Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the April 29, 2008 issue of the Bangkok Post.

By Krit Chatchavalwong

It's 2011 and a Thai company has just put the finishing touches on its latest project, an oil rig in the Gulf of Thailand. VIP guests arrive by helicopter for the opening ceremony, and executives toast to the completion of the project. The colossal size of the rig is awe-striking, and the challenge of constructing such a structure escapes no one. So who should already be thinking about the cost of tearing this oil rig down? Probably most of the people who put it up.

The cost of asset dismantlement, removal and restoration is substantial, and how this cost should be reflected in a company's financial statements is set to become a hot topic in Thailand.

What is propelling this discussion?

In the past, entities rarely thought about their obligation to dismantle, remove and restore property. The reason for this was because it seemed far removed from their immediate business due to its long life cycle, and the difficulty inherent in trying to estimate these costs. However, in light of current changes to the Thai Accounting Standards (TAS), companies in Thailand will soon be required to account for these costs.

As a result, the question arises whether the dismantling, removal, and restoration costs should be recognised as expenses in the statement of income when they are incurred, or should they be capitalised as part of the cost of the new asset.

Who is responsible for the costs?

Dismantling, removal, and restoration costs are considered a directly attributable cost to bring an asset to working condition under International Accounting Standard (IAS) 16 ''Property, Plant and Equipment''. All such costs must be estimated in accordance with IAS 37 ''Provisions, Liabilities and Contingent Assets'', and capitalised at the date the obligation to dismantle, remove, and restore is incurred.

In the past, the definition of the elements of cost of an asset under TAS 32 ''Property, Plant and Equipment'' was one step behind IAS 16. However, the addition of the wording ''the initial estimated costs of dismantling and removing the items and restoring the site on which they are located, the obligation for which arises either when the items are acquired or as a consequence of having used the items during a particular period for purposes other than producing inventories during the period'' will be added to TAS (revised) 32 to bring it in line with IAS 16.

This means that firms will be required to consider and recognise the obligation related to their assets upon acquisition. The entire amount of the obligation will be capitalised as part of the related asset and depreciated to the statement of income over the asset's useful life.

How can management measure these future costs?

In practice, the payment of asset dismantlement, removal and restoration costs will not be made in the near future, and in fact it could be several decades before the payments are made. While there will be uncertainty over the amount of cash flows and the timing of payment, management should record its best estimate of the entity's obligations to prepare for this eventuality.

Cash flows are discounted when calculating the provision to reflect the delayed payment. The amount recorded as a component of the asset cost and initial provision is the amount of estimated cash flows, discounted from the date payments are expected to be made.

The costs added to the asset are depreciated in line with the depreciation methodology selected for the asset. The provision is accreted to undiscounted value over time by the recognition of the discount as interest expense. By the end of the asset's useful life, when the dismantlement, removal and restoration costs will be paid, the full estimate of these costs will have been recognised in the statement of income through depreciation and interest expense.

Who should monitor changes to the estimated costs?

Management should periodically reassess the estimated accrued costs to see if there are any material changes that need to be reflected. New environmental or restoration rules may cause a significant increase in the amount of work that will be required. Equally, specific costs may change and this may be clear with the passage of time. The International Financial Reporting Interpretations Committee (IFRIC) proposes that material changes to the estimate of the provision, whether to the cash flows or the discount rate, are reflected by adjustments to provision and shall be added to, or deducted from the cost of related assets in the current period.

How will this affect Thai businesses?

In Thailand, the dismantling, removal and restoration costs should not have a significant effect on small- to medium-sized entities. It will be the large entities that employ expensive and complex production assets that will be affected most. These costs may be significant in particular for oil, gas and utility companies. Entities cannot ignore their obligation because their treatment of this will give a clear reflection of the actual cost of doing business.