Decommissioning and restoration costs

Telecom towers, oil and gas platforms, mines, power stations and leased premises that must be restored all carry decommissioning or asset retirement obligations. This guide explains how the cost is capitalised, how the provision unwinds, and how changes in estimates are treated under IFRIC 1.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Decommissioning costs, the estimated costs of dismantling an asset and restoring its site, are included in the asset's cost under IAS 16 when the company has an obligation for them, measured at present value under IAS 37. The provision then unwinds as a finance cost each year, while the asset, including the decommissioning cost, is depreciated. For a telecom tower site with expected restoration costs of CU 100,000 in 20 years at a 6% discount rate, CU 31,180 is added to the tower's cost.

At a glance

Capitalise
Present value of the obligation
Provision
IAS 37, best estimate, discounted
Each year
Unwinding is a finance cost
Asset
Depreciated including the cost
Changes in estimate
Adjust the asset (IFRIC 1)
Excel
Depreciation and revaluation schedule
Decommissioning and restoration costsCapitalise: Present value of the obligation; Provision: IAS 37, best estimate, discounted; Each year: Unwinding is a finance cost; Asset: Depreciated including the cost; Changes in estimate: Adjust the asset (IFRIC 1); Excel: Depreciation and revaluation schedule.KEY FACTS AT A GLANCEDecommissioning and restoration costsCapitalisePresent value of theobligationProvisionIAS 37, best estimate,discountedEach yearUnwinding is a financecostAssetDepreciated including thecostChanges in estimateAdjust the asset (IFRIC1)ExcelDepreciation andrevaluation scheduleChecked against official sourcesTax BakersDecommissioning and restoration costsCapitalise: Present value of the obligation; Provision: IAS 37, best estimate, discounted; Each year: Unwinding is a finance cost; Asset: Depreciated including the cost; Changes in estimate: Adjust the asset (IFRIC 1); Excel: Depreciation and revaluation schedule.KEY FACTS AT A GLANCEDecommissioning and restorationcostsCapitalisePresent value of the obligationProvisionIAS 37, best estimate, discountedEach yearUnwinding is a finance costAssetDepreciated including the costChanges in estimateAdjust the asset (IFRIC 1)ExcelDepreciation and revaluation scheduleChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

When are decommissioning costs capitalised?

The cost of an item of PPE includes the initial estimate of the costs of dismantling and removing it and restoring the site, for an obligation incurred when the item is acquired or as a result of using it other than to produce inventory. The obligation can be legal, from a licence, lease or law, or constructive, from a published policy the company is known to follow.

A worked example: a telecom tower site

Decommissioning a tower site: what goes whereDecommissioning a tower site: what goes whereOn day oneEach yearAt the endAssetCost + 31,180DepreciatedFully depreciatedProvision31,180 (presentvalue)Grows byunwinding100,000 paidProfit or lossNothingDepreciation +finance costAny differenceon settlement
The obligation is capitalised at present value and unwinds over the asset's life.

A telecom operator builds a tower for CU 500,000 on leased land. The lease requires it to remove the tower and restore the site at the end, estimated to cost CU 100,000 in 20 years. At a 6% discount rate:

CU
Provision at the start: 100,000 / 1.06^2031,180
Tower cost including decommissioning: 500,000 + 31,180531,180
Annual depreciation over 20 years26,559
Unwinding of the discount in year 1: 31,180 x 6%1,871

Day one: Dr Tower CU 31,180, Cr Decommissioning provision CU 31,180. Each year the provision grows by the unwinding, recorded as a finance cost, until it reaches CU 100,000 in year 20. The decommissioning sheet of the Depreciation and revaluation schedule (Excel) produces the full schedule.

Which discount rate is used?

A pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability, under IAS 37. If the cash flows already reflect risk, the rate does not. The rate is updated at each reporting date. US GAAP instead uses a credit-adjusted risk-free rate fixed for each layer of the obligation; see IAS 16 vs US GAAP.

How are changes in estimates treated?

Under IFRIC 1, for an asset at cost, changes in the estimated cash flows or the discount rate are added to or deducted from the cost of the asset, and depreciated prospectively over its remaining life. A decrease cannot exceed the asset's carrying amount; any excess goes to profit or loss. If an increase is large, the company considers whether the asset is impaired. The unwinding is always a finance cost, never capitalised.

What about environmental and contamination obligations?

An obligation to clean up contamination that arises from using the asset over time, such as soil contamination at a fuel depot, builds up as the damage occurs. Each layer is added to the asset's cost if the asset is still in use and the damage relates to its operation, or recognised in profit or loss if it relates to producing inventory. Fines and penalties for past breaches are expensed, never capitalised.

What about restoring leased premises?

An obligation to restore leased property at the end of a lease is included in the cost of the right-of-use asset under IFRS 16, with the provision under IAS 37. Obligations created by fitting out the premises, such as removing partitions, are added to the cost of the leasehold improvements. See IFRS 16 lessee accounting.

Where to go next

See IAS 16 explained for what else goes into the cost of an asset.

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Questions people ask

How are decommissioning costs accounted for under IFRS?

The present value of the obligation is added to the asset's cost under IAS 16 and recognised as a provision under IAS 37, which unwinds as a finance cost.

What is unwinding of the discount?

The annual increase in a discounted provision as the settlement date approaches, recognised as a finance cost.

How are changes in decommissioning estimates treated?

Under IFRIC 1, for assets at cost, they adjust the asset's carrying amount and are depreciated over its remaining life.

Which discount rate is used for decommissioning provisions?

A current pre-tax rate reflecting the time value of money and the risks specific to the liability, updated each reporting date.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 16 Property, Plant and Equipment
  2. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 16IAS 16 property, plant and equipment explainedIFRS vs US GAAPIAS 16 vs US GAAP: revaluation of property, plant and equipmentIFRS 16IFRS 16 lessee accounting step by step

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This guide is general information. It is not tax or legal advice for your situation.