BP p.l.c. (2010)
1 Significant accounting policies [extract]
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reasonably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites.
The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure.
Decommissioning [extract]
Liabilities for decommissioning costs are recognized when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Where an obligation exists for a new facility, such as oil and natural gas production or transportation facilities, this will be on construction or installation. An obligation for decommissioning may also crystallize during the period of operation of a facility through a change in legislation or through a decision to terminate operations. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements.
A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recognized. This is subsequently depreciated as part of the asset.
Other than the unwinding discount on the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding item of property, plant and equipment.
Illustration of IFRIC 6 requirements
An entity selling electrical equipment in 2008 has a market share of 4 per cent for that calendar year. It subsequently discontinues operations and is thus no longer in the market when the waste management costs for its products are allocated to those entities with market share in 2013. With a market share of 0 per cent in 2013, the entity’s obligation is zero. However, if another entity enters the market for electronic products in 2013 and achieves a market share of 3 per cent in that period, then that entity’s obligation for the costs of waste management from earlier periods will be 3 per cent of the total costs of waste management allocated to 2013, even though the entity was not in the market in those earlier periods and has not produced any of the products for which waste management costs are allocated to 2013. [IFRIC 6.BC5].
The Interpretations Committee concluded that the effect of the cost attribution model specified in the Directive is that the making of sales during the measurement period is the ‘past event’ that requires recognition of a provision under IAS 37 over the measurement period. Aggregate sales for the period determine the entity’s obligation for a proportion of the costs of waste management allocated to that period. The measurement period is independent of the period when the cost allocation is notified to market participants. [IFRIC 6.BC6].
Some constituents asked the Interpretations Committee to consider the effect of the following possible national legislation: the waste management costs for which a producer is responsible because of its participation in the market during a specified period (for example 2013) are not based on the market share of the producer during that period but on the producer’s participation in the market during a previous period (for example 2012). The Interpretations Committee noted that this affects only the measurement of the liability and that the obligating event is still participation in the market during 2013. [IFRIC 6.BC7].
IFRIC 6 notes that terms used in the interpretation such as ‘market share’ and ‘measurement period’ may be defined very differently in the applicable legislation of individual Member States. For example, the length of the measurement period might be a year or only one month. Similarly, the measurement of market share and the formulae for computing the obligation may differ in the various national legislations. However, all of these examples affect only the measurement of the liability, which is not within the scope of the interpretation. [IFRIC 6.5].