Rescinded [2023-12-13] - Future Asset Restoration Liability: A Supplement to the Financial Information Strategy (FIS) Manual

A department constructs an observation tower on leased land, on the condition that it restores the site to its original condition at the end of the lease term.

The tower cost $1,000,000 to construct and it is estimated that the initial discounted cost to dismantle and remove the tower at the end of the 10-year term is $150,000 (current market quote). At end of Year 2, an additional present value amount of $10,000 is estimated to be required to clean up the site.

FRA coding rationale:

The $1,000,000 cost to construct the tower and the $150,000 in future asset restoration costs are capitalized as part of the asset balance using 16113. The $150,000 credit is to liability account 24112, which will remain until the restoration work is performed 10 years later. Since the department has not yet paid for the tower, a payable must be recorded for the amount owing using 21111. At the end of Year 2, the additional $10,000 in site clean-up costs is estimated and added to the asset using 16113 and to the liability using 24112.

Authority coding rationale:

In this example, it is assumed that the cost of the observation tower would be charged to B14A. However, depending on the department and the asset involved, other authority codes could be used, such as B11A/B12A"or A131. As the costs associated with the future asset restoration will only be disbursed in the future, F359 is used for the asset and F419 is used for the liability. As usual, R300 is used for the accounts payable.

• B14A: Capital Vote
• B11A/B12A: Program Expenditures or Operating Expenditures Vote
• A131: Spending of Amounts Equivalent to Proceeds from Disposal of Surplus Moveable Crown Assets.
• F359:Other Non-Appropriated Amounts Added to or Deducted from Asset Balances
• F419: Charges to Other Accruals and Allowances
• R300: Total (or Net, as applicable) Amounts of All Other Assets and of All Other Liabilities

Note: For further details related to A131, please see Sections 13–15 of the Surplus Crown Assets Act.

Object coding rationale:

Object code 1339 is used to record the cost of the observation tower. Object code 7099 is used for the increase in asset value due to future asset restoration costs and 7029 is used for the corresponding liability. Object code 6299 is used to establish the accounts payable.

• 1339: Other Engineering Works
• 7099: Net Increase or Decrease in Other Transactions
• 7029: Other Allowances
• 6299: Net Increase or Decrease to Other Liability

FRA coding rationale:

Using straight-line amortization of 10 years, the cost of the asset and future asset restoration costs are allocated over the useful life of the asset. Amortization Expense at end of Year 1 and 2 would be $115,000 ($1,150,000 [divided by] 10 years). Starting end of Year 3, Amortization Expense would be $116,250 [($1,150,000 [minus] $230,000 [plus] $10,000) [divided by] 8 years].

If there is a salvage value of $20,000 discounted, that is expected from selling the dismantled structure at the end of the term, the amount to be amortized would be $980,000 ($1,000,000 [minus] $20,000) and Amortization Expense at end of Year 1 and 2 would be $113,000 [($980,000 [plus] $150,000) [divided by] 10 years]. Starting end of Year 3, Amortization Expense would be $114,250 [($980,000 [plus] $150,000 [minus] $226,000 [plus] $10,000) [divided by] 8 years].

Authority coding rationale:

F111 and F-311 are used because expenditures for the construction of the tower were charged to an appropriation in the previous journal entry. Accordingly, the appropriation is not affected when the amortization expense of the constructed tower is recorded.

• F111: Amortization Expenses for Capital Assets
• F311: Increases (Decreases) to Accumulated Amortization of Capital Assets

Object coding rationale:

3451 and 7061 are used as these are non-cash (non-expenditure) items that they have no effect on economic objects.

• 3451: Amortization Expenses for Capital Assets
• 7061: Accumulated Amortization on Capital Assets

FRA coding rationale:

The present value adjustment is calculated by multiplying the closing balance of the previous fiscal year's future asset restoration liability by the CPI factor. See "Other Misc Expenses" column in Appendix B. The present value adjustment is debited to a miscellaneous expense account 51729 and credited to the future asset restoration liability account 24112.

Authority coding rationale:

F120 and F419 are used because the costs associated with the future asset restoration will only be incurred in the future.

• F120: Expenses Related to the Increase in the carrying amount of an asset restoration liability due to the passage of time
• F419: Charges to Other Accruals and Allowances

Object coding rationale:

Object code 3469 is used for operating expenses relating to the inflation adjustment and 7029 is used for the corresponding liability. The resulting liability balance is the estimated fair value of the future asset restoration liability at year-end.

• 3469: Charges to Other Liability Accounts
• 7029: Other Allowances

Scenario A - Ten years have passed and the lease period has ended.  The tower is dismantled and removed and the site is restored to its original condition.

The balance of the future asset restoration liability is $194,566 ($150,000 [plus] $10,000 [plus] present value adjustments of $34,566). However, the actual demolition of the tower and clean-up costs amount to $175,000 (a) or $210,000 (b).

FRA coding rationale:

Debit 24112 to settle the liability of $194,566 ($150,000 [plus] $10,000 [plus] present value adjustments of $34,566) that was originally recorded as the estimated future asset restoration costs. A credit to 21111 for the actual restoration cost and to set-up the accounts payable is recorded. The difference between the liability balance and the actual accounts payable is credited or debited to 51729.

Authority coding rationale:

Given this is a legitimate charge against an appropriation, the actual restoration costs are charged to the capital vote, B14A, or to other appropriate authorities, such as B11A/B12A or A131. The excess in the liability balance over the actual restoration cost in (a) shall be reversed against F419, the original authority code used. As Accounts Payable does not have an impact on authorities, R300 is used.

• B14A: Capital Vote
• B11A/B12A: Program Expenditures or Operating Expenditures Vote
• A131: Spending of Amounts Equivalent to Proceeds from Disposal of Surplus Moveable Crown Assets
• F419:Charges to Other Accruals and Allowances
• R300: Total (or Net, as applicable) Amounts of All Other Assets and of All Other Liabilities

Object coding rationale:

Object codes 0819, 0499 or other professional service codes can be used for the restoration costs, depending on the nature of the services. 6299 is used to establish the accounts payable.

• 0819: Non-Professional Personal Service Contracts Not Elsewhere Specified
• 0499: Other Professional Services Not Elsewhere Specified
• 3469: Charges to Other Liability Accounts
• 6299: Net Increase or Decrease in Other Liability

(c) To record the sale of the capital asset and related gain

Scenario B - Five years have now passed, and the department chooses to sell the capital asset to an outside buyer for $600,000.

Please follow Treasury Board Directive on the Sale or Transfer of Surplus Real Property for sale procedures and access to the sale proceeds.

FRA coding rationale:

The liability of $176,224 ($150,000 [plus] $10,000 [plus] present value adjustments of $16,224) that was recorded as the estimated future asset restoration costs is debited. The asset is credited by its historical cost and the related accumulated amortization is debited, which removes them from the system. The difference between the proceeds less the net book value of the capital asset and the future asset restoration costs is credited as a gain (or debited as a loss as is appropriate).

Authority coding rationale:

Because the cash received has no impact on authority, R300 is used. D321, which is a restricted spending authority code for the disposal of surplus Crown assets, is used for the remaining debits and credits.

• R300: Total (or Net, as applicable) Amounts of All Other Assets and of All Other Liabilities
• D321: Proceeds from Disposal of Moveable Surplus Crown Assets

Object coding rationale:

As economic objects are recorded on an expenditure basis, 5299 is used to record the net impact on the cash account and 4843 is used to record the proceeds from the sale

• 4843: Sales of Surplus Crown Assets
• 5299: Net Increase or Decrease in Cash Account