IAS 37 · Energy

IAS 37 Provision Calculator
for Energy

Pre-configured for energy provision types: decommissioning and asset retirement obligations (oil rigs, nuclear plants, wind farms), environmental remediation, onerous power purchase agreements, and carbon emission obligations.

Obligation Type

Present Obligation

Does a present obligation exist from a past event?

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IAS 37.14 — A provision shall be recognised when: (a) an entity has a present obligation from a past event; (b) it is probable that an outflow will be required; (c) a reliable estimate can be made.

IAS 37.36 — The amount recognised shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

IAS 37.39 — Where there is a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value).

IAS 37.45 — Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to settle the obligation.

IAS 37.72 — A constructive obligation to restructure arises only when an entity has a detailed formal plan and has raised a valid expectation in those affected.

IAS 37 Provisions in Energy

Energy and utility companies carry some of the largest and most complex provisions in any industry. Decommissioning and asset retirement obligations for oil rigs, nuclear power plants, wind farms, and other energy infrastructure can individually exceed billions of euros and span timeframes of 20-50+ years. These long-horizon obligations make discounting critically important — the present value of a €500 million decommissioning obligation 30 years in the future at a 4% discount rate is approximately €154 million, a dramatic difference that must be prominently disclosed. The energy sector's provision landscape also includes environmental remediation for contaminated sites, onerous power purchase agreements, carbon emission obligations, and regulatory penalties for environmental violations. The interaction between decommissioning provisions and property, plant and equipment under IAS 16 and IFRIC 1 is a central feature of energy company financial statements.

Measurement Considerations for Energy

Decommissioning provisions require specialist engineering estimates of the physical work required, current cost estimates for that work, assumptions about technological developments that may affect future costs, and a pre-tax discount rate reflecting the time value of money and risks specific to the obligation. The provision is recognised at the present value of the best estimate and unwound annually through finance costs. IFRIC 1 governs changes in existing decommissioning obligations: increases or decreases in the estimated cost adjust the related PP&E asset (increasing or decreasing the asset's carrying amount), with the adjustment depreciated over the remaining useful life. If the asset has been fully depreciated, the entire adjustment flows through profit or loss. For onerous power purchase agreements, the May 2020 IAS 37 amendment is particularly relevant: the cost of fulfilling now includes allocated costs that relate directly to the contract, not just incremental costs.

Regulatory Context and Audit Considerations

Energy companies operate under extensive environmental regulation that creates legal obligations for decommissioning and remediation. Nuclear decommissioning is subject to specific regulatory frameworks in each jurisdiction, often involving dedicated decommissioning funds. Oil and gas decommissioning is regulated by bodies such as the OPRED (UK), SodM (Netherlands), and national mining authorities. Renewable energy decommissioning obligations are becoming increasingly significant as first-generation wind farms and solar installations approach end of life. Carbon emission obligations under the EU Emissions Trading System (EU ETS) create provisions when actual emissions exceed allocated allowances. Auditors of energy companies must evaluate the completeness and adequacy of decommissioning provisions, often engaging specialist engineers to assess the reasonableness of cost estimates.

Common Provision Types in Energy

asset retirement

Decommissioning obligations for oil rigs, nuclear power plants, wind farms, solar installations — often the largest single provision item

Typical: €10M-€10B per facility Timeline: 20-50+ years Method: Best Estimate
environmental

Site remediation for contaminated land, water pollution, soil contamination from energy operations

Typical: €5M-€500M Timeline: 5-30 years Method: Best Estimate
onerous contract

Onerous power purchase agreements, gas supply contracts with take-or-pay commitments at above-market prices

Typical: NPV of future losses Timeline: 5-25 years Method: Best Estimate
regulatory penalty

Environmental violations, emission quota penalties, safety standard breaches

Typical: €1M-€100M Timeline: 1-5 years Method: Best Estimate
contaminated land

Remediation of land contaminated by energy operations — drilling, refining, power generation, storage

Typical: €2M-€200M per site Timeline: 5-30 years Method: Best Estimate

Worked Example: NorthSea Energy BV

An offshore oil platform is expected to be decommissioned in 25 years. Engineering estimates indicate the following decommissioning cost at current prices, which must be discounted to present value:

Nominal decommissioning cost: €180,000,000. Timing: 25 years. Discount rate: 3.0% (pre-tax rate reflecting time value and risks specific to the liability). Present value = €180,000,000 / (1.03)^25 = €180,000,000 / 2.0938 = €85,952,000. Year 1 unwinding: €85,952,000 × 3.0% = €2,578,560 (Dr Finance costs / Cr Provision). The provision is recognised with a corresponding increase in the oil platform's PP&E cost (IAS 16.16(c)). The dramatic difference between nominal (€180M) and PV (€86M) demonstrates why discounting is critical for long-horizon provisions.

Provision Amount
€85.952.000
Regulatory Context: Oil and gas decommissioning is regulated by national authorities (OPRED UK, SodM Netherlands, BSEE US). Nuclear decommissioning involves dedicated regulatory frameworks and funding mechanisms. EU ETS creates carbon emission obligations. Environmental legislation creates remediation obligations for contaminated sites.

Frequently Asked Questions — Energy

How should oil rig decommissioning provisions be measured under IAS 37?
Oil rig decommissioning provisions should be measured at the present value of the best estimate of the cost to dismantle, remove, and restore the site. Engineering assessments provide the nominal cost estimate based on current technology and prices. This is discounted using a pre-tax rate reflecting the time value of money and risks specific to the liability (typically 2-4%). The provision is recognised with a corresponding increase in PP&E under IAS 16.16(c). Annual unwinding of the discount is charged to finance costs. Changes in the estimate adjust the related asset under IFRIC 1.
Why is the present value so much lower than the nominal cost for energy decommissioning?
Long time horizons create dramatic discounting effects. A €100M obligation 30 years away at 3.5% discount rate has a present value of only €36M — the discount reduces the provision by 64%. This is why IAS 37.45 requires discounting when the time value effect is material. Energy companies must present both the nominal and discounted amounts in their notes, with sensitivity analysis showing the effect of discount rate changes. The annual unwinding of the discount creates a finance cost that increases the provision each year, gradually closing the gap between PV and nominal as the decommissioning date approaches.
How does IFRIC 1 affect energy decommissioning provision changes?
IFRIC 1 (Changes in Existing Decommissioning, Restoration and Similar Liabilities) requires that changes in decommissioning estimates adjust the related PP&E asset, not profit or loss. If the revised estimate increases, the asset and provision both increase; if it decreases, both decrease. The adjustment to the asset is depreciated over its remaining useful life. However, if the asset has been fully depreciated, the entire adjustment goes through P&L. This is particularly relevant for mature oil fields or aging nuclear plants where changes in decommissioning estimates can be significant.
How should onerous power purchase agreements be provisioned for energy companies?
Onerous PPA provisions arise when the cost of generating or purchasing electricity under a long-term contract exceeds the revenue from selling it. The provision equals the lower of: (a) the net cost of fulfilling the PPA (total cost minus expected revenue for the remaining term) and (b) the penalty for terminating the contract. Since May 2020, the cost of fulfilling includes allocated costs that relate directly to the contract. For long-term PPAs, the provision should be discounted to present value. Material changes in energy market prices may trigger reassessment.
How should carbon emission provisions be calculated under the EU ETS?
Carbon emission provisions arise when an entity's actual emissions exceed its allocated allowances under the EU ETS. The provision is measured at the cost of purchasing the necessary allowances to cover the shortfall, based on the market price of carbon allowances at the reporting date. If the entity holds purchased allowances to cover the deficit, the provision may be nil but the allowances should be assessed for impairment. IFRIC 3 (Emission Rights) was withdrawn, and practice varies — some entities recognise a provision for the full annual obligation while others net against allowances held.
What discount rate should energy companies use for decommissioning provisions?
IAS 37.47 requires a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. For energy decommissioning, this typically ranges from 2-4% depending on the jurisdiction, the currency of the obligation, and the specific risks. Government bond yields provide a starting point for the risk-free rate, with adjustments for the risks specific to the decommissioning obligation (not the entity's own credit risk — IAS 37.47 explicitly prohibits this). The discount rate should be reviewed at each reporting date and the provision restated if it changes.

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