| 4.13 | Provisions and contingent liabilities |
Provisions are recognized when Ecopetrol has a current obligation (legal or implied) as a result of a past event, it is probable that Ecopetrol will be required to settle the obligation, and a reliable estimation can be made of the amount of the obligation. Where applicable, they are recorded at present value, using a rate reflecting the liability specific risk.
Future environmental decommissioning costs related to current or future operations, are accounted for as expenses or assets, as the case may be. Expenditures related to past operations that do not contribute to the obtaining of current or future benefits, are expensed as incurred.
The recognition of these provisions coincides with the identification of an obligation related to environmental remediation and Ecopetrol uses available information to determine a reasonable estimation of the related cost.
Provisions for which a negative outcome is assessed as possible are not recognized but are disclosed in the explanatory notes; including those for which the amount cannot be estimated.
If there is an expectation that the provision will be reimbursed, either in whole or in part, for example by virtue of an insurance contract, the amounts expected to be reimbursed are recognized as a separate asset only when such reimbursement is almost certain.
If the effect of the time value of money is significant, the provisions are discounted using the current market rate before taxes reflecting, as applicable, the liability specific risks. When recognizing the discount, the increase of the provision resulting from time elapsed is recognized as financial cost in the profit or loss statement.
Asset retirement obligation
Liabilities associated with the retirement of assets are recognized when there are current obligations, either legal or implied, related to the abandonment and dismantling of wells, facilities, pipelines, buildings and equipment.
The obligation is usually recorded when the assets are installed or the surface or the environment are altered at the operating sites. These liabilities are calculated using the discounted cash flow method, using a pre-tax rate reflecting current market conditions similar liabilities and considering the economic limits of the field or the useful life of the respective asset. When it is not possible to determine a reliable estimation in the period in which the obligation originates, a provision is recognized when there is sufficient information available to make the best estimation.
The carrying amount of the provision is reviewed and adjusted annually considering changes in the assumptions used for its estimation, using a rate that reflects the liability specific risk. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding property, plant and equipment and natural and environmental resources. When a decrease in the asset retirement obligation related to a producing asset exceeds the carrying amount of the asset, the excess is recognized the consolidated statement of profit or loss. The financial cost of updating these liabilities is recognized in results for the period as financial expense.
