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BROWNFIELDS & LAND REVITALIZATION 2011
CONFERENCESession 2
Tools to Manage Risk & Liability
SOX/GAAP/IFRS& Environmental Liabilities
May 12, 2011
DISCLAIMERThis presentation is not providing legal or financial advice.
You should seek your own legal or financial advise regarding
specific application of the regulatory requirements for your
business or operations.
1
AGRIUM
2
3
AGENDA
4
• Definitions• Current processes• Key controls• GAAP vs. International
Financial Reporting Standards (IFRS)
DEFINITIONS
5
Asset Retirement Obligations (ARO)Current legal obligations that must be fulfilled upon retirement of tangible, long-lived assets.
Examples: • Asbestos removal• Decommissioning• Demolition• Reclamation• Mineral processing wastes
DEFINITIONS
6
Environmental Remediation Liabilities (ERL)A present requirement to make known or probable environment-related expenditures that have arisen from past operations and which are related to impacts on real property.
Examples: • Remedial investigations• Soil / groundwater remediation
DEFINITIONS
7
Environmental Remediation Contingencies
• Same as ERL except uncertainty in exposure dependent on one or more future events• Disclose if probable and not reasonably estimable• Accrue if probable and reasonably estimable
PROCESS
8
Measurement and Accounting• ARO asset and liability recorded using the PV of
future cash outflows calculated with:a) Discount rate equal to the risk free interest
rate adjusted for Company’s market riskb) Inflation assumption based on Government of
Canada long-term estimates• ARO liability accreted to the income statement over
the period until the expected cash spend• ARO asset depreciated over the life of the facility• ERL recorded as a period cost• Business Unit’s Accounting groups maintain ARO /
ERL continuity schedules
KEY CONTROLS
9
Quarterly review of:• ARO / ERL provisions by Business staff, Legal and Accounting staff• Review all changes in provisions• Certification of balances• Review of Canadian and U.S. accounting standards changes
GAAP vs IFRS
10
Recognition: • Doctrine of promissory estoppels not significantly different from IFRS concept ‘constructive obligation’• Lower threshold under IFRS may result in an increased number of liabilities recognized
Measurement: • Cash flow processes to estimate costs compliant under Canadian GAAP likely not to require significant change• ERLs can be discounted• Discount rate is NOT adjusted for the company’s credit (market) risk
Canadian and U.S. GAAP
IFRS
ProvisionsContingencies
Liabilities
Liabilities
Provisions
Contingencies
GAAP vs IFRS
11
Canadian and U.S. GAAP IFRS
ProvisionsContingent liabilities
Liabilities Liabilities
Provisions
Contingent liabilities
Uncertain timing or amount
12
ProvisionsContingent liabilities
Provisions
Contingent liabilities
Passage of Time
Accounting Period end
Release of Financial Statements
CGAAP/USGAAP & IFRS
13
Range of outcomes but no reasonable best estimate = accrue lowest outcome in range
CGAAP/USGAAP
Existence of loss Probability Treatment
Likely High Accrue if reasonably estimable
Unlikely Slight Disclose
Not determinable Unknown Do nothing
CGAAP / USGAAP
14
Range of outcomes and no best estimate = accrue expected valueRange of equal outcomes and no best estimate = accrue midpoint of range
IFRS – CurrentExistence of loss Probability TreatmentProbable More likely
than notAccrue best estimate if reliable estimate can be made
No accrual in rare circumstances if no reliable estimate can be made
Unlikely Not more likely than not
Disclose
Not determinable Unknown Do nothing
IFRS
15
TIMELINE
2010 2011 2012
January 1, 2012Revised IAS 37 Valuation of Contingencies
January 1, 2011Conversion to IFRS
January 1, 2010IFRS Opening Balance SheetDecember 31, 2010U.S. GAAP Disclosures
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Ongoing Dual Reporting
Concept Current IFRS Proposed IFRS
Measurement • Best estimate• Probable
Fair value based = exit value
Single obligation Most likely outcome Fair value based = exit value
Contingent liability Disclose Concept gone and replaced with fair value based = exit value
17
IFRS
• “Best estimate of expenditure” replaced with“amount an entity would rationally pay today to be relieved of present obligation”.
• Lowest of:– present value of resources to fulfill obligation; – payment to cancel obligation; and – payment to transfer obligation to third party.
IFRS - FAIR VALUE
18
Outcome (discounted)
Probability Amount
$100 million 40% $40 million
$ nil 60% (best estimate) $ nil
Total provision 60% x $ nil $nil
EXPECTED VALUEIFRS - CURRENT
19
Outcome (discounted)
Probability Amount
$100 million 40% $40 million
$ nil 60% $ nil
$40 million
Risk adjustment (5%) $2 million
Total provision $42 million
EXPECTED VALUEIFRS PROPOSED
20
New Class of Disclosures
– Likelihood of loss at least reasonably possible– Asserted claims– Disclosure of nature, timing, magnitude
at entity's judgment
REMOTE CONTINGENCIES
21
• Quantitative Disclosures: Publicly available information on potential loss, including:– damage claim, or
– expert testimony about the amount of damages
– possible range of loss and amount accrued
– if not estimable, state with reason
– other non-privileged information
• assist financial statement users to understand/assess
“REASONABLY POSSIBLE” CONTINGENCIES
22
Qualitative Disclosures as Litigation Progresses
• For any disclosed contingency, qualitative information about nature and risks of contingencies
• Include at least the contentions of the parties
• Individually material litigation contingency
– Proceedings
– Allegations
– Procedural status
– If practicable, anticipated timing of, or the next steps in resolution
Enough information to identify and pursue any available public information from court files
23
INDIVIDUALLY MATERIAL LITIGATION CONTINGENCIES
PFD IFRS OPTIONStart
Present obligation as a result of an obligating event
Provide Do nothingDisclose contingent liability
Possible obligation ?
Reliable estimate ?
Probableoutflow ? Remote?
No
No
No (rare)
No
No
Yes
Yes
Yes
Yes
Source: IAS 37 – Provisions, Contingent Liabilities and Contingent Assets24
QUESTIONS WILL BE TAKEN AFTER ALL THREE PRESENTATIONS ARE COMPLETED
QUESTIONS
25