The promise
how much? The second—ignoring employees’ demographics—could also create last-minute problems: what if a newly formed company hires a number of middle-aged employees on day one, or employs a couple of highly paid members of a management team? Such “excuses” mainly delay the company’s recognition of expense. If a company has less than 10 employees but expects to breach that magic number, it would also be good to start recognizing retirement expenses early on.
As you may have guessed, pension calculation is complex and hinges on a multitude of assumptions—employee demographics, compensation increases, mortality rates, service life, discount rate, etc. Accordingly, companies should ideally seek an actuarial valuation report from an independent actuary to determine amounts that need to be recognized in their important for employers to take note that funding a retirement plan is different from accounting
The promise of remediation
Remediation obligation, more commonly termed by accountants as asset retirement obligation (ARO), is a liability attached to retirement of an asset or vacating a property. It is important to understand that it is applicable across many industries and not only to extractive, energy, power and utility companies.
- tion is triggered either legally or constructively—that is required by regulatory agencies such as the DENR, Bureau of Mines, lessors, the company’s very own health, security, environment, and safety policy, or its previously demonstrated but informal approach on cleaning up, or a similar obligatory responsibility. As energy and utility companies are already well versed on this topic, my examples include others who may be affected, especially ordinary lessees whose contracts contain back to original condition” or “surrender the property at clean state” or other statements pointing out to “extra efforts” than simply vacating the leased prop efforts mean extra costs as well.
ARO is accounted for at the net present value of the liability or obligation under IAS 37, Pro- visions, Contingent Liabilities and Contingent Assets, with a corresponding debit to an asset account. The asset is then amortized over the life of the lease or the asset itself, while the obligation is accreted on a yearly basis to recognize the time value of money until such time that the obligation is settled.
Common examples where ARO must be recognized are: (1) an oil and gas depot, which should be returned without any trace of environmental hazards on and space where the lessee is required to dismantle all improvements and return the property to the lessor in its original state; and (3) a pipeline which should be locked or sealed at the end of its life. An even more specific example is several individual units; in this particular case, the lessee has to rebuild the partitions including soundproofing, reroute electric lines, and close portions of the integrated vents as a result of the partitions.
Similar to the retirement expense, ARO estimation may require work from experts who are likely to be engineers, geologists, architects and similar professions.
Next steps
Today is a good day to revisit your promises if your business or company is in any of the industries mentioned above, or one that is engaged in environmentally “unfriendly” materials, or one that simply utilizes huge office space, or is labor- intensive. While it may seem simple from this article, there are complexities in accounting for retirement pay and ARO. Indeed, the promises do not come cheap and I won’t be surprised if some companies, after considering associated costs, end up adjusting product prices or service fees just to maintain the desired margin.
Promise means hope, love, and sometimes involves deception . . . but one thing is for sure, an accounting promise goes straight to the books, or at least gets disclosed through the notes to financial statements.
Vote wisely and good cheers for CheM.JavieristheAssurance LeadPartnerfortheConsumerandIndustrialProducts andServicesIndustryofIsla Lipana&Co./PwCPhilippines.Emailyourcomments andquestionstomarkets@ ph.pwc.com.Thiscontentisfor generalinformationpurposes only,andshouldnotbeusedas asubstituteforconsultationwith professionaladvisors.