Accounting for decommissioning, restoration and similar provisions to make good (RMG 114)

Introduction

Many entities have obligations to dismantle, remove and restore items of PPE – often referred to as ‘make good’. For example, an entity that leases premises may be required to make good the premises, by restoring it to its original condition at the end of the lease.
Under paragraph 16c of AASB 116, the cost of an item of PPE includes the initial estimated cost of dismantling, removing and restoring an item (i.e. make good costs), where the obligation was incurred either:
- when the item was acquired, or
- as a consequence of having used the item.

Example 1: Make good costs

Make good costs include the costs of:

dismantling (e.g. taking apart a piece of machinery for its removal from the site)
removing (e.g. transporting an aircraft to a disposal facility, due to a condition of purchase being that it must be disposed of in a particular manner)
restoration (e.g. returning a leased office building to its original condition).

The initial measurement of the provision for make good costs (where the effect of the time value of money (TVOM) is material) is the present value of expected expenditures to settle the obligation – for illustrative examples (IEs) on estimating the expected expenditure, see Appendix A.
Accounting for changes to make good provision estimates differs, according to whether the related asset is held at cost or fair value (including for changes due to revised timing or amount of settlement payments or changes in the discount rate).
Where the related asset is:

held at cost:
- an increase (decrease) in the provision leads to an increase (reduction) in the cost of the related asset. However, any reduction to the related asset should not exceed its carrying amount, with any excess recognised as a gain
held at fair value:
- an increase in the make good provision is recognised as an expense – unless there is a balance in the asset revaluation reserve (ARR) for the relevant asset class, in which case the ARR is debited
- a decrease in the make good provision would be credited to the ARR – unless a revaluation decrement had previously been recognised in the operating statement for that asset class, in which case a gain would be recognised.

A model for the accounting of changes in make good provision estimates (i.e. for revised timing or amount of settlement payments or changes in the discount rate) is at Appendix B.

Part 1 – Initial recognition and measurement

Paragraph 14 of AASB 137 requires make good obligations to be recorded as ‘liabilities’ where:
- there is a present obligation (legal or constructive) that has arisen from a past event
- there is a probable outflow of resources
- the eventual payment amount can be reliably estimated.

Present value

Under paragraphs 36-52 of AASB 137, the initial measurement of the provision is to be the best estimate of expenditure needed to settle the present obligation at the end of the financial reporting period.

Example 2: Estimating the expenditure required to settle the obligation

A common method of estimating the expenditure required to settle the obligation is to:

obtain a reasonable ‘at present’ estimate of the expenditure required to make good the asset (e.g. with quotes based on past experience in similar situations), then
adjust the estimate, using inflationary measures such as the Consumer Price Index or building price indices, to derive expenditure required in a future reporting period.

An example showing the process for estimating the expenditure required to settle the present obligation at the reporting date, is included at Appendix A - IE1.
Under paragraph 45 of AASB 137, where the TVOM is material, the provision should be discounted to reflect the present value of the estimated expenditures. Where the TVOM is not material, discounting is not required.

Make good provisions capitalised

On initial recognition, make good provisions should be capitalised to the related asset. Under paragraph 16 of AASB 116, the cost of an item of PPE includes the:

purchase price, including duties and taxes
directly attributable costs (see the examples at paragraph 17 of AASB 116)
make good costs.

Under paragraph 24 of AASB 16, the cost of a leased right-of-use (ROU) asset includes:

the initial measurement of the lease liability
lease payments made at or before the commencement date, less any lease incentives received
initial direct costs
estimated make good costs.

Where lessee make good obligations arise from normal wear and tear on the leased asset, the make good provision should be capitalised to the ROU asset. For example, if the lease contract requires the lessee to repaint the premises or service the air conditioning and lift systems at lease end, the lessee’s make good provision should be capitalised to the ROU asset.

However, where make good obligations relate to lessee leasehold improvements, the make good provision should be capitalised to the lessee’s leasehold improvement – not the ROU asset. The Central Budget Management System (CBMS) account details, for the initial recognition of a make good provision capitalised to leasehold improvements, are:

CBMS journal entries: Initial recognition of make good provision capitalised to leasehold improvements

Dr/Cr	CBMS account	Mmt* Code	CBMS account description
Dr	5310000	7121	L&B, IPE and Intangible Assets^
Cr	5220002		Cash at bank (or other appropriate account)
Cr	3381008		Provisions for restoration, decommissioning and make good

^{* Movement (Mmt) code}

^{^ Even though the above journal entry does not separate the make good component of the asset, entities may find it useful to show this separately in the asset register/ledger. This will assist entities when applying revaluations and impairment requirements on the assets.}

Part 2 – Subsequent accounting

Unwinding of the discount

Where the TVOM is material, the make good provision should be discounted to reflect the present value of the estimated expenditures.
The unwinding of the discount effectively increases the make good provision each year, to reflect the passage of time – where the TVOM is material, the periodic unwinding of the discount:

increases the make good provision
is recognised in the operating statement as a finance cost (capitalisation of this cost is disallowed under paragraph 8 of AASB Interpretation 1).

17. The unwinding of the provision should be recognised before revising the provision for any estimate changes.

Example 3: Unwinding of the make good provision

Using the scenario at IE1, where:

$50,000 is to be paid in five years (i.e. in 2025) to make good a premises
a 10% discount rate applies.

The unwinding of the provision is shown below.

Year	Provision Value ($)	Finance Cost (Unwinding of Provision) ($)
2020	31,046
2021	34,151	3,105
2022	37,566	3,415
2023	41,322	3,756
2024	45,455	4,133
2025	50,000	4,545


The value of $50,000 in 2025 is equivalent to $31,046 in today’s terms (at 2020) – i.e. if $31,046 is invested in 2020 at a rate of 10%, it would be worth $50,000 in 2025. However, at 2021: the initial make good provision of $31,046 is no longer sufficient to settle the liability of $50,000 in four years (at 2025) – the present value of $50,000 in 2021 is $34,151 the entity must increase the make good provision by $3,105 (i.e. the difference between the present value of $34,151 at 30 June 2021 and the present value of $31,046 at 30 June 2020).

Changes in make good provision estimates

Changes in the measurement of a make good provision may result from a change in the:

estimated timing of payments on settlement
estimated amount that will eventually be required to settle the obligation, or
discount rate.

Changes in make good provision estimates must be accounted for in accordance with AASB Interpretation 1.
Under paragraph 59 of AASB 137, entities are to review the make good provision at each reporting date and make adjustments to reflect the current best estimate. Where it is no longer probable that the entity will be required to settle the obligation, the make good provision should be reversed.

Example 4: Re-measurement of the make good provision for timing changes in estimates

Using the scenario at IE1, if at the end of the lease term the entity extends the lease and does not make good the property at that time:

the entity would be required to remeasure the provision to take into consideration this delay (rather than derecognising the provision)
the adjustment to the provision would be recognised in the operating statement (as the related leasehold improvement asset is fully depreciated).

Under section 17 of the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR), accounting for these changes depends on whether the related asset is measured:

under the cost model, or
at fair value under the revaluation model.

The cost model

Under paragraph 24 of AASB 16, make good provisions may be included in the initial recognition of lease ROU assets. This would occur for leases that commenced after the AASB 16 transition date of 1 July 2019, where the make good obligation does not relate to leasehold improvements undertaken by the lessee.
Section 17 of the FRR requires ROU assets to be measured at cost. For:

an increase in the make good provision – add this to the cost of the related ROU asset
a decrease in the make good provision – deduct this from the cost of the ROU asset, however, the amount of the reduction should not exceed the carrying amount of the ROU asset (any excess is to be recognised as a gain).

Example 5: Example of accounting for decreases in the make good provision

For this example:

an entity revised its estimate of the make good provision downwards by $75,000
the related ROU asset initially cost $600,000
the related ROU asset has accumulated depreciation of $550,000.

In accounting for this example, as the deduction amount ($75,000) exceeds the carrying amount of the asset ($50,000), the entity deducts $50,000 from the ROU asset and the excess of $25,000 is recognised as a gain.

An increase in the cost of the ROU asset may indicate that the asset is not fully recoverable – where this occurs, consider testing for impairment under AASB 136 Impairment of Assets.
Where the related PPE asset is at the end of its useful life, all subsequent changes to make good provisions are recognised in the operating statement as they occur.

CBMS journal entries: Increase in make good provision where ROU asset is measured at cost

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	5311002	7321	Buildings
Cr	3381008		Provisions for restoration, decommissioning and make good

CBMS journal entries: Decrease in make good provision where ROU asset is measured at cost

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	3381008		Provisions for restoration, decommissioning and make good
Cr	5311002	7321	Buildings

For more information on the decrease of a make good provision under the cost model, see Example 1 at paragraph IE2 of AASB Interpretation 1.

The revaluation model

PPE assets may be measured at fair value under AASB 116, including leasehold improvement assets to which make good costs have been capitalised.
Entities should identify whether an allowance for make good has been included or excluded in the asset valuation. For more information on the importance of understanding the basis of the valuation, see Example 2 at paragraph IE6 of AASB Interpretation 1.

Example 6: Valuation using the depreciated replacement cost valuation method

Three years into its useful life of ten years, an asset is revalued to $1,000 using the depreciated replacement cost method. The valuer determined that the present value of the make good liability is now $100. As a result:

the entity determines that $100, less the accumulated depreciation of $30 ($100/10*3), should be added to the depreciated replacement cost valuation amount
the asset is revalued to $1,070.

General accounting for revaluations

To understand the accounting for changes in make good provisions under the revaluation model, entities should first understand the general treatment of asset revaluations.
For not-for-profit entities, for:

a revaluation increase in the carrying amount of a class of PPE assets – this must be credited to the ARR (or recognised as a gain to the extent the revaluation increase reverses a decrease for the same class of PPE assets previously recognised as an expense)
a revaluation decrease in the carrying amount of a class of PPE assets – this will be recognised as an expense (or debited directly to the ARR to the extent a credit balance exists in the ARR in respect of that class of assets).

CBMS journal entries: Revaluation increase in a PPE asset class

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	5310000	7122	L&B, IPE and Intangible Assets
Cr	1265005		Reversal of previous asset write down*
Cr	4100011	7231	Asset Revaluation Reserve ^

^{* Where previous revaluation decrements have been recognised in the operating statement for that asset class.}

^{^ Movement code depends on the PPE asset class.}

CBMS journal entries: Revaluation decrease in a PPE asset class

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	4100011	7231	Asset Revaluation Reserve *
Dr	2254000		Write down and impairment of non-financial assets
Cr	5310000	7122	L&B, IPE and Intangible Assets

^{* For an existing balance in the ARR for that asset class, the movement code depends on the PPE asset class.}

Changes in make good provision estimates under the revaluation model

31. Changes in make good provision estimates under the revaluation model are the reverse of revaluations of the related asset – except for the account affected (asset or provision). Therefore, for:

an increase in the make good provision – this is recognised as an expense (similar to a revaluation decrease of an asset), except to the extent of any credit balance in the ARR for that asset class in which case the ARR is debited
a decrease in the make good provision – this is credited to the ARR (similar to a revaluation increase of an asset), except to the extent that the decrease reverses a revaluation decrease for that asset class previously recognised as an expense, in which case the decrease in the provision is credited as a gain. Where the decrease in the provision exceeds the carrying amount of the asset that would have been recognised under the cost model, the excess is recognised as a gain.

32. Where the related PPE asset is at the end of its useful life, all subsequent changes to make good provisions are recognised in the operating statement as they occur.

33. A change in the provision may also indicate that the related asset should be revalued. If a revaluation is necessary, all assets of that class must be revalued. These revaluations are taken into account in determining the amounts to be recognised in the operating statement or other comprehensive income (OCI).

CBMS journal entries: Increase in make good provision under revaluation model

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	4100011	7231	Asset Revaluation Reserve*
Dr	2254000		Write down and impairment of non-financial assets (excess, if any)
Cr	3381008		Provisions for restoration, decommissioning and make good

^{* For an existing balance in the ARR in respect of the asset class, the movement code depends on the PPE asset class.}

CBMS journal entries: Decrease in make good provision under revaluation model

Dr/Cr	CBMS account	Mmt Code	CBMS account description
Dr	3381008		Provisions for restoration, decommissioning and make good
Cr	1265005		Reversal of previous asset write down*
Cr	4100011	7231	Asset Revaluation Reserve (excess, if any)^

^{* For a previous revaluation decrement for the relevant asset class recognised as an expense.}

^{^ Movement code depends on the PPE asset class.}

Derecognising provisions

34. If on settlement the full make good provision was not derecognised, a provision reversal should be recognised as a gain in the operating statement.

Selecting discount rates

Extract: AASB 137

Paragraph 47: The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.

35. Entities need to carefully consider the discount rate applicable to all provisions, including for make good, to reflect the risks. Discount rates for make good provisions:

should not be set by simply using discount rates that apply to other provisions or other types of liabilities (e.g. a risk free or government bond rate may only be applicable if all other risks have been factored into the cash flow estimates)
are not to reflect risks where future cash flow estimates have been adjusted as this would double-count risk calculations.

Part 3 – Disclosure requirements

Make good provisions are a separate class of provisions that are to be disclosed in accordance with the requirements of AASB 137.
Under paragraph 84 of AASB 137, a movement schedule is required for the current year only.
Under paragraph 85 of AASB 101 Presentation of Financial Statements, the changes in the ARR resulting from changes in make good provisions may be a separate OCI line item – where it is considered relevant to understanding an entity’s financial performance.

Part 4 – Budget implications

The impact on budget aggregates of transactions at different stages in the lifecycle of a make good provision are shown in the following table.

Impact on budget aggregates in the lifecycle of a make good provision

Transaction	Fiscal balance	Underlying cash balance
Recognise make good provision	Worsen – due to movement in non-financial assets (NFAs)	Nil impact (no cash inflow/outflow)
Unwinding of the discount	Worsen – interest expense reduces net operating balance	Nil impact (no cash inflow/outflow)
Changes in the make good provision due to change in provision estimates	Generally nil impact – as the change in provision is usually due to price or timing changes and treated as a revaluation expense classified as another economic flow. If the change in provision is due to additional or less make good requirements, the amount will impact on fiscal balance	Nil impact (no cash inflow/outflow)
Make good payments	Nil impact – no impact on net operating balance from operations or NFAs	Worsen

Appendix A – Illustrative examples

The following IEs show the accounting treatment for a make good provision, including the initial recognition and subsequent change in provision estimates, where the provision is:

for leasehold improvements – where the make good provision is accounted for as a component of the leasehold improvement asset and measured at fair value, see:
- IE1: Make good provision capitalised to lessee leasehold improvements
- IE2: Increase in provision capitalised to leasehold improvements held at fair value

These IEs would also be applicable for any other make good provisions relating to PPE assets measured at fair value.

for a lease commencing after the AASB 16 transition date – for a lease that commenced after 1 July 2019, where the make good provision does not relate to leasehold improvements by the lessee and is capitalised as a component of the lease ROU asset, measured at cost (under paragraph 24(d) of AASB 16), see:
- IE3: Initial make good provision capitalised to a ROU asset
- IE4: Increase in provision capitalised to a ROU asset held at cost
changed because of a revised discount rate or timing of payments – the same accounting requirements apply to a change in make good provision due to a changed estimated amount to settle the obligation, a revised discount rate or a change in the timing of payments. For these accounting requirements, see:
- IE2: Increase in provision capitalised to leasehold improvements held at fair value
- IE4: Increase in provision capitalised to a ROU asset held at cost

IE1: Make good provision capitalised to lessee leasehold improvements

Scenario: On 1 July 2018, an entity entered into a lease for an office block for a period of 5 years and made $200,000 worth of leasehold improvements (capitalised as an asset by lessee). The contract specifies that the entity must make good any leasehold improvements on the premises at the end of the lease term. For this scenario:

the lease was accounted for as an operating lease in 2018-19 under AASB 117 Leases
on initial application of AASB 16, on 1 July 2019, a lease liability and ROU asset of $1,000,000 was recognised
on initial application of AASB 16, on 1 July 2019, a lease liability and ROU asset of $1,000,000 was recognised
the leasehold improvements asset will include an estimate of the cost of making good the premises at the end of the lease and the entity estimated that, at 1 July 2018, it would cost approximately $40,000 to return the building to its original condition
assume the entity depreciates PPE on a straight-line basis a discount rate of 10% applies and inflation is estimated at 4.5% per annum.

Accounting treatment

Initial accounting

To determine the expenditure required at the end of the lease (at 30 June 2023), the entity projects the current value of the $40,000 using an inflationary measure of 4.5% as follows:

Future value (FV) = Present value x (1 + inflation rate) ^{Time period}
= $40,000 x (1.045)⁵ = $50,000

As the TVOM is material, the $50,000 provision is discounted to its present value (PV). The following formula shows the process applied in calculating the PV:

Present value (PV) = FV / (1 + discount rate) ^{Time period remaining}
= $50,000 / (1.10)⁵ = $31,046

At 1 July 2018, the following journal is posted to recognise the leasehold improvement asset and the associated make good provision:

CBMS journal entries: Recognition of leasehold improvement asset and make good provision

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	5311002	7121	Buildings - Leasehold improvements (asset)	231,046
Cr	5220000		Cash	200,000
Cr	3381008		Provisions for restoration, decommissioning and make good	31,046

On 1 July 2019, a lease liability and ROU asset under AASB 16 is recognised.

CBMS journal entries: Recognition of lease liability and ROU asset

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	5311002	7332	ROU Asset – Gross Value Adjustments	1,000,000
Cr	3240102		Lease Liabilities – Adjustments	1,000,000

Subsequent accounting

Over the life of the lease term, the discount on the make good provision is unwound to the full $50,000.

CBMS journal entries: Unwinding of the make good provision discount

Dr/Cr	CBMS Account	CBMS account description	30/06/19 $	30/06/20 $	30/06/21 $	30/06/22 $	30/06/23 $
Dr	2422008	Unwinding of discount on restoration (expense)	3,105	3,415	3,756	4,133	4,545
Cr	3381008	Provisions for restoration, decommissioning and make good	3,105	3,415	3,756	4,133	4,545

Dr/Cr

CBMS Account

CBMS account description

30/06/19

$

30/06/20

$

30/06/21

$

30/06/22

$

30/06/23

$

Dr

2422008

Unwinding of discount on restoration (expense)

3,105

3,415

3,756

4,133

4,545

Cr

3381008

Provisions for restoration, decommissioning and make good

3,105

3,415

3,756

4,133

4,545

The entity will also recognise depreciation expense for years 1-5, in relation to the related leasehold improvement asset, which is depreciated on a straight-line basis over the term of the lease of 5 years.

CBMS journal entries: Depreciation of leasehold improvement asset (30 June 2019 – 2023)

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	2241002		Buildings - Depreciation (leasehold improvements)	46,209
Cr	5311002	7153	Buildings - Accumulated depreciation (leasehold improvements)	46,209

At the end of the lease the provision is derecognised, as the premises is made good.

CBMS journal entries: Premises is made good at 30 June 2023

Dr/Cr	CBMS account	CBMS account description	Amount ($)
Dr	3381008	Provisions for restoration, decommissioning and make good	50,000
Cr	5220000	Cash	50,000

Disclosure

The movement schedule disclosures that are required for each year are as follows:

Note X: Other Provisions [extracts for 2019 – 2023]

	2019 $’000	2020 $’000	2021 $’000	2022 $’000	2023 $’000
As at 1 July	-	34	38	41	45
Additional provisions made	31	-	-	-	-
Amounts used	-	-	-	-	(50)
Unwinding of discount or change in discount rate	3	3	4	4	5
Total as at 30 June	34	38	41	45	-

IE2: Increase in provision capitalised to leasehold improvements held at fair value

Scenario: Using the same scenario as IE1, assume that at 1 July 2020 the entity makes changes to the building, creating new offices and meeting rooms.

The changes lead to an increase of $20,000 in the expected cost to make good the premises. In accordance with the FRR, the entity measures PPE under the revaluation model and no credit balance exists in the ARR.

Accounting treatment

Up until 30 June 2020 (inclusive), the accounting treatment at IE1 applies.

At 1 July 2020, the entity must increase the provision to reflect the increase of $20,000 in expected cost to make good the premises. As the balance of the provision at 30 June 2020 is $37,566 (calculated at IE1 as $31,046 +$3,105 + $3,415), the entity must recognise the difference, being:

Increase in provision = $52,592 ($70,000 / (1.10)³) – $37,566 = $15,026

CBMS journal entries: Recognition of the increase in the provision in the operating statement

Dr/Cr	CBMS account	CBMS account description	Amount ($)
Dr	2254001	Buildings – Write Down and Impairment*	15,026
Cr	3381008	Provisions for restoration, decommissioning and make good	15,026

^{* Posting would be to ARR to the extent credit balance exists for that asset class}

The entity would be required to recognise the unwinding of the discount as a finance cost as it occurs (as in IE1).

The periodic unwinding of the discount will now be recognised in respect of the increased amount of $52,592 as follows:

CBMS journal entries: Unwinding of the discount

Dr/Cr	CBMS Account	CBMS account description	30/06/21 $	30/06/22 $	30/06/23 $
Dr	2422008	Unwinding of discount on restoration (expense)	5,259	5,785	6,364
Cr	3381008	Provisions for restoration, decommissioning and make good	5,259	5,785	6,364

Dr/Cr

CBMS Account

CBMS account description

30/06/21

$

30/06/22

$

30/06/23

$

Dr

2422008

Unwinding of discount on restoration (expense)

5,259

5,785

6,364

Cr

3381008

Provisions for restoration, decommissioning and make good

5,259

5,785

6,364

Total make good provision before and after increase on 1 July 2020 in expected settlement costs

Year	Total provision before increase ($)	Total provision after increase ($)
30/06/2019	34,151	34,151
30/06/2020	37,566	37,566
01/07/2020	37,566	52,592*
30/06/2021	41,322	57,851
30/06/2022	45,455	63,636
30/06/2023	50,000	70,000

^{* Calculated by adding the prior year’s total provision with the increase in provision due to the increase in the expected cost to make good the premises (i.e. 37,566 + 15,026 = 52,596)}

The entity would also be required to depreciate the leasehold improvements asset over the term of the lease (as in IE1).

As the premises is made good at the end of the lease a journal entry for $70,000 is required (similar to that in IE1).

Disclosure

The movement schedule disclosures required for the remaining three years are now as follows:

Note X: Other Provisions [extracts for 2020 – 2023]

	2021 $’000	2022 $’000	2023 $’000
As at 1 July	38	58	64
Additional provisions made	15	-	-
Amounts used	-	-	(70)
Unwinding of discount or change in discount rate	5	6	6
Total as at 30 June	58	64	-

IE3: Initial make good provision capitalised to a ROU asset

Scenario:An entity enters into a lease for an office block on 1 July 2020, for a period of 5 years. The lease liability recognised on lease commencement is $1,000,000.

There are no initial lease direct costs, lease accruals or incentives on commencement and the lessee does not make any leasehold improvements. The contract specifies that the entity must make good the leased premises at the end of the lease term, including cleaning the carpets and repainting offices.

For this scenario:

the cost of the ROU asset will include an estimate of the cost of making good the premises at the end of the lease
the entity estimates that at 1 July 2020 it would cost approximately $40,000 to return the building to its original condition
assume the entity depreciates ROU assets on a straight-line basis, a discount rate of 10% applies and inflation is estimated to be 4.5% per annum.

Accounting treatment

Initial accounting

At 1 July 2020, the following journal is posted to recognise the initial lease, leasehold improvements and make good provision balances:

CBMS journal entries: Recognition of the initial lease, leasehold improvements and make good provision balances

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	5311002	7321	Buildings - ROU Asset	1,031,046
Cr	3240102		Lease Liabilities – Adjustments	1,000,000
Cr	3381008		Provisions for restoration, decommissioning and make good	31,046

Subsequent accounting

Over the life of the lease term, the discount is unwound to the full $50,000. The following formula is repeated in this process through to the end of the lease term:

Increase in provision = (PV for current year) – (PV for prior year)

For example, to calculate the increase in provision as at 30 June 2021:

Increase in provision
at 30/06/2021 = ($50,000 / (1.10)⁴) – $31,046 = $3,105

CBMS journal entries: Unwinding of the discount

Dr/Cr	CBMS Account	CBMS account description	30/06/21 $	30/06/22 $	30/06/23 $	30/06/24 $	30/06/25 $
Dr	2422008	Unwinding of discount on restoration (expense)	3,105	3,415	3,756	4,133	4,545
Cr	3381008	Provisions for restoration, decommissioning and make good	3,105	3,415	3,756	4,133	4,545

Dr/Cr

CBMS Account

CBMS account description

30/06/21

$

30/06/22

$

30/06/23

$

30/06/24

$

30/06/25

$

Dr

2422008

Unwinding of discount on restoration (expense)

3,105

3,415

3,756

4,133

4,545

Cr

3381008

Provisions for restoration, decommissioning and make good

3,105

3,415

3,756

4,133

4,545

The entity will also recognise depreciation expense of $206,209 for years 1-5 in relation to the ROU asset. This is derived from the cost of the ROU asset of $1,031,046 depreciated on a straight-line basis over the term of the lease (5 years).

CBMS journal entries: Depreciation of ROU asset (this journal is repeated (1 July 2020 – 2025))

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	2241002		Buildings - Depreciation	206,209
Cr	5311002	7353	Buildings - Accumulated depreciation ROU Asset	206,209

Dr/Cr

CBMS account

Mmt

Code

CBMS account description

Amount ($)

Dr

2241002

Buildings - Depreciation

206,209

Cr

5311002

7353

Buildings - Accumulated depreciation ROU Asset

206,209

At the end of the lease term the provision is derecognised as the premises is made good.

CBMS journal entries: Derecognising the provision as premises is made good at 30 June 2025

Dr/Cr	CBMS account	CBMS account description	Amount ($)
Dr	3381008	Provisions for restoration, decommissioning and make good	50,000
Cr	5220000	Cash	50,000

Disclosure

The movement schedule disclosures that are required for each year are as follows:

Note X: Other Provisions [extracts for 2021 – 2025]

	2021 $’000	2022 $’000	2023 $’000	2024 $’000	2025 $’000
As at 1 July	-	34	38	41	45
Additional provisions made	31	-	-	-	-
Amounts used	-	-	-	-	(50)
Unwinding of discount or change in discount rate	3	3	4	4	5
Total as at 30 June	34	38	41	45	-

IE4: Increase in provision capitalised to ROU asset held at cost

Scenario: Assume the same information as IE3, however assume that at 1 July 2022 the entity makes changes to the building, creating a number of new offices and meeting rooms and the changes made lead to an increase of $20,000 in the expected cost to make good the premises.

Accounting treatment

Up until 30 June 2022 (inclusive), the accounting treatment at IE3 applies.

At 1 July 2022, the entity must increase the provision to reflect the increase of $20,000 in expected cost to make good the premises. As the balance of the provision at 30 June 2022 is $37,566 (calculated at IE1 as $31,046 +$3,105 + $3,415), the entity must recognise the difference:

Increase in provision = ($70,000 / (1.10)³) – 37,566 = 52,592 – 37,566 = $15,026

CBMS journal entries: Recognise the increase in the make good provision

Dr/Cr	CBMS account	Mmt Code	CBMS account description	Amount ($)
Dr	5311002	7321	Buildings (ROU Asset)	15,026
Cr	3381008		Provisions for restoration, decommissioning and make good	15,026

Dr/Cr

CBMS account

Mmt

Code

CBMS account description

Amount ($)

Dr

5311002

7321

Buildings (ROU Asset)

15,026

Cr

3381008

Provisions for restoration, decommissioning and make good

15,026

The entity would be required (as in IE3) to recognise the unwinding of the discount as a finance cost as it occurs. The periodic unwinding of the discount will now be recognised for the increased provision amount of $52,592, as follows:

CBMS journal entries: Unwinding of the discount

Dr/Cr	CBMS Account	CBMS account description	30/06/X3 $	30/06/X4 $	30/06/X5 $
Dr	2422008	Unwinding of discount on restoration (expense)	5,259	5,785	6,364
Cr	3381008	Provisions for restoration, decommissioning and make good	5,259	5,785	6,364

Dr/Cr

CBMS Account

CBMS account description

30/06/X3

$

30/06/X4

$

30/06/X5

$

Dr

2422008

Unwinding of discount on restoration (expense)

5,259

5,785

6,364

Cr

3381008

Provisions for restoration, decommissioning and make good

5,259

5,785

6,364

Make good provision before and after increase on 1 July 2022 in the expected settlement costs

Year	Total provision before increase ($)	Total provision after increase ($)
30/06/21	34,151	34,151
30/06/22	37,566	37,566
01/07/22	37,566	52,592*
30/06/23	41,322	57,851
30/06/24	45,455	63,636
30/06/25	50,000	70,000

^{*Calculated by adding the prior year’s provision with the increase in provision due to the increase in the expected cost to make good the premises (i.e. 37,566 + 15,026 = 52,596)}

The entity would also be required to depreciate the ROU asset over the term of the lease (as in IE3 but adjusted from the 2022-23 reporting period).

As the premises is made good at the end of the lease, a journal entry similar to that in IE3 but for $70,000 is required.

Disclosure

The movement schedule disclosures required for the remaining three years are now as follows:

Note X: Other Provisions [extracts for 2023 – 2025]

	2023 $’000	2024 $’000	2025 $’000
As at 1 July	38	58	64
Additional provisions made	15	-	-
Amounts used	-	-	(70)
Unwinding of discount or change in discount rate	5	6	6
Total as at 30 June	58	64	-

Appendix B – Accounting for changes in make good provision estimates

This model shows accounting for changes in make good provision estimates due to revised timing or amount of payments on settlement or changes in the discount rate (under AASB Interpretation 1).

Change in make good provision estimates

Example diagram

Appendix C – Glossary

Subject to key terms defined in this appendix, all other key terms have the same definition as specified in the AASB Glossary of defined terms.

Term	Definition
Liability	a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (paragraph 10 of AASB 137).
Property, plant and equipment	tangible items that: are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period (paragraph 6 of AASB 116).
Provision	a liability of uncertain timing or amount (paragraph 10 of AASB 137).

Appendix D – Acronyms

Acronym	Full title or term
AASB	Australian Accounting Standards Board
ARR	Asset Revaluation Reserve
CBMS	Central Budget Management System
FRR	Public Governance, Performance and Accountability (Financial Reporting) Rule 2015
FV	Fair value
OCI	Other comprehensive income
PPE	Property, plant and equipment
PV	Present value
RMG	Resource management guide
TVOM	Time value of money

Accounting for decommissioning, restoration and similar provisions to make good (RMG 114)

Audience

Key points

Resources

Introduction

Example 1: Make good costs

Part 1 – Initial recognition and measurement

Present value

Example 2: Estimating the expenditure required to settle the obligation

Make good provisions capitalised

CBMS journal entries: Initial recognition of make good provision capitalised to leasehold improvements

Part 2 – Subsequent accounting

Unwinding of the discount

Example 3: Unwinding of the make good provision

Changes in make good provision estimates

Example 4: Re-measurement of the make good provision for timing changes in estimates

The cost model

Example 5: Example of accounting for decreases in the make good provision

CBMS journal entries: Increase in make good provision where ROU asset is measured at cost

CBMS journal entries: Decrease in make good provision where ROU asset is measured at cost

The revaluation model

Example 6: Valuation using the depreciated replacement cost valuation method

General accounting for revaluations

CBMS journal entries: Revaluation increase in a PPE asset class

CBMS journal entries: Revaluation decrease in a PPE asset class

Changes in make good provision estimates under the revaluation model

CBMS journal entries: Increase in make good provision under revaluation model

CBMS journal entries: Decrease in make good provision under revaluation model

Derecognising provisions

Selecting discount rates

Extract: AASB 137

Part 3 – Disclosure requirements

Part 4 – Budget implications

Impact on budget aggregates in the lifecycle of a make good provision

Appendix A – Illustrative examples

IE1: Make good provision capitalised to lessee leasehold improvements

Accounting treatment

CBMS journal entries: Recognition of leasehold improvement asset and make good provision

CBMS journal entries: Recognition of lease liability and ROU asset

Subsequent accounting

CBMS journal entries: Unwinding of the make good provision discount

CBMS journal entries: Depreciation of leasehold improvement asset (30 June 2019 – 2023)

CBMS journal entries: Premises is made good at 30 June 2023

Disclosure

Note X: Other Provisions [extracts for 2019 – 2023]

IE2: Increase in provision capitalised to leasehold improvements held at fair value

Accounting treatment

CBMS journal entries: Recognition of the increase in the provision in the operating statement

CBMS journal entries: Unwinding of the discount

Total make good provision before and after increase on 1 July 2020 in expected settlement costs

Disclosure

Note X: Other Provisions [extracts for 2020 – 2023]

IE3: Initial make good provision capitalised to a ROU asset

Accounting treatment

CBMS journal entries: Recognition of the initial lease, leasehold improvements and make good provision balances

Subsequent accounting

CBMS journal entries: Unwinding of the discount

CBMS journal entries: Depreciation of ROU asset (this journal is repeated (1 July 2020 – 2025))

CBMS journal entries: Derecognising the provision as premises is made good at 30 June 2025

Disclosure

Note X: Other Provisions [extracts for 2021 – 2025]

IE4: Increase in provision capitalised to ROU asset held at cost

Accounting treatment

CBMS journal entries: Recognise the increase in the make good provision

CBMS journal entries: Unwinding of the discount

Make good provision before and after increase on 1 July 2022 in the expected settlement costs

Disclosure

Note X: Other Provisions [extracts for 2023 – 2025]

Appendix B – Accounting for changes in make good provision estimates

Appendix C – Glossary

Appendix D – Acronyms

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