Asset Retirement Obligations to Natural Assets – The Spectrum of Environmental Reporting

Public sector entities across Canada are in the midst of their implementation journey for PS 3280, Asset Retirement Obligations. This standard was issued by the Public Sector Accounting Standards Board (PSAB) to address the accounting treatment of retirement activities related to tangible capital assets arising from legal or contractual obligations. The standard is effective for fiscal years starting on or after April 1, 2022. Local Governments and Regional Districts with a December 31st year end will adopt this standard for the fiscal year ended December 31, 2023. The new standard requires the upfront recognition of asset retirement obligations (ARO) as a liability, with a corresponding increase to the cost of the associated TCA:

Most Local Governments and Regional Districts are still working on the scoping of assets for this standard. This is the most critical phase of implementation, as it is essential for completeness of the retirement obligation. The most significant asset retirement obligations typically include buildings with asbestos or lead; underground fuel storage tanks; obligations related to land use agreements and leases; active landfill sites; sewage and water treatment plants where retirement is identified as necessary in environmental permits or approvals; and temporary linear assets (roads, train tracks, bridges).

The scoping phase should be completed by October 31, 2022, to allow time for the measurement of retirement obligations and validation with the financial statement audit team.

Clear milestones should be established for auditor engagement on topics such as scoping, measurement, and financial statement note disclosure. Be ready for this engagement to start as early as the 2022 interim audit.

Documentation is essential to support the auditability of retirement obligations. Public sector entities should be building working papers and position papers documenting key implementation assumptions and decisions, including those related to transition options.

Remember, the use of a present value technique for the measurement of retirement obligations is suggested, but not required by the standard. Typically, the use of a present value approach is most appropriate where a public sector entity has clarity on the specific timing of the retirement activity, and discounting would have a significant impact on financial reporting.

Beyond the implementation of PS3280, leading Local Governments and Regional Districts are looking ahead to the disclosure of natural resources. Natural resources are defined in the International Public Sector Accounting Board (IPSASB)’s Natural Resources Consultation Paper as resources which are capable of generating economic benefits and/or service potential; came into existence without the actions of humankind; and are not subject to human intervention. This typically includes

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subsoil resources, water and living resources which are in their natural state such as trees and wetlands. IPSASB’s impactful consultation paper is due for comment by October 17, 2022, and will impact Canadian Public Sector Accounting Board standards that Local Governments and Regional Districts follow based on PSAB’s international strategy. A number of Local Governments and Regional Districts from British Columbia are joining with their peers in other provinces in a working group organized by GFOABC and KPMG to explore disclosure options for natural resources. If you are interested in adding your voice to this important initiative, join us by sending a note to bchurch@kpmg.ca.

BAILEY CHURCH

leads the National Public Sector Accounting Advisory service line and is the Leader of the Public Sector ESG and Climate Reporting Centre of Expertise at KPMG. Bailey is also the Leader of KPMG’s Global International Public Sector Accounting Standards working group.

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