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HomeMy WebLinkAboutFIN 04-24Report to Council Report Number: FIN 04-24 Date: February 26, 2024 From: Stan Karwowski Director, Finance & Treasurer Subject: Advisory Services to Meet Asset Retirement Obligation Reporting File: F-1000-001 Recommendation: 1. That Council approve the engagement of the advisory services of Deloitte LLP, under section 10.03 c) of the City’s Purchasing Policy, to assist with the implementation of Public Sector Accounting Standard 3280, Asset Retirement Obligation (ARO); 2. That the proposal submitted by Deloitte LLP in the amount of $96,728.00 (HST included) be accepted; 3. That Council authorize the Director, Finance & Treasurer to fund the net project cost of $87,107.00 from property taxes as provided in the 2024 Current Budget; and, 4. That the appropriate City of Pickering officials be given authority to take the necessary actions to give effect thereto. Executive Summary: The Public Sector Accounting Board (PSAB) introduced a new Standard (3280), referred to as Public Sector Accounting Standards (“PSAS”), to deal with the potential issue of a sudden unplanned expenditure or liability associated with the retirement of an asset. The common example is the cost of removing asbestos (legal requirement) from buildings when the building reaches the end of its life. PSAS 3280 Asset Retirement Obligation (ARO) takes effect for all fiscal years beginning on or after April 1, 2022. For the City of Pickering, the ARO comes into effect/applies for the 2023 year end audit and Financial Statement reporting. Deloitte was engaged in November 2023 to assist with scoping and identifying the tangible capital assets for the ARO implementation, and, as such, it is recommended the firm continue to provide their advisory services for the completion of additional works associated with ARO implementation. Deloitte’s continued assistance is required for the City to complete the December 31, 2023 financial reporting. In other words, the identified liabilities will be measured and included in the City’s 2023 financial statements. Relationship to the Pickering Strategic Plan: The recommendations in this report respond to the Pickering Strategic Plan Priority of Advance Innovation & Responsible Planning to Support a Connected, Well-Serviced Community. FIN 04-24 February 26, 2024 Subject: Advisory Services to Meet Asset Retirement Obligation Reporting Page 2 Financial Implications: The advisory services fee proposal is estimated at $87,107.00 (net of HST). The 2024 Major’s Budget for the Finance Department includes sufficient funding in the Finance Department Consulting Budget (502230.10600.0000) to accommodate this expense. The City’s financial statements reflects balances and disclosures aligned with public sector accounting standards addressing general liabilities, contractual obligations and contingent liabilities. This new measure, extends these requirements to include liabilities related to the retirement of existing assets. The accounting standard outlines that recognizing the total cost of an asset should consist of the expenses incurred to retire that asset in the future. Discussion: The City of Pickering is responsible for the adoption of the Public Sector Accounting Standards (“PSAS”) 3280 Asset Retirement Obligations (ARO) for 2023 year end audit and Financial Statement reporting. According to PS 3280, an asset retirement obligation should be recognized when all of the following criteria are satisfied:  There is a Legal obligation to incur retirement costs associated with tangible capital assets.  The past transaction or event given rise to the liability has incurred.  There is an expectation that future economic benefits will be given up.  A reasonable estimate of the cost can be made. Retirement activities/obligations result from an assets acquisition, construction, development or normal use. The completion of the current work to-date has identified the following assets that may have ARO liabilities:  City buildings built in 1990 and prior containing asbestos, which was commonly used in tiling, piping, sealant and other building materials.  Agreements for City parks situated on leased lands contain the obligation to remove TCA, and return the premise in a state of good condition. The City does not have sufficient resources or expertise with the various aspects related to the ARO in order to be compliant with the standard. Deloitte was engaged in mid-November 2023 to assist the City with scoping and identifying the tangible capital assets where an ARO would be deemed. Now the City is entering/approaching the measurement and recognition, and reporting and disclosing, which will bring the City into full l compliance with the accounting standard. The work to be completed is summarized below. Determining the Measurement Methodology:  determine if external expertise is needed for costing or modelling  identify key inputs and sources for estimated costs to remediate  accumulate costs to remediate by asset or asset category  evaluate and select the accounting transition approach FIN 04-24 February 26, 2024 Subject: Advisory Services to Meet Asset Retirement Obligation Reporting Page 3  evaluate and present value assumptions. Evaluate Data and Reporting Requirements Depending on the Number of AROs:  identify and evaluate data and reporting requirements  develop templates for tracking AROs and performing calculations  update current chart of accounts for ARO The last part is the implementation, reporting and disclosure of AROs for the Financial Statements. This consists of the following: Calculate ARO Entries and the Transition Impact:  use future cashflow estimates to measure AROs  determine appropriate discount and inflation rates and perform present value calculations  prepare opening adjustment entries depending on transition provision  validate accuracy of ARO calculations with key stakeholders Report and Disclose:  prepare financial statements for the year of transition, including restated prior comparatives (if appropriate)  develop new ARO liability disclosures  modify tangible assets disclosures  develop transitional disclosures  educate stakeholders on financial impact In accordance with item 10.03 c) of the Purchasing Policy where the project cost of a consulting assignment is more than $50,000.00, the award is subject to the approval of Council. The total net project cost will be $87,107.00 and will be funded from Finance’s consulting budget (502230.10600.0000). Compliance with the ARO accounting standard is required for the City to complete the 2023 year end audit and to receive an unmodified report (clean report) on the 2023 Financial Statements. Attachments: None FIN 04-24 February 26, 2024 Subject: Advisory Services to Meet Asset Retirement Obligation Reporting Page 4 Prepared By: Approved/Endorsed By: Original Signed By: Original Signed By: Susan Marsh, CPA, CGA, PLP Stan Karwowski, MBA, CPA, CMA Senior Accounting Analyst, Internal Audit Director, Finance & Treasurer Recommended for the consideration of Pickering City Council Original Signed By: Marisa Carpino, M.A. Chief Administrative Officer