Site restoration provisions

A site restoration example

An operator has 8,000 tower sites on leased land. Removing a tower and restoring the land costs about 5,000 per site at today's prices. Leases are expected to end in 15 years on average, cost inflation is 3% a year, and the discount rate is 9%.

Journal entry when the towers are built: Dr Property, plant and equipment 17.1 million, Cr Provision 17.1 million. The asset is depreciated with the tower, and the provision grows each year by the unwinding of the discount, about 1.5 million in the first year, charged as a finance cost.

When do site restoration provisions arise?

Under US GAAP the same obligations are called asset retirement obligations, under ASC 410. Under IFRS, the provision arises when the operator has a present obligation from a past event, usually installing equipment on a site whose lease or permit requires removal at the end. Obligations can also be constructive, such as a published policy of restoring sites, or come from environmental law. If the operator expects to keep a site indefinitely, the provision is still recognised if the obligation exists, with timing reflecting the expected end of use.

Where does the cost go: PPE or right-of-use asset?

Costs of removing the operator's own equipment, such as a tower it built on leased land, are added to that property, plant and equipment. Costs of restoring the leased land itself to its original condition, if required by the lease, are included in the right-of-use asset under IFRS 16. In practice the two are often estimated together, but the split affects which asset carries the cost.

How are changes in estimates treated?

Under IFRIC 1, changes in the expected cost, timing or discount rate adjust the provision and the cost of the related asset, which is then depreciated prospectively. A decrease cannot reduce the asset below zero; any excess goes to profit or loss. After a merger, when duplicate sites will be closed sooner, the timing change brings forward the cost and increases the provision. See telecom mergers.

Which discount rate is used?

A pre-tax rate reflecting the time value of money and risks specific to the liability that are not already reflected in the cash flow estimates. Operators often use risk-free rates for the currency and term, with the cost estimates carrying the risk. Because the provision is long-dated, small changes in rates move it noticeably.

What is disclosed about site restoration provisions?

The carrying amount and movements in the provision, including new sites, unwinding of the discount, changes in estimates and amounts used, together with the main assumptions on costs, timing, inflation and discount rates, and the uncertainty around them.

How do operators estimate costs across thousands of telecom sites?

By site type, such as rooftop, greenfield tower or small cell, using average removal costs from recent decommissioning work, rather than site by site. The estimates are reviewed annually against the actual costs incurred. See decommissioning costs under IAS 16, IAS 37 explained and telecom accounting.

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