Provision with Discounting Effect
Introduction
Extract from Accounting Memento 2023 (26035)
The dismantling and site restoration costs referred to in CU CNC notice no. 2005-H are the costs that the company will incur at the end of its use of the facility or site.
They result from:
a. either immediate deterioration, necessary for future operation, see no. 26055;
Environmental degradation is considered immediate if it occurs as soon as the facility is built. It is therefore independent of the level of activity of the facility after it has been commissioned.
b. or progressive degradation, due to past operation, see no. 26060.
Progressive deterioration occurs as the plant is used. It is therefore necessarily due to past operation and dependent on the level of activity of the plant, unlike immediate deterioration.
Extract from Accounting Memento 2023 (27945)
II. Valuation of the Provision
The amount of the provision for dismantling and restoration costs is determined in accordance with the general rules for estimating provisions (see no. 48310). However, in the specific case of provisions for restoration following immediate deterioration (Opinion CU CNC 2005-H § 3):
a. Initial valuation According to the above-mentioned CU CNC opinion (§ 3.1):
The provision must include costs directly attributable to site restoration operations, whether carried out by the company itself or by external service providers, including preliminary feasibility and preparatory studies.
In practice, the assessment may be based either on in-house data (if dismantling or plant/site restoration operations have already been undertaken by the company in the past), or on estimates made by the company or third-party service providers.
b. Discounting Unlike other provisions (see no. 48290 V.), discounting should be mandatory (Opinion CU CNC 2005-H). As the timing of cash outflows is generally long-term, the effect of discounting is significant.
Accretion, corresponding to the discounting of decommissioning liabilities for the period just ended, is recognized as a financial expense.
In practice, when a company chooses to discount its provision, the discount rate used is:
- Pre-tax,
- Risk-free (government bond type),
- Plus the risks inherent in the liability (unless these have been taken into account in estimating the amount of future cash outflows),
- Over the period between the asset's commissioning date and its decommissioning.
Strong demand from our users has led us to develop the possibility of recognizing the provision for restoration taking into account the effect of discounting.
This note sets out the behavior of the Lease application to enable this type of transaction to be processed under both IFRS and French standards.
Setting the Option in Contracts
In the Initial Conditions
In the "Initial conditions" section of the asset entry page, after entering the restoration costs, an option is proposed to evaluate the provision taking into account the discounting effect.
Important: The discount rate is automatically taken from the rate used to value the rental debt, but can be modified.
A tooltip explains the impact of activating this option.
In an Amendment Modifying the Initial Conditions
Here, the option is located in the section dedicated to the asset since the event.
Important:
- If the option has already been activated since the initial contract conditions, then it is automatically applied in the event.
- The fair value of the provision and/or the discount rate can be updated.
- Under the modified retrospective method, the amount of the provision entered in the initial terms and conditions disappears, as it was the amount of the restoration cost estimated at the beginning of the contract, it should therefore be added by an amendment to the contract.
Impact on Calculations
Activating this new option creates 2 new schedules:
- Provision calculation
- Provision accounting monitoring
Provision Calculation
The provision will give rise to different valuations in the following 3 situations:
- Initial valuation of the provision
- Taking into account the effect of discounting during the life of the contract
- Taking into account an event that revises the duration of the contract, the fair value or the discount rate of the provision
Initial Valuation of the Provision
The provision is calculated on the basis of the duration and frequency criteria defined in the contractual terms and conditions, using the formula:
Provision at end of contract * (1 + i)^-n
- i = equivalent discount rate specific to the provision
- n = number of discounting periods
Important: The initial valuation of the provision takes into account a partial discount rate for the first period if the contract includes a prorated due date (for example, with the application of the FTA or prorated 1st rent).
Taking into Account the Effect of Discounting During the Life of the Contract
For each calculation period, the discounting effect is calculated using the following formula:
(Start of period provision + Adjustment of provision over the period) * i
For each calculation period, the final provision is defined by the following formula:
Provision at start of period + Adjustment of provision over period + Discounting effect over period
Taking into Account an Event That Revises the Duration of the Contract, the Fair Value or the Discount Rate of the Provision
During the life of the contract, the provision may be re-estimated, so the adjustment will be defined according to the following formula:
(New amount of the provision at the end of the contract * (1 + i)^-n) - Amount of the provision at the beginning of the period
- i = new discount rate specific to the provision
- n = number of discounting periods between the event and the end of the contract
Provision Accounting Monitoring
An accounting monitoring of the provision will be established at the end of each month to present the distribution determined in proportion to the number of days in each month concerned according to the periods present on the provision calculation table.
Important: The 360/365 calculation base used is the same as that defined for the calculation of assets, to ensure symmetrical treatment.
Accounting Treatment
At the Beginning of the Contract
- Provision entry: account L-L15 - Cost for dismantling restoring asset - flow: CC02 – Increase
- Asset entry: account L-A210 - Gross value - flow: CC02 – Increase
During the Life of the Contract
- Discounting effect: account L-L15 - Cost for dismantling restoring asset - flow: CR03 - Discounting
- Counterpart to P&L: account L-R668 - Financial expenses on provision for dismantling restoring asset
Provision Revaluation
- Provision valuation: account L-L15 - Cost for dismantling restoring asset - flow:
- CC06 - Revaluation Increase
- CC05 - Revaluation Decrease
- Asset valuation: account L-A210 - Gross value - flow:
- CC06 - Revaluation Increase
- CC05 - Revaluation Decrease
Conversion Treatment
When accounts are converted into the lessee's operating currency, the provision remains associated with a non-monetary item, and the method applied is therefore that of the historical exchange rate.
The increase in the provision and the discounting effect are therefore converted at the average rate for the period in which they are recorded in the accounts.
Important: The historical rate is revised when the provision is revalued.
When converting financial statements into the Group's consolidation currency, the closing rate method is applied.
This means that movements are converted at the average rate for the accounting period, while the balance is converted at the closing rate.
Lease therefore naturally generates the following effects:
- FC04 - Currency effect on opening
- FC05 - Exchange rate effect on average
Impact on Mappings
Since a new account and a new flow are created, the mapping files must be modified.
Mapping examples:
Modification of Contract Import File
The contract import file has been adapted to allow the new fields to be filled in.
Impact on Contract Repository Exports
The file used to export contracts from the contract library has been adapted to include the new fields.