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2019-07-25_Audit Committee_Agenda Package
Page 1 of 1 of Agenda Cover Page(s) Audit Committee AGENDA Thursday,July 25, 2019 Chester Municipal Council Chambers 151 King Street, Chester, NS 1.MEETING CALLED TO ORDER 2.APPROVAL OF AGENDA/ORDER OF BUSINESS 3.MINUTES OF PREVIOUS MEETING 3.1.Audit Committee –March 7, 2019 4.MATTERS ARISING 5.CORRESPONDENCE 6.NEW BUSINESS 6.1 Request for Recommendation prepared by Finance Department dated July 24, 2019 regarding Financial accounting policies. 7.ADJOURNMENT 384 MUNICIPALITY OF THE DISTRICT OF CHESTER Minutes of Meeting of AUDIT COMMITTEE Held in Council Chambers at 151 King Street, Chester, NS On Thursday, March 7, 2019 MEETING CALLED TO ORDER The meeting was called to order at 11:14 a.m. by Warden Allen Webber. ROLL CALL Members Warden Webber (District 4)Deputy Warden Shatford (District 2) Councillor Connors (District 6)Councillor Assaff (District 5) Councillor Hector (District 1)Councillor Church (District 7) Councillor Barkhouse (District 3)Sandra Dumaresq Bruce Phinney Grant Thornton Georg Ernst, Grant Thornton Kelsey Murphy , Grant Thornton Jeff Sabean, Grant Thornton Staff Dan McDougall, CAO Malcolm Pitman, Director of Finance Pamela Myra, Municipal Clerk Public There were no members of the public in attendance. Press There were no members of the press in attendance. Regrets APPROVAL OF AGENDA/ORDER OF BUSINESS Add salaries over 100,000. 2019-094 MOVED by Councillor Barkhouse,SECONDED by Councillor Hector the Agenda/Order of Business be approved as amended. CARRIED. Audit Committee (continued)March 7, 2019 2 MINUTES OF PREVIOUS MEETING 3.1 August 17, 2018 2019-095 MOVED by Councillor Assaff, SECONDED by Deputy Warden Shatford the minutes of the August 17, 2018 minutes of the Audit Committee be approved as circulated. CARRIED. MATTERS ARISING There were no matters arising for discussion. CORRESPONDENCE There was no correspondence for discussion. NEW BUSINESS 6.1 Audit Plan for 2018/19. Georg Ernst and Kelsey Murphy of Grant Thornton were present and reviewed the Audit Plan for the 2018/19 fiscal year. Mr. Ernst indicated that the purpose of this meeting was to focus on or answer any general questions the Committee might have. The Executive Summary was reviewed, and comments were made regarding: Council Governance –training was encouraged; Code of Conduct is being developed that would be a part of Council Governance; Cyber security –also being reviewed by Municipal IT staff; Expense reporting –due in part to a change in the MGA; Transparency; Attendance at conferences/networking; Continuing education for Councillors; Review of policies by all municipalities to ensure consistencies –staff is preparing policies on expenses and hospitality; Audit Plan and Risk Assessment: Materiality –the threshold to say this is where they are focusing efforts; Audit Committee (continued)March 7, 2019 3 Review of significant risks -tax revenue and revenues from outside of taxes,most of which can be confirmed, i.e. from other units; payables –there is a pretty good system in place to ensure day to day payables are getting picked up. Other Audit Risks –Payables –the landfill is revisited frequently to ensure estimates are still reasonable. The Director of Finance reviewed: The need for another actuary on sick leave; Landfill closure cost is required as the last one was completed in June of 2016; Asset retirement –is there any benefit for early adoption? Audit and Other Services Fees: For transparency we may want to consider as a note those salaries over $100,000 –the idea would be to follow the same guidelines of the province. o It could be done as a note in the financial statements as it is for transparency and not required by legislation at this time. Or it could be self-reporting on the website. o Expense reporting of Council and the CAO is required. Staff would like to follow the province’s guidelines. Team, Timing and Communications Ms. Murphy has already started planning work with the Director of Finance and Manager of Finance; June would include field work and July would see communications assuming schedules align. Technical updates –highlights: Asset retirement obligations: o The biggest change is the audit report –based on standards auditors must follow –items appear in a different order. Appendix A –Overview and Approach Role of the Audit Committee Role of Management The auditors are more concerned about controls related to the big dollar numbers they are focused on. They want to ensure the assets are there and all liabilities are recorded,and that revenue and expenses are real –they will do testing. Appendix B –PSAS Accounting Developments Consideration the presentation on the statements in the future. Audit Committee (continued)March 7, 2019 4 Warden Webber asked the Committee if they felt anything was missing or focusing on a particular area. Mr. Ernst commented that he considers MODC proactive in addressing things early as opposed to reacting.He recommended that continue. He also noted that municipalities will be continually scrutinized –people will ask for more and more information and municipalities will be scrutinized on that information, i.e. expense policies.Materiality will be evaluated throughout the audit. Mr. Ernst noted that this unit is unique in that it has sources of revenue that are a high percentage of revenue. Unadjusted Errors: Bruce Phinney asked if the report included unadjusted errors?Ms. Murphy indicated that yes, they do, but historically have not had any –and there were no adjusted errors last year. Bruce Phinney commented regarding materiality and suggested the Audit Committee should hear/see it and determine if it should be adjusted.Ms. Murphy replied that during the time of financial statements they make some entries but haven’t done financial statements in a couple of years now as the current Director of Finance compiles them. 6.2 Approval of Audit Plan –Recommendation to Council. 2019-096 MOVED by Bruce Phinney, SECONDED by Councillor Hector that the Audit Committee recommend to Council acceptance of the Audit Strategy dated March 7, 2019 as presented by Grant Thornton representatives. CARRIED. 6.3 Risks/legal matters out of the ordinary. Nothing for discussion. 6.4 Confirmation of Statutory Payments The Director of Finance reviewed the confirmation of statutory payments. Councillor Hector asked about charitable organization tax receipts and the Director of Finance outlined Policy P-77 Designated Community Project Fund Policy which allows the Municipality to accept donations on behalf of an organization and issue receipts to the donor. Audit Committee (continued)March 7, 2019 5 Mr. Ernst indicated that the policy is be worded in such a way that there is a risk you might donate it to them for a specific thing. Ultimately it is the municipality’s money and the municipality may or may not issue the grant. 6.5 Confirmation of the Reporting of Quarterly Financial Results. Council receives reports quarterly on the results of the o perating fund. Mr. Phinney suggested adding surplus/deficit to show how well the Municipality is doing. He also suggested that the reports should be signed; this confirms to Council that liability goes away because the Municipality is relying on someone to confirm payments are being made and the evidence that council has asked the question. Ms. Dumaresq commented on disability actuarial and the pension plan. It was noted that the pension plan is defined contribution,so no actuary is required. Staff can determine their own risk and invest where they wish to do so. Mr. Phinney noted that a defined contribution pension plan de-risks the municipality. From an employer standpoint it is the safest way to go.Ms. Dumaresq commented that the responsibility of the Municipality would be to make sure the premiums are paid. Staff members left the meeting at 12:10 p.m. 6.6 Committee Meeting with auditors without staff. ADJOURNMENT 2019-097 MOVED by Councillor Church, SECONDED by Councillor Assaff the meeting adjourn. CARRIED. (12:18 p.m.) ______________________________________________________ Allen Webber Pamela Myra Warden Municipal Clerk REQUEST FOR RECOMENDATION Prepared By:Malcolm Pitman, CPA, CA, Director of Finance Date July 24,2019 Reviewed By:Date Authorized By:Malcolm Pitman, CPA, CA, Director of Finance Date July 24, 2019 CURRENT SITUATION A new public sector accounting handbook section (PS 3280) has been released on asset retirement obligations. Its scope includes landfill closure and post closure liability. PS 3280 does not have to be adopted until years beginning on or after April 1, 2021. Early adoption is permitted, and prospective application may be applied. A new engineering estimate has just been co mpleted on the closure and post closure costs. This new estimate along with review of appropriateness of assumptions results in a significant adjustment in the closure cost calculations. Review of the situation indicates that early adoption of PS 3280 will not make a significant different to the adjustment that must be made. One of the core responsibilities of the Audit Committee is oversight of accounting policies and review of any new reporting standards. RECOMMENDATION That, the Municipality choose to early adopt this new section PS 3280 and apply the new section using the prospective application. Prospective application recognized the effect of the changes in the current and future periods, but not in the prior periods. BACKGROUND The Municipality of the District of Chester operates a solid waste landfill site. Asset retirement costs for the landfill site include closure costs at retirement for capping the cells as well as post closure costs for ongoing environmental monitoring. An engineering report measures total capacity, capacity remaining and estimates the closure and post closure costs. These factors together with assumptions for timing of closure, annual inflation and rate of return and used to calculate the net present value of the cost which is used as the amount of the asset retirement obligation. These factors will be reviewed annual to assess their ongoing appropriateness. REPORT TO:Audit Committee SUBMITTED BY:Finance Department DATE:July 25, 2019 SUBJECT:Financial accounting policies ORIGIN: 2 Request For The current section, PS 3270, requires the calculated liability only to be recognized as the landfil l site’s capacity is used.The new section, 3280, requires recognition of the whole amount of the liability offset by recognition of a related tangible capital asset and then amortized to expense over the life of the asset in a rational and systematic manner. In the past the manner used to recognize expense and increase the liability was based upon the percentage of the total estimate capacity used each year. I am recommending that we continue to use this method in amortizing to expense the asset. DISCUSSION Using both the old and new sections, both calculations of the portion of the asset/liability to be recognized as an expense came out to the same amount;$5,826,677. This is a reduction of $1,176,837 from the accumulated expense amount recognized at March 2018. In addition, the total liability to be recorded will be $8,201,411.The draft note disclosure requirements are included the information on the following page.This information shows the impact of the changes. The scope of section PS 3280 extends beyond landfill assets and would apply to any asset that require post retirement decommissioning or dismantling. The asset obligation is the legal obligation associated with its retirement.Therefore, where there is a legal obligation to incur costs and the amount can be reasonably estimated,then a liability should be recognized, IMPLICATIONS Policy Financial accounting policy on the accounting standard to use for the landfill closure liability. PS 3280 will require additional disclosure requirement and the setting up of the full amount of the liability and an offsetting related asset that amortized in a rational and systematic manner. Financial/Budgetary May be some annual differences in the expense, but the total expense over time is generally t he same. Environmental –n/a Strategic Plan –n/a Work Program Implications –n/a OPTIONS Two options: ATTACHMENTS PS 3280 PS 3270 Draft engineering report on landfill closure costs COMMUNICATIONS (INTE RNAL/EXTERNAL) Internal –n/a External-n/a 3 Request For 15. Landfill Closure Costs liability (a) General description - The Municipality of the District of Chester operates a solid waste landfill site. Asset retirement costs for the landfill site include closure costs at retirement for capping the cells as well as post closure costs for ongoing environmental monitoring and care. (b) Amortization method - The amortization method used for the asset retirement costs is to allocate based upon the level of annual usage of the capacity expected to used. (c) Basis for the estimate of the liability - The Municipality uses an engineering report dated June 2019 that measues total capacity, measues total capacity remaining, estimates the landfill closure and post closure costs and period of time for post closure activities. Assumptions are used as to the expected level of annual usage, estimated year of closure, annual inflation and rate of return on the funding associated with the retirement obligation. Significant assumptions include: Expected annual usage starting in 2020-21 9,800 Tonnes Remaing capacity after 2020-21 225,000 Tonnes Year of closure and capping 2039-40 Post closure period 25 years Annual inflation applied to the costs in the June 2019 engineering report 1.56% Rate of return 2.40% These factors are used to calculate the present value of the costs which in turn equals the asset retirement obligation. These factors will be reviewed annually to assess their ongoing appropriateness. (d) Reconcilation of the beginning and ending amounts 2019 2018 Asset retirement obligation, beginning 7,003,514$6,273,280 Adjust previously recognized liability in applying public sector section 3280 *1,197,897 * Adjust liability per public sector 3270 730,234 Asset retirement obligation, end of the year 8,201,411$7,003,514 * Offsetting entry re" adjustment to previously recognized liability Increase the carrying amount of ther related tangible capital asset (TCA) (landfill)8,201,411$ Credit accumulated amortization of the related TCA = amount previously expensed (7,003,514) Net book value, opening *1,197,897 Current year's amortization adjustment, using amortization method - reduction (increase)1,176,837 Net book value, end of the year 2,374,734$ Asset retirement obligation, end of the year 8,201,411$ TCA Net book value, end of the year 2,374,734 Funding requirement, end of the year 5,826,677$ (e) Funding requirements - The Municipal Government Act requires, under section 99(g), that the current year's accrual for landfill closure and post-closure expenses be placed in the Capital Reserve Fund. The total amount in the Capital Reserve for the landfill retirement obligation is $5,826,677 (2018 - $7,003,514) Capital Reserve Fund funding Balance, beginning of the year 7,003,514$6,273,280$ Transfer in (out)(1,298,277)651,308 Interest earned on the fund 121,440 78,926 Balance, end of the year 5,826,677$7,003,514$ 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 1/14 Public Sector Accounting >> Public Sector Accounting Standards >> Specific Items — Financial Statement Items [PS 3030 — PS 3510] >> PS 3280 Asset Retirement Obligations SECTION PS 3280 asset retirement obligations FOR THOSE PUBLIC SECTOR ENTITIES THAT APPLY SOLID WASTE LANDFILL CLOSURE AND POST-CLOSURE LIABILITY, Section PS 3270, WHO CHOOSE NOT TO EARLY ADOPT THIS SECTION, see Section PS 3270 in Archived Pronouncements. TABLE OF CONTENTS Paragraph Purpose and scope .01-.07 Definitions .08 Recognition of asset retirement obligations .09-.23 Legal obligations .10-.15 Past transaction or event .16-.22 Existence uncertainty .23 Recognition and allocation of asset retirement costs .24-.32 Allocation of asset retirement costs .27-.29 Obligations associated with fully amortized tangible capital assets .30 Obligations associated with unrecognized tangible capital assets .31 Obligations associated with tangible capital assets no longer in productive use .32 Measurement .33-.59 Initial measurement .33-.48 Subsequent measurement .49-.57 Measurement uncertainty .58-.59 Recoveries .60-.62 Presentation and disclosure .63-.66 Transitional provisions .67-.73 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 2/14 Modified retroactive application .69-.71 Prospective application .72-.73 Decision tree Appendix A Illustrative examples Appendix B PURPOSE AND SCOPE .01 This Section establishes standards on how to account for and report a liability for asset retirement obligations. Specifically, it: (a) defines which activities would be included in a liability for retirement of a tangible capital asset; (b) establishes when to recognize and how to measure a liability for an asset retirement obligation; and (c) provides the related financial statement presentation and disclosure requirements. .02 This Section provides guidance for applying the definition of liabilities set out in FINANCIAL STATEMENT CONCEPTS, Section PS 1000, and the general recognition and disclosure standards in LIABILITIES, Section PS 3200, in accounting for and reporting a liability for asset retirement obligations. It may be useful to read this Section in conjunction with LIABILITY FOR CONTAMINATED SITES, Section PS 3260, CONTINGENT LIABILITIES, Section PS 3300, and CONTRACTUAL OBLIGATIONS, Section PS 3390. .03 This Section defines which asset retirement activities would be included in the cost of a tangible capital asset. It may be useful to read this Section in conjunction with TANGIBLE CAPITAL ASSETS, Section PS 3150. .04 This Section applies to legal obligations, including obligations created by promissory estoppel, associated with the retirement of a tangible capital asset that result from its acquisition, construction, development, or normal use. .05 This Section applies to asset retirement obligations associated with tangible capital assets controlled by a public sector entity that are in productive use and those that are no longer in productive use. Tangible capital assets include leased tangible capital assets reported under PUBLIC SECTOR GUIDELINE, PSG-2, Leased Tangible Capital Assets. .06 This Section does not deal with costs: (a) to acquire, construct or develop the related tangible capital asset, its replacement and maintenance, which are covered in TANGIBLE CAPITAL ASSETS, Section PS 3150; (b) related to remediation of contaminated sites, which are covered in LIABILITY FOR CONTAMINATED SITES, Section PS 3260; (c) related to the improper use of a tangible capital asset; (d) related to activities necessary to prepare a tangible capital asset for an alternative use; (e) resulting from an unexpected event such as an unexpected contamination; (f) related to obligations created by waste or by-products produced by a tangible capital asset such as sewage waste; and (g) that arise solely from a plan to sell or otherwise dispose of a tangible capital asset. .07 This Section does not deal with impairment of tangible capital assets, which is covered in TANGIBLE CAPITAL ASSETS, Section PS 3150. DEFINITIONS .08 The following terms are used in this Section with the meaning specified: (a) Accretion expense is the increase in the carrying amount of a liability for asset retirement obligations due to the passage of time. (b) Asset retirement activities include all activities related to an asset retirement obligation. These may include, but are not limited to: (i) decommissioning or dismantling a tangible capital asset that was acquired, constructed or developed; (ii) remediation of contamination of a tangible capital asset created by its normal use; (iii) post-retirement activities such as monitoring; and (iv) constructing other tangible capital assets to perform post-retirement activities. (c) An asset retirement cost is the estimated amount required to retire a tangible capital asset. (d) An asset retirement obligation is a legal obligation associated with the retirement of a tangible capital asset. (e) Productive use means the tangible capital asset is held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other tangible capital assets. (f) Promissory estoppel is defined in Black's Law Dictionary as "the principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise and the promisee did actually rely on the promise to his or her detriment." The Quebec Civil Code does not recognize the doctrine of promissory estoppel but Quebec courts have developed a similar concept known as la fin de non-recevoir. (g) Retirement of a tangible capital asset is the permanent removal of a tangible capital asset from service. This term encompasses sale, abandonment or disposal in some other manner but not its temporary idling. RECOGNITION OF ASSET RETIREMENT OBLIGATIONS .09 A liability should be recognized when, as at the financial reporting date: (a) there is a legal obligation to incur retirement costs in relation to a tangible capital asset; (b) the past transaction or event giving rise to the liability has occurred; (c) it is expected that future economic benefits will be given up; and (d) a reasonable estimate of the amount can be made. A liability for an asset retirement obligation cannot be recognized unless all of the criteria above are satisfied. [APRIL 2021] Legal obligations .10 A legal obligation establishes a clear duty or responsibility to another party that justifies recognition of a liability. For purposes of this Section, a legal obligation can result from: (a) agreements or contracts; (b) legislation of another government; (c) a government's own legislation; or (d) a promise conveyed to a third party that imposes a reasonable expectation of performance upon the promisor under the doctrine of promissory estoppel. .11 An agreement or contract could take the form of a licence governing the operation of a nuclear facility or a particular asset such as a reactor. The licence may contain legally enforceable obligations related to the retirement of the facility or the reactor. The entity, through the licence, agrees to those 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 3/14 terms and conditions that may create a liability to incur the costs of retiring that facility or reactor. .12 In other cases, another government's legislation may create a legally enforceable obligation. For example, a provincial ministry of environment may issue legislation and regulations setting out a stringent environmental approval process for landfill sites. That process may establish activities required when the site stops accepting waste. Under the environmental approval process, the entire landfill footprint may require approval or each phase may require separate approval. A landfill operator must agree to certain obligations prior to receiving environmental approval and accepting any waste. Those obligations include responsibility for closure and post-closure care of the approved site. .13 A government's own legislation can also create a legally enforceable obligation. For example, a province may require its own coal-based, electricity- generating facility to be decommissioned and remediated upon retirement. .14 Where an asset retirement obligation is established by agreement, contract or legislation, the obligation to incur costs to retire the tangible capital asset is legally enforceable and compliance is mandatory. Breaches may be enforced through prosecution, fines, jail and similar penalties, order or loss of permit. .15 A public sector entity's promise to a third party may also create a legally enforceable obligation under the doctrine of promissory estoppel. For example, a third party may have purchased a property near a gravel pit relying on the promise of the entity to close and decommission its pit at the end of its productive life. In the case of a promise conveyed to a third party, facts and circumstances need to be considered carefully in determining whether that promise has imposed a legal obligation upon the promisor under the doctrine of promissory estoppel. Past transaction or event .16 A liability for an asset retirement obligation can be incurred due to: (a) the acquisition, construction or development of a tangible capital asset; or (b) normal use of a tangible capital asset. .17 The existence of an agreement, contract, legislation or another legally enforceable obligation is not the event that creates the liability. It is the acquisition, construction, development or the subsequent use of the tangible capital asset that is the obligating event. .18 In most circumstances, whether an obligation results from the acquisition, construction or development of a tangible capital asset is clear. For example, if a public sector entity acquires an X-ray machine, the obligation to retire it in a prescribed manner results from the acquisition of this equipment. Another example is when a public sector entity acquires a building that contains asbestos. Regulations require the entity to handle and dispose of the asbestos in a prescribed manner when it is disturbed, such as when the building undergoes renovations or is demolished. Although timing of the asbestos removal is conditional on the building undergoing renovations or being demolished, existing regulations create a legally enforceable obligation for the entity to remove and dispose of the asbestos. The ability to postpone the asbestos removal does not relieve the entity of the obligation. The asbestos will eventually need to be removed and disposed of because buildings have finite lives. The obligating event occurs when the entity acquires the building. .19 Normal use of a tangible capital asset may result in an obligation to retire it. In some cases, the entire amount of the obligation may be incurred when the asset is initially put into production. For example, in the case of a landfill site, the obligation to complete closure activities under the environmental approval may arise when the site starts accepting waste, irrespective of the volume of waste accepted. In other cases, the obligation may be incurred incrementally with use if the events or transactions that create the obligation occur over more than one reporting period. For example, an environmental approval may require a landfill operator to complete certain post-closure activities that are directly linked to the volume of waste accepted. .20 Obligations that result from the normal use of a tangible capital asset are predictable, likely to occur and unavoidable as a result of operations. On the other hand, costs resulting from a catastrophic event, such as a flood, are considered unexpected and are outside the scope of this Section. .21 A change in circumstance during the life of the tangible capital asset may give rise to a new liability as a result of a past transaction or event. This could be the case when new legislation requires the public sector entity to dispose of a toxic material that was not previously required to be retired. Only when the change in circumstances occurs and the obligation arises would the costs be accounted for. They are not reported as a prior period adjustment as new legislation is a current period event. .22 Obligations that arise solely from a plan to sell or otherwise dispose of a tangible capital asset are not in scope of this Section. For example, if a public sector entity commits to remove a building in connection with selling a parcel of land and it is not otherwise obligated to remove the building, the obligation to remove the building is outside the scope of this Section. Existence uncertainty .23 In some circumstances, a public sector entity may have doubts as to the existence of an asset retirement obligation. For example, a public sector entity may be uncertain whether it has incurred an obligation through the operation of the doctrine of promissory estoppel. The existence of any liability in such cases is contingent on a future determination by a court, a regulator or some other competent authority, or a future determination by the entity that it would be held liable. In these circumstances, CONTINGENT LIABILITIES, Section PS 3300, provides additional guidance. If a liability for an asset retirement obligation is recognized, this Section would be applied. RECOGNITION AND ALLOCATION OF ASSET RETIREMENT COSTS .24 Upon initial recognition of a liability for an asset retirement obligation, a public sector entity should recognize an asset retirement cost by increasing the carrying amount of the related tangible capital asset (or a component thereof) by the same amount as the liability. [APRIL 2021] .25 The public sector entity should allocate the asset retirement cost to expense in a rational and systematic manner over the useful life of the tangible capital asset (or a component thereof). [APRIL 2021] .26 Asset retirement costs are necessary and an integral part of owning and operating the related tangible capital asset. These costs, as defined in TANGIBLE CAPITAL ASSETS, Section PS 3150, increase the carrying amount of the related tangible capital asset (or a component thereof). Allocation of asset retirement costs .27 An asset retirement obligation may exist for component parts of a larger system. In some circumstances, the retirement of the component parts may be required before the retirement of the larger system to which the component parts belong. For example, consider a transformer station (network) to be retired after a 50-year period for which its power transformers (component) need to be retired every 25 years. Accounting for asset retirement costs at the network level would allocate the asset retirement costs for the transformer station, including the power transformers, over 50 years. Accounting for retirement costs at the component level would allocate these costs for the power transformers over 25 years. .28 Whether a public sector entity records and accounts for its tangible capital assets at the component or the network level will be determined by the usefulness of the resulting information to the public sector entity compared to the cost of collecting and maintaining it. TANGIBLE CAPITAL ASSETS, Section PS 3150, provides further guidance regarding accounting and allocation of cost of a tangible capital asset. .29 Application of a systematic and rational allocation method does not preclude an entity from capitalizing an asset retirement cost and allocating an equal amount to expense in the same accounting period. For example, assume an entity opens a landfill. As the landfill is operated, the entity incurs additional asset retirement obligations of equal amount each year. Application of a systematic and rational allocation method would not preclude that entity from capitalizing and then expensing the asset retirement costs incurred each year. Obligations associated with fully amortized tangible capital assets .30 An asset retirement obligation may exist in connection with a fully amortized tangible capital asset that is still in productive use. For example, a public sector entity may control a fully amortized school containing asbestos. Although the tangible capital asset is fully amortized, its cost basis exists and the liability for an asset retirement obligation related to the initial acquisition, construction or development of the tangible capital asset would increase the cost basis of that asset. The costs would be amortized over the revised estimate of the remaining useful life. Obligations associated with unrecognized tangible capital assets .31 An asset retirement obligation may arise in connection with a tangible capital asset that is not recognized. In this case, the asset retirement cost would be expensed as there is no cost basis of the underlying asset to which the asset retirement costs can be attached. This is consistent with the principle that asset retirement costs are not a separate asset because there is no specific and separate future economic benefit that results from them. Obligations associated with tangible capital assets no longer in productive use 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 4/14 .32 An asset retirement obligation may arise for a tangible capital asset no longer in productive use. For example, a new legislation created after the tangible asset has been removed from service may now require its disposal in a prescribed manner and specific post-retirement activities. Given that there is no longer any period of future benefit associated with the asset retirement costs, these costs would be expensed. MEASUREMENT Initial measurement .33 The estimate of a liability should include costs directly attributable to asset retirement activities. Costs would include post-retirement operation, maintenance and monitoring that are an integral part of the retirement of the tangible capital asset. The estimate would include costs of tangible capital assets acquired as part of asset retirement activities to the extent those assets have no alternative use. [APRIL 2021] .34 Directly attributable costs would include, but are not limited to, payroll and benefits, equipment and facilities, materials, legal and other professional fees, and overhead costs directly attributable to the asset retirement activity. Costs would include only those related to the nature and extent of the asset retirement obligation in accordance with the agreement, contract, legislation or a legally enforceable obligation establishing the liability. On the other hand, costs related to obligations created by waste or by-products produced by a tangible capital asset are outside the scope of this Section as such costs are not associated with the retirement of a tangible capital asset but are costs of operations. For example, the use of a nuclear facility may result in radioactive waste requiring clean up. These costs are not associated with the retirement of a tangible capital asset but rather with the cleanup of waste or by-products. .35 Similarly, routine replacement of a tangible capital asset is not an asset retirement obligation. For example, infrastructure assets such as roads, sewer systems and bridges are normally not permanently removed from service (i.e., retired). Rather, they are maintained and, when necessary, replaced at the end of their useful lives. However, if there is a particular agreement, contract, legislation or other circumstance that obligates the public sector entity to incur asset retirement costs, this Section applies. .36 In some cases, asset retirement obligations involve ongoing activities such as the operating, maintenance and monitoring of a facility that has been shut down. These are part of the asset retirement activities rather than a separate future obligation. When ongoing operation, maintenance and monitoring are an integral part of the asset retirement activities, the estimate of the liability would include such post-retirement costs. .37 Asset retirement activities may also involve the acquisition of another tangible capital asset. For example, as part of the ongoing monitoring of a retired wastewater treatment facility, additional groundwater monitoring wells may need to be installed. The cost of the asset required for asset retirement activities would be included in the estimate of the liability. .38 Additionally, a tangible capital asset acquired as part of asset retirement activities may have an alternative use. For example, as part of the ongoing monitoring of a retired nuclear research facility, a laboratory may need to be constructed and operated to monitor the effects of radiation. The laboratory may also be used to monitor other activities not related to the retirement of the research facility. Only that portion of the asset used for retirement activities would be included in the estimate of the liability. .39 A liability for an asset retirement obligation should be estimated based on information available at the financial statement date. [APRIL 2021] .40 The estimate of the liability would be based on requirements in existing agreements, contracts, legislation or legally enforceable obligations, and technology expected to be used in asset retirement activities. The effect of new legislation would not be taken into consideration in estimating the liability until such legislation is enacted regardless of effective date. .41 The amount of the liability may not necessarily become determinable at a specific point in time. The amount of the liability may become determinable over a continuum of events and activities as information becomes available. For example, new information regarding the eventual costs to be incurred may become available as the public sector entity retires similar tangible capital assets. The estimate of costs may become better known as the public sector entity completes the asset retirement activities. In the interim, the public sector entity would recognize the liability based on management's best estimate of future asset retirement costs. .42 If new information becomes available between the financial statement date and the date of completion of the financial statements that would affect the estimates of a liability, this would be accounted for in accordance with SUBSEQUENT EVENTS, Section PS 2400. .43 Measurement of a liability for an asset retirement obligation should result in the best estimate of the amount required to retire a tangible capital asset (or a component thereof) at the financial statement date. [APRIL 2021] .44 The estimate of the liability would require professional judgment and could be supplemented by experience, third-party quotes and, in some cases, reports of independent experts. .45 Professional judgment will be required in assessing the appropriate measurement technique that results in the best estimate of the amount required to retire a tangible capital asset. The appropriate measurement technique depends on such factors as the extent and complexity of the future costs, and time frame over which activities will occur. .46 When the cash flows required to settle or otherwise extinguish a liability are expected to occur over extended future periods, a present value technique is often the best available technique with which to estimate the measure of a liability. .47 A key input into a present value technique, such as a discounted cash flow calculation, is the discount rate. A discount rate reflects the time value of money and the risks specific to the liability for asset retirement obligations, for which future cash flow estimates have not been adjusted. The assumptions applied in the cash flows and the discount rate should be internally consistent. For example, if the cash flows include the effect of inflation, then the discount rate also incorporates the same inflation assumptions. .48 The passage of time also affects the measurement of asset retirement obligations. As the liability for an asset retirement obligation approaches its settlement date, the liability balance increases as the discounting of the future cash flows decreases. This is often referred to as the unwinding of the discount or accretion. Subsequent measurement .49 The carrying amount of a liability for an asset retirement obligation should be reconsidered at each financial reporting date. [APRIL 2021] .50 A liability for an asset retirement obligation is generally long term in nature and the measurement of the amount is likely to change as new information becomes available over the useful life of the tangible capital asset. .51 When a present value technique is used, a public sector entity makes its best estimate of the appropriate discount rate, the amount of future retirement costs and their timing when initially measuring a liability. As more experience is acquired or as additional information is obtained, those estimates need to be updated. At each financial reporting date, the discount rate used should be reviewed to assess its ongoing appropriateness. A public sector entity would apply a consistent methodology to determine the discount rate. .52 A liability for an asset retirement obligation continues to be recognized until it is settled or otherwise extinguished. .53 In periods subsequent to initial measurement, a public sector entity should recognize period-to-period changes in a liability resulting from: (a) revisions to either the timing, the amount of the original estimate of undiscounted cash flows or the discount rate, as part of the cost of the related tangible capital asset; and (b) the passage of time as an accretion expense. [APRIL 2021] .54 The revised carrying amount of the related tangible capital asset (or a component thereof) should be amortized in a rational and systematic manner on a go-forward basis. [APRIL 2021] .55 Once the related tangible capital asset (or a component thereof) is no longer in productive use, all subsequent changes in the estimate of the liability for asset retirement obligations should be recognized as an expense in the period they are incurred. [APRIL 2021] .56 Asset retirement costs are necessary and an integral part of owning and operating the related tangible capital asset. These costs increase its carrying amount. As asset retirement costs on their initial recording are capitalized and amortized over the period of benefit, changes in their estimate would be accounted for similarly. .57 A change in measurement resulting from the passage of time (i.e., accretion expense) results from events of the accounting period. It would be expensed in the period and reported in the statement of operations. An entity will measure and incorporate changes due to the passage of time into the 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 5/14 carrying amount of the liability before measuring changes resulting from a revision to either the timing, the amount of the original estimate of undiscounted cash flows or the discount rate. Measurement uncertainty .58 In certain cases, there may be an indeterminate settlement date for the asset retirement obligation. For example, a public sector entity may be uncertain when the cash flows associated with an asset retirement obligation will occur. Uncertainty about the timing and amount of settlement of the asset retirement obligation does not remove that obligation but will affect the measurement of the liability. .59 Uncertainties affecting the measurement of a liability for an asset retirement obligation are disclosed in accordance with MEASUREMENT UNCERTAINTY, Section PS 2130. RECOVERIES .60 A recovery related to asset retirement obligation should be recognized when: (a) the recovery can be appropriately measured; (b) a reasonable estimate of the amount can be made; and (c) it is expected that future economic benefits will be obtained. A recovery should not be netted against the liability. [APRIL 2021] .61 A contingent recovery should be disclosed in accordance with CONTINGENT ASSETS, Section PS 3320. [APRIL 2021] .62 Recoveries of asset retirement obligations may result when a public sector entity is able to recover asset retirement costs from a third party. Accounting for recoveries depends on whether they meet the definition of an asset or a contingent asset (see ASSETS, Section PS 3210, and CONTINGENT ASSETS, Section PS 3320). PRESENTATION AND DISCLOSURE .63 A public sector entity should disclose the following information: (a) a general description of the liability for an asset retirement obligation and the associated tangible capital asset (or a component thereof); (b) the amortization method used for the asset retirement costs; (c) the basis for the estimate of the liability, including the estimated total undiscounted expenditures, the time period over which the undiscounted expenditures are to be incurred, the estimated timing of settlement of these expenditures and the discount rate used; (d) a reconciliation of the beginning and ending aggregate carrying amount of the liability showing separately the changes attributable to: (i) the liability incurred in the current period; (ii) the liability settled in the current period; (iii) the change resulting from the passage of time (i.e., accretion expense); and (iv) revisions in estimated cash flows; (e) how any requirements for financial assurance and funding associated with asset retirement obligations, if legally required, are being met; (f) when a reasonable estimate of the amount of an asset retirement obligation cannot be made, that fact and the reasons therefor; and (g) the estimated recoveries. [APRIL 2021] .64 When deciding the level of detail to disclose, entities consider the usefulness of the information to readers in assessing the nature and extent of an entity's liability for asset retirement obligations. It may be useful to group similar items together. .65 If a public sector entity is subject to legal requirements to provide financial assurance and funding associated with asset retirement obligations by setting aside assets designated for payment of such obligations, the entity would disclose that fact. .66 In extremely rare cases, a public sector entity may not be able to make a reasonable estimate of the amount of the liability. When a reasonable estimate of the amount of the liability cannot be made, this fact should be disclosed in accordance with LIABILITIES, Section PS 3200. TRANSITIONAL PROVISIONS .67 This Section applies to fiscal years beginning on or after April 1, 2021. Earlier adoption is permitted. .68 This Section may be applied using: (a) retroactive application in accordance with ACCOUNTING CHANGES, Section PS 2120; (b) modified retroactive application in accordance with the transitional provisions described in paragraphs PS 3280.69-.71; or (c) prospective application in accordance with the transitional provisions described in paragraphs PS 3280.72-.73. Modified retroactive application .69 As of the beginning of the fiscal year in which a public sector entity first applies this Section, the entity removes from its statement of financial position any liability for an asset retirement obligation and associated asset retirement costs and recognizes: (a) a liability for any existing asset retirement obligations, adjusted for accumulated accretion to that date; (b) an asset retirement cost capitalized as an increase to the carrying amount of the related tangible capital assets; (c) accumulated amortization on that capitalized cost; and (d) an adjustment to the opening balance of the accumulated surplus / deficit. .70 Entities with asset retirement obligations associated with assets no longer in productive use should recognize a liability and a corresponding adjustment to the opening accumulated surplus / deficit. .71 Those amounts are measured using information, assumptions and discount rates that are current at the beginning of the fiscal year in which this Section is first applied. The amount recognized as an asset retirement cost is measured as of the date the asset retirement obligation was incurred. Accumulated accretion and amortization are measured for the period from the date the liability would have been recognized had the provisions of this Section been in effect to the date as of which this Section is first applied. The information presented for comparative purposes should be restated unless the necessary financial data are not reasonably determinable. Appendix B demonstrates the application of the modified retroactive transitional provision option. Prospective application .72 For the purposes of prospective application the entity would recognize: (a) asset retirement obligations where the event giving rise to the obligation (i.e., acquisition, construction, development or normal use) occurred on or after April 1, 2021; (b) asset retirement obligations where the event giving rise to the obligation arose prior to April 1, 2021 and the obligation has not been previously recognized; and (c) asset retirement obligations where the event giving rise to the obligation arose prior to April 1, 2021, and the previously recognized obligation requires adjustment in applying this standard. .73 For asset retirement obligations associated with tangible capital assets in productive use, the entity would increase the carrying amount of the related tangible capital asset (including those that have been fully amortized) by the same amount as the liability. For asset retirement obligations associated with tangible capital assets no longer in productive use, the entity would recognize an expense of the same amount as the liability. APPENDIX A DECISION TREE — SCOPE OF APPLICABILITY This material is illustrative only. 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 6/14 The decision tree illustrates the boundaries between this Section and LIABILITY FOR CONTAMINATED SITES, Section PS 3260. Matters of principle relating to particular situations should be decided in the context of this Section. APPENDIX B ILLUSTRATIVE EXAMPLES This material is illustrative only. These examples illustrate how the accounting treatment specified in this Section might be applied in particular situations. Matters of principle relating to particular situations should be decided in the context of this Section. Unless otherwise stated, the examples assume that it is expected that future economic benefits will be given up and a reasonable estimate of the amount can be made. The facts and circumstances of each situation that may require recognition of a liability for an asset retirement obligation need to be considered carefully in applying the Section. TABLE OF CONTENTS Paragraph Recognition and measurement provisions B1-B7 Example 1 — Purchase of a building containing asbestos B2-B4 Example 2 — Landfill site opened B5-B7 Transitional provisions B8-B11 RECOGNITION AND MEASUREMENT PROVISIONS B1 The following two examples illustrate the recognition and measurement provisions. Example 1 illustrates initial measurement of a liability for an asset retirement obligation (ARO liability) and subsequent measurement assuming that there are changes in the estimated cash flows and the discount rate. Example 2 illustrates the recognition and measurement provisions to solid waste landfill closure and post-closure costs. Example 1 — Purchase of a building containing asbestos B2 A public sector entity purchases a building containing asbestos for $6 million on April 1, 2X21. B3 Significant assumptions in the example are as follows: (a) The remaining useful life of the building is 10 years. (b) The entity plans to demolish the building at the end of its useful life and the relevant legislation requires that asbestos be removed in a prescribed manner. (c) The estimated cost of this removal in 2X31 is $1 million. (d) The appropriate discount rate to compute the present value is three percent. (e) The public sector entity amortizes the building over its useful life using a straight-line method. (f) As at March 31, 2X26, the entity revised the estimated cost of removal to $1.2 million and the discount rate to four percent. B4 The journal entries and calculations below deal only with the asset retirement costs (i.e., exclude capitalization and amortization of the underlying tangible capital asset). Initial Measurement of the ARO Liability Present value of the ARO liability at April 1, 2X21 $744,094 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 7/14 Subsequent Measurement of the ARO Liability Reflecting Changes in the Estimated Cash Flows and the Discount Rate Present value of the ARO liability at March 31, 2X26 – before revision $862,609 Present value of the ARO liability at March 31, 2X26 – after revision $986,313 Present value of the incremental liability at March 31, 2X26 $123,704 Interest Method of Allocation Year Liability balance April 1 Accretion Change in estimate Liability balance Mar. 31 2X21-2X22 $ 744,094 $ 22,323 $ —$ 766,417 2X22-2X23 766,417 22,992 —789,409 2X23-2X24 789,409 23,683 —813,092 2X24-2X25 813,092 24,392 —837,484 2X25-2X26 837,484 25,125 123,704 986,313 2X26-2X27 986,313 39,452 —1,025,765 2X27-2X28 1,025,765 41,031 —1,066,796 2X28-2X29 1,066,796 42,671 —1,109,467 2X29-2X30 1,109,467 44,379 —1,153,846 2X30-2X31 1,153,846 46,154 —1,200,000 Schedule of Expenses Year end Accretion expense Amortization expense Total expense 2X22 $22,323 $74,409 $ 96,732 2X23 22,992 74,409 97,401 2X24 23,683 74,409 98,092 2X25 24,392 74,409 98,801 2X26 25,125 74,409 99,534 2X27 39,452 99,150 138,602 2X28 41,031 99,150 140,181 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 8/14 2X29 42,671 99,150 141,821 2X30 44,379 99,150 143,529 2X31 46,154 99,150 145,304 Journal entries April 1, 2X21: Dr. Tangible capital asset 744,094 Cr. ARO liability 744,094 To record the initial ARO liability March 31, 2X26: Dr. Tangible capital asset 123,704 Cr. ARO liability 123,704 To record the subsequent change in ARO liability March 31, 2X22-2X31: Dr. Amortization expense Per schedule Cr. Accumulated amortization Per schedule To record amortization on the asset retirement cost Dr. Accretion expense Per schedule Cr. ARO liability Per schedule To record accretion expense on the ARO liability March 31, 2X31: Dr. ARO liability 1,200,000 Cr. Cash 1,200,000 To record settlement of the ARO liability Example 2 — Landfill site opened B5 A public sector entity opens a landfill site. Regulations require that the entity perform closure and post-closure activities upon retirement of the site. Closure activities include all activities related to closing the site. These include final cover and vegetation and completing facilities for activities such as monitoring and recovery of gas. Post-closure activities include all activities related to monitoring the site once it can no longer accept waste and include activities such as monitoring ground water and surface water. Only the expenditures relating to those activities required when the site stops accepting waste are included in the closure and post-closure care liability. B6 Significant assumptions in the example are as follows: (a) The land was purchased on April 1, 2X20, for $2 million. 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 9/14 (b) The cost incurred to ready the property for use as a landfill site (land improvements, installation of the leachate collection system, roads, etc.), before considering asset retirement costs, was $500,000. The landfill site's construction started on April 1, 2X21, and completed on March 31, 2X22. (c) The estimated closure costs related to final cover and vegetation in 2X33 are $100,000. Environmental approval requires that final cover and vegetation be put in place irrespective of landfill site use. Therefore, in this specific case the liability is incurred on construction. (d) The estimated closure costs in 2X33 related to completion of facilities for monitoring and recovery of gas are $250,000. The post-closure care period is expected to be five years (April 1, 2X32 – March 31, 2X37) at $10,000 per year. Environmental approval requires the same closure and post-closure activities irrespective of volume of waste accepted. Therefore, in this specific case, the liability is incurred when the site starts accepting waste because the cost of these activities does not vary incrementally with use. (e) The landfill site starts accepting waste on April 1, 2X22. (f) The estimated useful life of the landfill site is 10 years (April 1, 2X22 – March 31, 2X32). The estimated capacity of the site is 100,000 tonnes of garbage. The level of usage is expected to be constant over the life of the site. (g) All cash outflows are incurred at the end of the year. (h) The appropriate discount rate to compute the present value is three percent. B7 The journal entries and calculations below deal only with the asset retirement costs (i.e., exclude capitalization and amortization of the underlying tangible capital asset). Payment Schedule 2X33 2X34 2X35 2X36 2X37 $100,000 $ —$ —$ —$ — 250,000 ———— 10,000 10,000 10,000 10,000 10,000 $360,000 $10,000 $10,000 $10,000 $10,000 =============================== Interest Method of Allocation — Closure Costs Related to Final Cover and Vegetation Year Liability balance April 1 Change in estimate Liability balance Mar. 31 2X21-2X22 $ —$ —$72,242 (a) 2X22-2X23 72,242 2,167 74,409 2X23-2X24 74,409 2,233 76,642 2X24-2X25 76,642 2,299 78,941 2X25-2X26 78,941 2,368 81,309 2X26-2X27 81,309 2,439 83,748 2X27-2X28 83,748 2,513 86,261 2X28-2X29 86,261 2,588 88,849 2X29-2X30 88,849 2,665 91,514 2X30-2X31 91,514 2,746 94,260 2X31-2X32 94,260 2,827 97,087 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 10/14 2X32-2X33 97,087 2,913 —(b) (a) $72,242 = present value of $100,000, 3%, 11 years. (b) Balance reflects settlement of liability. Interest Method of Allocation — Closure Costs Related to Completion of Facilities and Post-closure Costs Year Liability balance April 1 Accretion Liability balance Mar. 31 2X22-2X23 $214,683 (a)$6,440 $221,123 2X23-2X24 221,123 6,634 227,757 2X24-2X25 227,757 6,833 234,590 2X25-2X26 234,590 7,037 241,627 2X26-2X27 241,627 7,249 248,876 2X27-2X28 248,876 7,466 256,342 2X28-2X29 256,342 7,691 264,033 2X29-2X30 264,033 7,921 271,954 2X30-2X31 271,954 8,158 280,112 2X31-2X32 280,112 8,404 288,516 2X32-2X33 288,516 8,655 37,171 (b) 2X33-2X34 37,171 1,115 28,286 (b) 2X34-2X35 28,286 849 19,135 (b) 2X35-2X36 19,135 574 9,709 (b) 2X36-2X37 9,709 291 —(b) (a) $214,683 = present value of $250,000, 3%, 11 years + present value of $50,000 payable over five years from 2X33 to 2X37. (b) Balance reflects settlement of liability. Schedule of Expenses — Closure Costs Related to Final Cover and Vegetation Year end Accretion expense Amortization expense Total expense 2X23 $2,167 $7,224 (a)$ 9,391 2X24 2,233 7,224 9,457 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 11/14 2X25 2,299 7,224 9,523 2X26 2,368 7,224 9,592 2X27 2,439 7,224 9,663 2X28 2,513 7,224 9,737 2X29 2,588 7,224 9,812 2X30 2,665 7,224 9,889 2X31 2,746 7,224 9,970 2X32 2,827 7,224 10,051 2X33 2,913 — 2,913 (a) $7,224 = [72,242 × (10,000 tonnes ÷ 100,000 tonnes)] Schedule of Expenses — Closure Costs Related to Completion of Facilities and Post-closure Costs Year end Accretion expense Amortization expense Total expense 2X23 $6,440 $21,468 (a)$27,908 2X24 6,634 21,468 28,102 2X25 6,833 21,468 28,301 2X26 7,037 21,468 28,505 2X27 7,249 21,468 28,717 2X28 7,466 21,468 28,934 2X29 7,691 21,468 29,159 2X30 7,921 21,468 29,389 2X31 8,158 21,468 29,626 2X32 8,404 21,468 29,872 2X33 8,655 — 8,655 2X34 1,115 — 1,115 2X35 849 — 849 2X36 574 — 574 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 12/14 2X37 291 — 291 (a) $21,468 = [214,683 × (10,000 tonnes ÷ 100,000 tonnes)] Journal entries March 31, 2X22: Dr. Tangible capital asset 72,242 Cr. ARO liability 72,242 To record the ARO liability related to closure activities (final cover and vegetation) April 1, 2X22: Dr. Tangible capital asset 214,683 Cr. ARO liability 214,683 To record the ARO liability related to closure activities (facilities) and post-closure activities March 31, 2X23-2X32: Dr. Amortization expense Per schedule Cr. Accumulated amortization Per schedule To record amortization on the asset retirement cost March 31, 2X23-2X37: Dr. Accretion expense Per schedule Cr. ARO liability Per schedule To record accretion expense on the ARO liability March 31, 2X33-2X37: Dr. ARO liability Per schedule Cr. Cash Per schedule To record settlement of the ARO liability TRANSITIONAL PROVISIONS B8 This example illustrates the modified retrospective application transitional provisions described in paragraphs PS 3280.69-.71 assuming that this Section is adopted on April 1, 2021. Therefore, for measurement purposes, the example uses information and assumptions to derive cash flow estimates related to an asset retirement obligation at April 1, 2021. B9 This example depicts a public sector entity that did not recognize an asset retirement obligation in the past. B10 Significant assumptions in the example are as follows: (a) The tangible capital asset to which the asset retirement obligation relates was acquired on April 1, 2004, and is estimated to have a useful life of 20 years. (b) The entity incurred 100 percent of the asset retirement obligation on acquisition (April 1, 2004). 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 13/14 (c) The entity uses straight-line amortization. (d) As at April 1, 2021, undiscounted expected cash flows that will be required to satisfy the asset retirement obligation on March 31, 2024, are $250 million. (e) The April 1, 2021, discount rate is three percent. B11 The journal entries and calculations below deal only with the asset retirement costs (i.e., exclude capitalization and amortization of the underlying tangible capital asset). ($ thousands) Interest Method of Allocation Year Liability balance April 1 Accretion Liability balance Mar. 31 2020-2021 $222,121 $6,664 $228,785 (a) 2021-2022 228,785 6,864 235,649 2022-2023 235,649 7,069 242,718 2023-2024 242,718 7,282 250,000 (a) $228,785 = present value of $250,000, 3%, 3 years. Transitional Amounts Required by the Provisions of this Section Asset — April 1, 2021: Capitalized April 1, 2004 $ 138,419 (Present value of $250,000, 3%, 20 years) Accumulated amortization — April 1, 2020: Capitalized April 1, 2020 $110,735 [($138,419 ÷ 20) × 16] Amortization expense 6,921 ($138,419 ÷ 20) Accumulated amortization — March 31, 2021 $117,656 ======= Journal entry required at transition (April 1, 2021) Dr. Opening accumulated surplus / (deficit)208,022 Dr. Tangible capital asset 138,419 Cr. Accumulated amortization 117,656 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 14/14 Cr. Liability for an asset retirement obligation 228,785 The March 31, 2021, balance sheet amounts are adjusted as indicated in the journal entry above in providing comparative figures in the March 31, 2022, financial statements. Previously reported March 31, 2021, operating surplus or deficit is reduced by $6,664 of accretion expense and $6,921 of additional amortization expense for a net reduction of $13,585 in operating surplus or deficit. The opening balance of accumulated surplus or deficit as at April 1, 2020, is decreased by $194,437. Document ID: PS 3280 View Terms and conditions and Privacy policy Help desk: Mon-Fri, 9am-5pm ET 1-866-256-6842 Contact us © 2001-2019, EYEP and/or E&Y LLP and/or CPA Canada. All rights reserved. 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 1/2 Public Sector Accounting >> Archived Pronouncements >> PS 3270 Solid waste landfill closure and post-closure liability SECTION PS 3270 solid waste landfill closure and post-closure liability FOR FUTURE UPDATES RELATED TO THIS SECTION, see Section PS 3280. TABLE OF CONTENTS Paragraph Purpose and scope .01-.03 Landfill operations .04-.07 Definitions .08-.11 Recognition and measurement .12-.20 Disclosure .21 PURPOSE AND SCOPE .01 This Section establishes standards on how to account for and report the liability for closure and post-closure care of a solid waste landfill site in government financial statements. Specifically, it: (a) defines which activities should be included in closure and post-closure care; (b) establishes when to recognize and how to measure the closure and post-closure care liability; and (c) provides the related financial statement presentation and disclosure requirements. .02 The Section applies to all operating and closed landfill sites of governments and their organizations. .03 This Section does not address accounting and reporting for: (a) opening expenditures, such as those associated with locating a site or constructing a leachate collection system; (b) end-use expenditures, such as those that transform the site into park land, as they would be attributable to that end-use and not to the landfill; and (c) unforeseen or catastrophic events, such as a major leachate collection system failure. LANDFILL OPERATIONS .04 A solid waste landfill site is a defined area of land or excavation that receives waste that may include household waste, commercial solid waste, non- hazardous sludge, and industrial solid waste. .05 Government legislation and regulations set out a stringent environmental approval process for landfill sites. That process may establish: (a) how sites are selected and operated; (b) when sites should be closed; (c) for how long into the future the sites should be monitored to determine if environmental damage is being caused; and (d) in some cases, that financial assets be available to satisfy the liability. .06 Generally, there is a landfill "footprint" that represents the impression of an entire landfill site and comprises the total expected capacity of the site. The footprint can be divided into individual "phases". Under the environmental approval process, the entire footprint may require approval or each phase may require separate approval. A phase may comprise a series of individual "cells", so that only a portion of each phase would be used at any one time. .07 A landfill operator must agree to certain obligations prior to receiving environmental approval and accepting any waste. Those obligations include responsibility for closure and post-closure care of the approved site. DEFINITIONS .08 Certain activities relating to a site or phase are required before it opens, during its operating life and when it stops accepting waste. Only the expenditures relating to those activities required when the site or phase stops accepting waste are included in the closure and post-closure care liability. .09 Closure activities include all activities related to closing the landfill site. These may include: (a) final cover and vegetation; and (b) completing facilities for: (i) drainage control features; (ii) leachate monitoring; (iii) water quality monitoring; and (iv) monitoring and recovery of gas. .10 Post-closure care activities include all activities related to monitoring the site once it can no longer accept waste. These may include: (a) acquisition of any additional land for buffer zones; (b) treatment and monitoring of leachate; (c) monitoring ground water and surface water; (d) gas monitoring and recovery; and (e) ongoing maintenance of various control systems, drainage systems, and final cover. .11 Some closure and post-closure care activities may not be listed above, or may not be applicable in every situation. Closure and post-closure care activities may differ depending on the method used for the landfill operations, the type of waste accepted, the environmental conditions within which the 7/24/2019 CPA Canada Standards and Guidance Collection - Members Only https://www.knotia.ca/Knowledge/Home.aspx?productid=126 2/2 landfill is situated, and the environmental requirements needed to comply with regulations. Reference should be made to the environmental approval and legislative or contracted requirements when determining which activities to include in closure and post-closure care. RECOGNITION AND MEASUREMENT .12 Under environmental law, there is a liability for closure and post-closure care. It is not sufficient to disclose the closure and post-closure care liability as a contingency or a contractual obligation as the existence of the liability is known with certainty. .13 Financial statements should recognize a liability for closure and post-closure care as the landfill site's capacity is used. Usage should be measured on a volumetric basis (e.g., cubic metres). [FEB. 1998] .14 The liability for closure and post-closure care begins when the site starts accepting waste. Normally, it would be recognized over the operations of the site, beginning when the site first accepts waste and be fully recognized when the site stops accepting waste. If the site is operated on a phase basis, the closure and post-closure liability associated with that phase would be fully recognized when the phase stops accepting waste. .15 The change in the liability and the expense for the site or phase would be calculated as follows: (Estimated total x Cumulative capacity used)–Expenditures (expenditure Total estimated capacity)previously recognized .16 The estimated total expenditure represents the sum of the discounted future cash flows associated with closure and post-closure care activities. The government's average long-term borrowing rate, determined on a consistent basis, may be appropriate to use as the discount rate. .17 When determining the estimated total expenditure for closure and post-closure care, consideration needs to be given to current technology, the length of the post-closure care period, and the environmental regulations at the time the estimate is made. .18 The capacity used would be estimated based on a rational and systematic method and on the best available information. It is important that the basis for estimating the total capacity and the capacity used be applied consistently so that the liability and results are comparable over time. At least once every three years, an assessment of the need for a comprehensive review of capacity would be completed. .19 The reported liability may be affected by changes in the estimated total expenditure, capacity used or total capacity. Changes could result from new technology, the demand for landfill space, the settling of waste, inflation rates, interest rates, regulatory requirements, or amendments to the approved size of the site or phase. A change in the estimated total expenditure, capacity used or total capacity would be recognized in accordance with the recognition formula set out in paragraph PS 3270.15. .20 Closure and post-closure care disbursements would be deducted from the reported liability when they are made. DISCLOSURE .21 The notes to the financial statements should disclose: (a) the nature and source of landfill closure and post-closure care requirements; (b) the basis of recognition and measurement of the liability for closure and post-closure care; (c) the reported liability for closure and post-closure care at the balance sheet date, the estimated total expenditures for closure and post-closure care, and the amount remaining to be recognized; (d) the remaining capacity of the site and the estimated remaining landfill life in years; (e) how any requirements for closure and post-closure care financial assurance are being met, e.g., performance bonds; (f) the amount of any assets designated for settling closure and post-closure care liabilities; and (g) the estimated length of time needed for post-closure care. [FEB. 1998] Document ID: ps 3270 View Terms and conditions and Privacy policy Help desk: Mon-Fri, 9am-5pm ET 1-866-256-6842 Contact us © 2001-2019, EYEP and/or E&Y LLP and/or CPA Canada. All rights reserved. MEMO DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 1 of 7 TO:Christa Rafuse, P.Eng FROM:Christopher Shortall, P. Eng DATE:June 28, 2019 SUBJECT:Kaizer Meadows Environmental Management Centre –Updated Closure Information OUR FILE:16-3834-1000 Dillon Consulting Limited (Dillon) was engaged by the Municipality of the District of Chester to review the remaining capacity of the constructed disposal cells at the Kaizer Meadows Environmental Management Centre and the associated probable budget to cap the constructed disposal cells. Remaining Capacity in the Constructed Cells To determine the remaining capacity Dillon relied on: •The current approval to operate Approval No. 2005- 50000-03; •Topographic surveys of May 4, 2016 and April 8, 2019; and •Approved top of the landfill at 205 m. Photo 1 presents the current layout of the cells with Photo 2 illustrating the top of the landfill waste contours. PHOTO 1 –CELLS 1 TO 4 DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 2 of 7 The approximate volume of municipal solid waste, daily and intermediate cover placed between the two topographic surveys is approximately 165,000 m3. There are 1411 calendar days between the two topographic surveys resulting in a fill rate of approximately 117 m3/day. The previous report of June 2106 identified a density of 808 kg/m3 for an approximate tonnage of 133,000 tonnes. The remaining capacity of the cells from the 2019 survey to the assumed top of waste is approximately 340,000 m3 which translates intoi an approximate tonnage of 275,000 tonnes of remaining capacity. Photos 3, 4 and 5 present cross sections though the cells along with the 2016, 2019 topographic surveys and the designed top of waste of 206.25 m. Full size drawings are attached to this memo. PHOTO 2 –PROPOSED TOP OF CELLS 1 TO 4 DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 3 of 7 PHOTO 3 –SECTION 1 PHOTO 4 –SECTION 2 DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 4 of 7 Closure Program Cost Estimation Requirements for closure of the Landfill are outlined in Approval No. 2005- 50000-03 Clause 17 Closure Plan issue by the Department of Environment. The detail of closure consists of three stages, Planning, Implementation and Monitoring. The planning stage consists of: •Defining the limits of the landfill; •Defines the final contours; •Outlines the activities during the physical closure; and •Post-closure monitoring and maintenance activities. PHOTO 5 –SECTION 3 DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 5 of 7 Final Cover System The requirement for a landfill final cover system is outlined in the Nova Scotia Environment Municipal Solid Waste Landfill Guidelines, November 2004. The purpose of the final cover system is to: •Control the amount of surface water infiltration into the buried waste material; •Limit erosion and sedimentation; •Control the release of methane gas from the facility; and •Protect the underlying waste from exposure. The proposed final cover system for Cells 1 to 4 is presented in Photo 6. The cover system from bottom to top would consist of the following layers. •Geotextile ‘A’- to separate the soil layer from the top of the intermediate cover. •Clear Stone Layer– placed on the top of the landfill (300 mm thick) to control landfill gas movement under the geomembrane liner. The stone is not placed on the side slope due to the potential for the stone to slip. •Geotextile ‘B’ - to protect the geomembrane liner from stones in the Clear Stone Layer. •Geomembrane Liner/ Low Permeability Soil Liner - to control surface water infiltration a barrier either a 750 mm thick low permeability soil or a geomembrane is required. A geomembrane is presented in Photo 6. •Clear Stone Drainage Layer - on the low slope (top) area of the landfill and typically 300 mm thick, to drain surface water that infiltrates through the Soil Layer, away from the top of the landfill. PHOTO 6 –PROPOSED FINAL COVER DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 6 of 7 •Geo-composite - on side slopes of the landfill, to provide drainage for surface water that infiltrates through the Soil Layer. The geo- composite would be connected to a toe drain to direct collected water to the surface for discharge. •Geotextile ‘C’ – placed over the Clear Stone Drainage Layer, to protect the stone from intrusion of soil from the Soil Layer. •Soil Layer – located above the Geo-composite or Clear Stone Drainage Layer to provide a soil layer for final hydroseeding of the cover. This soil layer (500 to 800 mm thick) would include surface water drainage swales and side slope geomembrane lined drainage channels to reduce the potential for erosion by providing pathways for precipitation to be removed from the top of the landfill in a controlled manner. •Hydroseeding - would be done on all exposed areas. Landfill Gas Control - Landfill gas extraction wells/vents are required to control the release of landfill gas and to prevent the build-up of landfill gas under the final cover. Probable Closure Budget Table 1 presents the probable closure budget for the landfill 1 to 4, 2016 probable unit prices were based on the tendered pricing for the closure of Cell 1 at the Guysborough Landfill in 2012. The 2019 probable unit prices were based on the closure of Cell 1 and 2 at the Guysborough Waste management Facility in 2018 and the closure of Cells 1, 2A and 2B at the Cumberland Central landfill in 2019. We note that the unit prices for Site Grading, Soil Layer have increased to reflect recent tenders. Also, in the 2016 report a geotextile/drainage net/geotextile was included in the pricing for side slope installation to replace the clear stone. Recent closure tenders have used a geo-composite instead of the geotextile/drainage net/geotextile combination as the geo-composite is a typically a lower cost and is easier to install.Table 2 identifies potential budget items, monitoring, leachate treatment after the landfill closes. TABLE 1 – PROBABLE CLOSURE BUDGET Item Description Units Probable Quantity Probable Unit Price (2016) Probable Unit Price (2019) Probable Budget(2019) 1 Site Grading sm 99,250 $2 $4 $400,000 2 Gas Collection Vent ea 40 $2,000 $1,000 $40,000 3 Geotextile 'A'sm 99,250 $4 $4 $350,000 4 25 mm Clear Stone sm 99,250 $16 $14 $1,400,000 5 Soil Layer sm 99,250 $5 $9 $900,000 6 Geotextile 'B'sm 99,250 $6 $4 $375,000 7 750 mm low permeability soil sm 99,250 $17 $17 $1,700,000 8 Geotextile 'C'sm 99,250 $7 $5 $475,000 DILLON CONSULTING LIMITED 137 Chain Lake Drive, Suite 100, Halifax, NS, B3S 1B3, (902)450-4000 www.dillon.ca Page 7 of 7 Item Description Units Probable Quantity Probable Unit Price (2016) Probable Unit Price (2019) Probable Budget(2019) 9 25 mm Clear Stone sm 19,850 $16 $15 $300,000 10 Geo-composite sm 79,400 -$10 $800,000 11 Soil Layer sm 99,250 $5 $10 $900,000 12 Hydroseeding sm 99,250 $1 $1 $100,000 13 Side Slope Check Dam m 3,600 $150 $95 $350,000 14 Toe of Cap Drain m 1,400 $75 $150 $210,000 15 Sediment Control Plan ls 7 $10,000 $10,000 $70,000 16 Erosion Control Allowance ls 7 $5,000 $5,000 $35,000 Subtotal $8,405,000 Closure Report $50,000 Contingency Allowance (20%)$1,681,000 Engineering and Construction (12%)$1,008,600 Probable Budget $11,144,600 Probable Budget per m2 $112 TABLE 2 – SCHEDULE OF POST – CLOSURE PROBABLE BUDGET Item Description Units Probable Time Probable Unit Price Probable Budget 1 Groundwater and Surface Water Monitoring Year 25 $40,000 $1,000,000 2 Site Maintenance Years 1 to 10 Year 10 $25,000 $250,000 3 Site Maintenance Years 11 to 25 Year 20 $15,000 $300,000 4 Engineering and Site Inspections Year 25 $5,000 $125,000 Subtotal $1,675,000 Contingency Allowance (20%)$335,000 Probable Budget $2,010,000 Probable Budget per m2 $20 DATE DESIGN DRAWN PROJECT NO. SHEET NO. No.DATE BYISSUED FOR written permission from Dillon Consulting Limited. than those intended at the time of its preparation without prior Do not scale dimensions from drawing. Report any discrepancies to Dillon Consulting Limited. Verify elevations and/or dimensions on drawing prior to use. Conditions of Use REVIEWED BY CHECKED BY Do not modify drawing, re-use it, or use it for purposes other SCALE KAIZER MEADOW LANDFILL LANDFILL CLOSURE COSTS UPDATE 16-3834 MAY 2019 1EXISTING CONDITIONS PLAN - APRIL 8, 2019 1:1000 DATE DESIGN DRAWN PROJECT NO. SHEET NO. No.DATE BYISSUED FOR written permission from Dillon Consulting Limited. than those intended at the time of its preparation without prior Do not scale dimensions from drawing. Report any discrepancies to Dillon Consulting Limited. Verify elevations and/or dimensions on drawing prior to use. Conditions of Use REVIEWED BY CHECKED BY Do not modify drawing, re-use it, or use it for purposes other SCALE KAIZER MEADOW LANDFILL LANDFILL CLOSURE COSTS UPDATE 16-3834 MAY 2019 2PROPOSED FINAL WASTE CONTOURS 1:1000 DATE DESIGN DRAWN PROJECT NO. SHEET NO. No.DATE BYISSUED FOR written permission from Dillon Consulting Limited. than those intended at the time of its preparation without prior Do not scale dimensions from drawing. Report any discrepancies to Dillon Consulting Limited. Verify elevations and/or dimensions on drawing prior to use. Conditions of Use REVIEWED BY CHECKED BY Do not modify drawing, re-use it, or use it for purposes other SCALE KAIZER MEADOW LANDFILL LANDFILL CLOSURE COSTS UPDATE 16-3834 MAY 2019 3SECTIONS AS NOTED