Financial Reporting · Ind AS 16 Property, Plant and Equipment

Decommissioning and Restoration Costs (IFRIC 1) under Ind AS 16

Updated 5 October 2026 · Fact-checked

Under Ind AS 16, the initial estimate of dismantling and site restoration costs is added to the asset's cost, with a matching provision measured under Ind AS 37. Later changes in estimate or discount rate adjust the asset (cost model) or the revaluation surplus (revaluation model). Unwinding of discount goes to profit or loss as finance cost.

Understand Decommissioning and Restoration Costs (IFRIC 1)

Some assets leave you with a future bill. An oil rig must be removed. A mine must be restored. A factory site may need cleaning up. If your obligation arises when you install the asset, or from using it, you have a present obligation on day one.

Ind AS 16 says the cost of an item of PPE includes the initial estimate of the costs of dismantling and removing the item and restoring the site. This applies when the obligation is incurred on acquiring the item, or as a result of using it during a period for purposes other than producing inventories. Costs from using the asset to make inventory go to Ind AS 2 instead.

The other side of the entry is a provision under Ind AS 37, measured at the best estimate of the expenditure required, discounted to present value. The discount rate is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability. So on day one: Dr PPE, Cr Provision, both at present value.

Over time the liability grows because the discount unwinds. This unwinding of discount is recognised in profit or loss as a finance cost as it occurs. It is not capitalised into the asset under Ind AS 23. The asset, meanwhile, is depreciated over its useful life, and that includes the decommissioning component.

Estimates change. The expected outflow, its timing or the discount rate may move. Appendix A to Ind AS 16 (IFRIC 1) governs how you account for changes in an existing decommissioning, restoration or similar liability. Under the cost model, the change is added to or deducted from the asset's cost. Under the revaluation model, it hits the revaluation surplus or profit or loss, depending on the asset's history.

Key rules to remember

Initial cost of PPE: Cost = Purchase price + directly attributable costs + PV of initial estimate of dismantling and restoration obligation; Applies when the obligation arises on acquisition or from using the asset other than to make inventory. Provision is measured under Ind AS 37.
Present value of obligation: PV = Estimated future outflow ÷ (1 + r)ⁿ; r is a pre-tax rate reflecting current market assessments of time value and risks specific to the liability. n is the years to settlement.
Unwinding of discount: Finance cost for the year = Opening provision × discount rate; Charged to profit or loss. Not capitalised under Ind AS 23. It increases the provision.
Change in liability: cost model: Increase in liability → add to asset cost. Decrease → deduct from asset cost, limited to carrying amount. Excess decrease → profit or loss.; If an addition is made, consider whether the asset may be impaired and test under Ind AS 36. The revised depreciable amount is depreciated over the remaining useful life.
Change in liability: revaluation model: Decrease → credit revaluation surplus (OCI), except reversal of earlier deficit goes to profit or loss. Increase → profit or loss, except debit revaluation surplus up to its credit balance for that asset.; Change in the liability alters the revaluation surplus or deficit. It may also signal that the asset must be revalued to check carrying amount against fair value.
Asset at end of useful life: Cost model, once the asset has reached the end of its useful life: all later changes in liability go to profit or loss as they occur; While the asset is still in use, an increase is added to cost with an impairment check. Once the carrying amount is nil, any further decrease goes wholly to profit or loss, because it is an excess over the carrying amount. Only after the end of the useful life do all changes, increases too, go to profit or loss.

How to solve Decommissioning and Restoration Costs (IFRIC 1) questions

Use this order for any question on decommissioning liabilities. It works for initial recognition, later changes and revaluation variants.

1Check that a present obligation exists: it must arise on acquisition or from using the asset, not from making inventory.
2Discount the estimated outflow at the given pre-tax rate for the remaining years. Dr PPE, Cr Provision at present value.
3Compute depreciation on the full cost including the decommissioning component, over the useful life.
4Each year compute unwinding as opening provision × rate. Charge it to profit or loss as finance cost. Do not capitalise it.
5If the estimate, timing or discount rate changes, recompute the liability at the date of change. The difference from the carried liability is the adjustment.
6Identify the model. Cost model: adjust asset cost, with the cap at carrying amount for decreases. Revaluation model: apply the surplus and deficit rules for that asset.
7Redo depreciation from the date of change: revised carrying amount ÷ remaining useful life.
8For an increase, state that you will check for impairment under Ind AS 36. Then write final journal entries and the closing balances.

Quickest way: Four-line check for decommissioning questions

When to use it: Use when time is short and the question gives initial cost, a discount rate and a revised estimate.

Line 1: PV of obligation = outflow × discount factor. Add it to cost. Credit provision.
Line 2: Unwinding = opening provision × rate, to profit or loss. Add it to the provision, not to the asset.
Line 3: New liability − carried liability = adjustment. Apply it to the asset under the cost model.
Line 4: Check the cap. If a decrease exceeds the carrying amount, the excess goes to profit or loss. Then redo depreciation over the remaining life.

Common mistakes in Decommissioning and Restoration Costs (IFRIC 1)

Capitalising the unwinding of discount into the asset.
Students link all interest-like costs to Ind AS 23 and assume capitalisation.
Fix: Unwinding is a finance cost recognised in profit or loss as it occurs. Only the initial estimate and changes under IFRIC 1 touch the asset's cost.
Adding the undiscounted estimate to the asset cost.
The question gives a big future figure, and students use it directly.
Fix: Always discount to present value first. Ind AS 37 measures the provision at present value when the time value of money is material.
Taking a decrease in the liability fully to the asset even when it exceeds the carrying amount.
Students forget the cap in the cost model.
Fix: Deduct only up to the carrying amount. Recognise the excess in profit or loss immediately.
Spreading a change in liability over past years or treating it as a prior period error.
Confusion with Ind AS 8 prior period adjustments.
Fix: A change in estimate or discount rate is prospective. Adjust the asset in the current period and depreciate the revised amount over the remaining life.
Using the original discount rate for the revised liability.
Students keep the same rate for convenience.
Fix: The liability is remeasured at the current pre-tax discount rate at each reporting date. Under the cost model, a change in the rate is also added to or deducted from the asset cost, just like a change in the estimated outflow or timing. Use the rate the question gives for the revision date.
Mixing cost and revaluation model treatment, for example crediting profit or loss when the model is revaluation and surplus exists.
The two sets of rules look alike and students memorise only one.
Fix: Identify the model first. Under revaluation, route the change through surplus or deficit for that asset, with the reversal exceptions.

Worked examples

Example 1

Case: Sagar Offshore Ltd (an Ind AS company) acquires drilling equipment on 1 April 2026 for ₹50,00,000. Useful life is 10 years, straight line, nil residual value. It must dismantle the equipment and restore the site at the end of year 10, estimated at ₹20,00,000. The pre-tax discount rate is 8% and the present value factor for 10 years is 0.4632. On 31 March 2027, after unwinding, the estimate is revised to ₹24,00,000 with the same rate; the factor for 9 years is 0.5002. Use the cost model. Show the initial recognition, year 1 and the revision.

Show the solution

Initial provision = ₹20,00,000 × 0.4632 = ₹9,26,400.
Cost of equipment = ₹50,00,000 + ₹9,26,400 = ₹59,26,400. Entry: Dr Equipment ₹59,26,400; Cr Cash ₹50,00,000; Cr Provision ₹9,26,400.
Depreciation for 2026-27 = ₹59,26,400 ÷ 10 = ₹5,92,640. Carrying amount at 31 March 2027 = ₹53,33,760.
Unwinding for 2026-27 = ₹9,26,400 × 8% = ₹74,112. Dr Finance cost ₹74,112; Cr Provision ₹74,112. Provision before revision = ₹10,00,512.
Revised provision = ₹24,00,000 × 0.5002 = ₹12,00,480. Increase = ₹12,00,480 − ₹10,00,512 = ₹1,99,968.
Under the cost model, add the increase to the asset: Dr Equipment ₹1,99,968; Cr Provision ₹1,99,968. New carrying amount = ₹53,33,760 + ₹1,99,968 = ₹55,33,728.
Revised depreciation from 2027-28 = ₹55,33,728 ÷ 9 = ₹6,14,859 (rounded). Because cost increased, test the asset for impairment under Ind AS 36.

Answer: Initial provision ₹9,26,400; cost ₹59,26,400; 2026-27 depreciation ₹5,92,640 and finance cost ₹74,112. The revision adds ₹1,99,968 to cost, giving a carrying amount of ₹55,33,728. Depreciation is ₹6,14,859 a year for the remaining 9 years, subject to an impairment check.

Example 2

Case: Kavya Minerals Ltd uses the cost model for a processing plant. The plant is still in use and has not reached the end of its useful life. Its carrying amount is ₹3,00,000. A new reclamation method reduces the expected restoration cost, and the decommissioning provision falls by ₹4,50,000 at the reporting date. Show the accounting.

Show the solution

The change is a decrease in an existing decommissioning liability. Under the cost model it is deducted from the asset's cost.
The deduction cannot exceed the carrying amount of ₹3,00,000.
Deduct ₹3,00,000 from the asset. The excess is ₹4,50,000 − ₹3,00,000 = ₹1,50,000. Recognise it in profit or loss immediately.
Entry: Dr Provision ₹4,50,000; Cr Plant ₹3,00,000; Cr Profit or loss ₹1,50,000.
The plant's carrying amount is now nil, so no further depreciation arises on it. While the plant stays in use, a later increase in the liability is added to cost, with an impairment check. A later decrease cannot be deducted from a nil carrying amount, so the whole of it goes to profit or loss as an excess. Once the plant reaches the end of its useful life, all later changes in the liability go to profit or loss as they occur.

Answer: Reduce the plant to nil by ₹3,00,000 and recognise ₹1,50,000 as a credit in profit or loss. Entry: Dr Provision ₹4,50,000; Cr Plant ₹3,00,000; Cr Profit or loss ₹1,50,000.

Exam tips

In case-scenario MCQs, look for the words dismantling, restoration or site clean-up. They signal that the cost of the asset includes the PV of the obligation.
In written answers, state the provision, the facts and the conclusion: Ind AS 16 includes the initial estimate in cost; Ind AS 37 measures it; IFRIC 1 handles changes.
Always show unwinding as a separate finance cost line. Examiners give marks for stating that it is not capitalised.
Check which model the question uses. If it says revalued, apply the surplus and deficit rules. If it says nothing, assume the cost model.
Round discount factors as given and show each figure. Show the impairment check when the cost of the asset increases.

Practice questions from Ind AS 16 Property, Plant and Equipment

Decommissioning and Restoration Costs (IFRIC 1): frequently asked questions

Is the decommissioning cost capitalised at the undiscounted amount?

No. You capitalise the present value of the estimated outflow, using a pre-tax rate that reflects current market assessments of time value and risks specific to the liability. The provision is credited at the same amount.

How is unwinding of discount treated under Ind AS 16 and IFRIC 1?

It is recognised in profit or loss as a finance cost in the period it arises. It is not added to the cost of the asset. It increases the carrying amount of the provision each year.

What happens if the liability falls by more than the asset's carrying amount under the cost model?

You deduct only up to the carrying amount from the asset. The excess is recognised in profit or loss immediately.

How do I account for a change in the decommissioning liability under the revaluation model?

The change alters the revaluation surplus or deficit on that asset. A decrease is credited to OCI, except to the extent it reverses a deficit earlier charged to profit or loss. An increase goes to profit or loss, except to the extent of any credit balance in surplus for that asset.

Is a change in the decommissioning estimate a prior period error?

No. It is a change in accounting estimate and is applied prospectively. You adjust the asset in the current period and depreciate the revised amount over the remaining useful life.