Considerations for reporting Asset Retirement Obligations by First Nations communities

What is an asset retirement obligation?

An asset retirement obligation (ARO) is the expected costs associated with the retirement of a tangible capital asset. This is the permanent removal of the asset from service and includes its sale, abandonment, or disposal and covers assets controlled by First Nations (on or off-reserve) and in or out of productive use, including leased assets.

PS 3280 Asset Retirement Obligations of the Public Sector Accounting Standards became effective on April 1, 2022 and replaced PS 3270 Solid Waste Landfill Closure and Post-Closure Liability. As such, there is now guidance for considering AROs related to all assets instead of just for landfills. Each asset should be considered for its legal obligation to require retirement activities. Retirement activities can include:

Retirement activities can include:

• Decommissioning or dismantling a tangible capital asset (TCA) that was acquired, constructed or developed
• Remediation of contamination of a TCA by its normal use
• Post-retirement activities such as monitoring
• Constructing other TCAs to perform post-retirement activities

While there are many possible TCAs that may have an ARO included in its costs, there are a few common examples to consider:

• Asbestos removal from homes, buildings, and structures
• Solid waste landfills
• Wastewater holding tanks and disposal fields – including water and wastewater lines, especially those with concrete asbestos or lead pipes
• Underground storage tanks
• Solar or wind energy generating equipment
• Reforestation of land subject to a timber lease
• Leased equipment

Depending on the condition of the asset, the amount of time estimated before retirement, and the cost to retire the asset, there is a potentially significant change to the liabilities reposted by a First Nation.

Navigating the ARO reporting process

The ARO standard is being implemented to support making better, more informed decisions around future resources and funding requirements. In the case of asbestos removal, this includes the health and welfare of employees, contractors, and members of the First Nation. To support those decisions, it is important to have timely, accurate, and complete information.

The first step is to review all the Nation’s TCAs that it controls or shares control of, whether located on-reserve or off. The next step is to determine which TCAs have a legal obligation to have retirement activities.

Determining legal obligations applicable to a First Nation and its assets has been a significant topic of debate and potential obstruction for adopting the new reporting standard.

A review and understanding of federal, provincial, and a Nation’s own legislation is the starting point. Research shows there is consistency around items such as asbestos management; however, landfills, wastewater, and other environmental factors can vary by jurisdiction and level of government.

Additional legal obligations can come from funding or operating agreements and other contracts. Even the public promise by Chief and Council can create a legal obligation which may result in the requirement to report an ARO. Approaching this process can be daunting but there are advisors who can help plan for and navigate this process.

From an audit perspective, having an identifiable plan to approach the assessment is almost as important as the conclusion and numbers. Auditors will be concerned about the completeness of the ARO being reported. Therefore, the assessment process should be robust enough and documented to support the First Nations conclusion on what AROs are being or not being reported.

Managing TCA and ARO information

Once an ARO is identified, the measurement of the liability is an estimate that requires consideration of the reasonableness and accuracy of the items used to create the estimate. Sufficient effort needs to be put into sourcing good information for the estimate such that the information reported in the financial statements. Having all of this information heading into the process leads to good decisions.

An asset management system will be valuable to any entity who needs to manage many TCAs. Whether its an automated system tied to the accounting software or a manual system reported in a spreadsheet, a First Nation should have a system to manage their assets to help make better decisions on the cost to use, repair, replace, and fund their TCAs.

The Public Sector Accounting Standards are designed to help with decision making; PS 3280 Asset Retirement Obligations joins PS 3150 Tangible Capital Assets and PS 3260 Contaminated Sites in helping government entities consistently report the financial considerations of TCAs and their related liabilities within the financial statements.

Every Nation will have a different approach to the ARO process, and MNP advisors are experienced in supporting communities throughout the process and for years down the road.

Working closely with an advisor will help Nations maximize the life cycle of their assets, mitigate health and safety risks, ensure assets meet codes and standards, plan for replacement, and much more.

Contact us

To learn more about how you can get help throughout the ARO process, contact Keith Fonstad, National Leader, Indigenous Audit & Assurance Services, at [email protected]. For more information on asset management systems, contact Matt Hamilton, Consulting Services, at [email protected].