brownfields & land revitalization 2011 conference …

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.

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AGRIUM

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AGENDA

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• Definitions• Current processes• Key controls• GAAP vs. International

Financial Reporting Standards (IFRS)

DEFINITIONS

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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

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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

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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

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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

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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

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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

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Canadian and U.S. GAAP IFRS

ProvisionsContingent liabilities

Liabilities Liabilities

Provisions

Contingent liabilities

Uncertain timing or amount

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ProvisionsContingent liabilities

Provisions

Contingent liabilities

Passage of Time

Accounting Period end

Release of Financial Statements

CGAAP/USGAAP & IFRS

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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

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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

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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

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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

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Outcome (discounted)

Probability Amount

$100 million 40% $40 million

$ nil 60% (best estimate) $ nil

Total provision 60% x $ nil $nil

EXPECTED VALUEIFRS - CURRENT

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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

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New Class of Disclosures

– Likelihood of loss at least reasonably possible– Asserted claims– Disclosure of nature, timing, magnitude

at entity's judgment

REMOTE CONTINGENCIES

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• 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

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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

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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

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