valuers may value the asset without deducting any provision for decommissioning costs (“gross” valuation), while others may value the asset after deducting the provision for decommissioning costs (“net” valuation), since the entity acquiring the asset generally also assumes the decommissioning obligation. For financial reporting purposes, the decommissioning obligation is recognized as a separate liability and is not deducted from the asset. Consequently, if the asset is valued on a net basis, it is necessary to adjust the valuation obtained by adding back the provision for the liability, so that the liability is not counted twice;1 (b) if an asset is valued based on depreciated replacement cost, the valuation obtained may not include the value for the decommissioning component of the asset. If it does not include it, it is necessary to add the appropriate value to the valuation to reflect the depreciated replacement cost of this component.

EI8 Assume that a market-based discounted cash flow valuation of $115,000 is obtained on December 31, 2002. It includes a provision of $11,600 for decommissioning costs, which represents no change to the original estimate, after three years of discount unwinding. The values included in the balance sheet on December 31, 2002 are therefore:

Notes:
(1) Valuation obtained of $115,000 plus decommissioning costs of $11,600 considered in the valuation, but recognized as a separate liability = $126,600.
(2) Depreciation of three years on the original cost $120,000 x 3/40 = $9,000 plus accumulated discount on $10,000 at 5% compounded = $1,600; total $10,600.
(3) Revalued amount $126,600 less previous net carrying amount of $111,000 (cost $120,000 less accumulated depreciation of $9,000).

1 For examples of this principle, see Technical Pronouncement CPC 01 – Impairment of Assets and Technical Pronouncement CPC 28 – Investment Property.

$ $
Asset (1) 126,600
Accumulated depreciation None
Decommissioning liability (11,600)
Net assets 115,000
Retained earnings (2) (10,600)
Revaluation reserve (3) 15,600

EI9 The depreciation expense for 2003 is therefore $3,420 ($126,600 x 1/37) and the discount rate for 2003 is $600 (5% of $11,600). On December 31, 2003, the decommissioning liability (before any adjustment) is $12,200 and the discount rate has not changed. However, on this date the entity estimates that, as a result of technological advances, the present value of the decommissioning liability has decreased by $5,000. Consequently, the entity adjusts the decommissioning liability from $12,200 to $7,200.

EI10 The total of this adjustment is charged to the revaluation reserve, as it does not exceed the carrying amount that would have been recognized had the asset been recorded in accordance with the cost method. If this had occurred, the excess would have been charged to profit or loss in accordance with item 6(b). The entity makes the following entry to reflect the change:

$ $
Dr Decommissioning liability 5,000
Cr Revaluation reserve 5,000

EI11 The entity decides that a full valuation of the asset is necessary on December 31, 2003, to ensure that the carrying amount does not differ materially from fair value. Assume that the asset is now valued at $107,000, which is net of the provision of $7,200 for the reduced decommissioning obligation that must be recognized as a separate liability. The valuation of the asset for financial reporting purposes, before deducting this provision, is therefore $114,200. The following additional entry is required:

$ $
Dr Accumulated depreciation (1) 3,420
Cr Asset 3,420
Dr Revaluation reserve (2) 8,980
Cr Asset (3) 8,980

Notes:
(1) Eliminating accumulated depreciation of $3,420, in accordance with the entity's accounting policy.
(2) The debit is made to the revaluation reserve, as the reduction arising from the revaluation does not exceed the existing positive balance in the revaluation reserve with respect to the asset.
(3) Previous valuation (before provision for decommissioning costs) of $126,600, less accumulated depreciation of $3,420, less new valuation (before provision for decommissioning costs) of $114,200.

EI12 After this valuation, the values included in the balance sheet are:

$ $
Asset 114,200
Accumulated depreciation None
Decommissioning liability (7,200)
Net assets 107,000
Retained earnings (1) (14,620)
Revaluation reserve (2) 11,620

Notes:
(1) $10,600 on December 31, 2002 plus depreciation expense in 2003 of $3,420 and discount rate of $600 = $14,620.
(2) $15,600 on December 31, 2002, plus $5,000 from the reduction in liability, less $8,980 from the reduction in revaluation = $11,620.

Example 3: Transition
EI13 Retrospective application is required by Technical Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, when practicable. The following example illustrates the retrospective application of the Interpretation for a preparer who:
(a) adopts the Interpretation on January 1, 2010; and (b) before adopting the Interpretation, recognized changes in estimated cash flows to settle decommissioning liabilities as revenue or expense.

EI14 On December 31, 2005, due to the unwinding of the discount (5%) for one year, the decommissioning liability grew from $10,000 to $10,500. Furthermore, based on recent facts, the entity estimates that the present value of the decommissioning liability has increased by $1,500 and, consequently, adjusts it from $10,500 to $12,000. According to its then-current policy, the increase in the liability is recognized in profit or loss.

EI15 On January 1, 2010, the entity makes the following entry to reflect the adoption of the Interpretation:

$ $
Dr Asset 1,500
Cr Accumulated depreciation 154
Cr Retained earnings 1,346

EI16 The cost of the asset is adjusted to what it would have been if the increase in the estimated cost of decommissioning on December 31, 2005 had been capitalized on that date. This additional cost would be depreciated over 39 years. Therefore, the accumulated depreciation on this value on December 31, 2009 would be $154 ($1,500 x 4/39 years).

EI17 Considering that, before adopting the Interpretation on January 1, 2010, the entity recognized changes in the decommissioning liability in profit or loss, the net adjustment of $1,346 is recognized as a credit to opening retained earnings. This credit does not need to be disclosed in the financial statements, due to the restatement described below.

EI18 Technical Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors requires that comparative financial statements be restated and adjustments to opening retained earnings at the beginning of the comparative period be disclosed. The equivalent entries on January 1, 2009 are shown below. In addition, the depreciation expense for the year ended December 31, 2009 is increased by $39 relative to the previously reported value:

$ $
Dr Asset 1,500
Cr Accumulated depreciation 115
Cr Retained earnings 1,385

CVM Resolution 125 Approves Consolidated Technical Interpretation ICPC 12 on Decommissioning, Restoration and Similar Liabilities

Lineage: In force