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I am unable to understand this IFRIC 5 interpretation. Can u elaborate this please and what would be the accounting entries for recording liability and interest in the fund?.
in IAS 37 - Provisions, Contingent Liabilities and Contingent Assets by

1 Answer

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IFRIC 5 applies to accounting in the financial statements of a contributor for interests arising from decommissioning, restoration and environmental funds (hereafter referred to as ‘decommissioning funds’) that have both of the
following features:
· The assets are administered separately (either by being held in a separate legal entity or as segregated assets within another entity)
· A contributor’s right to access the assets is restricted.
Residual interests in funds that extend beyond a right of reimbursement may be an equity instrument within the scope of IAS 39 Financial Instruments: Recognition and Measurement, and is scoped out of IFRIC 5.

Let me give you a brief, simple example to illustrate this extremely complex topic.


Let’s say your experts estimated the expenses to decommission the plant.

Their estimate is in the following table:

Year    Expenses
20X31    400
20X32    500
20X33    600
20X34    550
20X35    250

On top of that, the experts estimate the annual expenses of CU 100 to remove the radioactive waste caused by the plant’s operations during its useful life.

All expenses are stated in the real prices (20X1).

Based on recent economic development, you assume that the inflation rate will be 1.5% p.a. and the appropriate discount rate is 2%.

Calculate a provision to decommission the plant and recognize it in the financial statements.


Once we have our experts’ report, estimates of inflation and discount rate, we verified everything, etc., we need to:

Inflate the cash flows, because they are stated in the current prices; and
Discount them to a present value
Be careful, because you should not include the estimated expenses for removal of radioactive waste into the initial provision.

The reason is that the obligation arises when the plant is in operation and therefore, you need to recognize a relevant provision needs when a plant operates and produces radioactive waste (in profit or loss).

The initial measurement of a provision for decommissioning the plant is shown in the following table:

Year    N. of years from 20X1 (A)    Expenses (B)    Expenses inflated at 1.5% p.a. (C)    Discount factor at 2% p.a. (D)    Present value (E)
20X31    30    400    625    0.552    345
20X32    31    500    793    0.541    429
20X33    32    600    966    0.531    513
20X34    33    550    899    0.520    468
20X35    34    250    415    0.510    212
Total    n/a    2 300    3 698    n/a    1 967


Expenses inflated at 1.5% p.a. (C) = B * 1.015 to the power of (A)
Discount factor at 2% (D) = 1/(1.02 to the power of (A))
Present value (E) = (C)*(D)

The journal entry is:

Debit Property, Plant and Equipment (nuclear power plant): CU 1 967

Credit Provision for Decommissioning: CU 1 967
When there’s no change in estimates in the subsequent reporting period, you need to unwind the discount. Therefore, journal entry in 20X2 is:

Debit P/L – Finance Expenses: CU 39 (1 967*2%)

Credit Provision for Decommissioning: CU 39

Now, let’s say that in 20X3, your estimate of the discount rate changes to 1.8% and all the other estimates (cash flows) remain unchanged.

You need to recalculate the provision and account for its changes under IFRIC 1.

Just be careful, because now you are in 20X3, not in 20X1 and therefore, the number of years for discounting change (not for inflating the costs, as you still inflate from the date of your report).

The new table could look something like this:

Year    N. of years from 20X3 (A)    Expenses (B)    Expenses inflated at 1.5% p.a. (C from previous table)    Discount factor at 1.80% p.a. (D)    Present value (E)
20X31    28    400    625    0.607    379
20X32    29    500    793    0.596    473
20X33    30    600    966    0.586    566
20X34    31    550    899    0.575    517
20X35    32    250    415    0.565    234
Total    n/a    2 300    3 698    n/a    2 169
You can see that the revised provision of CU 2 169 is different from the currently recognized provision.

Assuming you use cost model for your power plant, you need to recognize the change in the cost of a plant.

Before we recognize this change in line with IFRIC 1, we must not forget to unwind the discount for 20X3, too:

Debit P/L – Finance Charges: CU 40 ((1967+39)*2%)

Credit Provision for Decommissioning: CU 40

Then, we can recognize the change in the provision:

Debit PPE (Nuclear power plant): CU 123 (2 169 – (1 967+39+40))

Credit Provision for Decommissioning: CU 123

Finally, when a company starts decommissioning – i.e. removing the plant and restoring the site, then all expenses are charged against the provision:

Debit Provision for Decommissioning: CU XXX

Credit Cash/Bank Account/Suppliers: CU XXX
by Level 4 Member (9.8k points)
Thank you for ur time but can you please explain the accounting entries for the interest in fund.