The cost of clean up
New research funded by ICAS finds that ambiguity about IAS 37 may be handing the cost of long-term liabilities to the public.
There has been a focus in recent years on increasing the amount of sustainability reporting firms provide to the market and the broader stakeholder community. But existing international accounting rules could, with improvement or better application, help stimulate organisations into being more transparent in their presentation of the costs of decommissioning and clean-up operations in pollution-prone industries.
When a company acquires certain types of long-term assets, such as an oil rig or a nuclear power plant, it incurs an inherent obligation to remove the assets, and clean-up and restore the site once the asset has reached the end of its useful life. And a critical issue crystallises where such a company becomes insolvent – the clean-up liability remains attached to the asset, which may therefore become less attractive to a potential buyer, and so, if eventually the asset remains unsold, the taxpayer ends up picking up the cost of decommissioning.
This issue is the focus of a new ICAS-funded paper, Black box accounting: Discounting and disclosure practices of decommissioning liabilities, by Giovanna Michelon from the Universities of Bristol and Exeter, Mari Paananen from the University of Gothenburg and Thomas Schneider from Ryerson University.
The research considered whether accounting according to IAS 37: Provisions, Contingent Liabilities and Contingent Assets is designed and applied not only in the best interests of investors and creditors but also in those of the general public. It found that, across more than 3,000 examples of reporting in the mining, utilities and oil and gas sectors, substantial variation exists in the choice to disclose the discount rate, along with various adjustments that make comparison difficult.
To increase transparency of presentation of the costs of decommissioning and clean-up operations, and therefore also hopefully increase corporate responsibility for managing these clean-ups, the report ultimately recommends that:
- Standard setters require disclosing the discount rates applied to facilitate comparability and allow for users of financial statements and other key stakeholders to see inside the ‘black box’ of accounting for decommissioning liabilities;
- Preparers include and auditors demand enhanced disclosures, to include not only the discount rate but also undiscounted future estimated cash flows and timing of decommissioning activities, augmented by a comprehensive narrative on the major uncertainties surrounding these three items.
To find out more read the full report