GASB Proposes Standards for Liabilities Related to Asset Retirement Obligations

Not every issue the Governmental Accounting Standards Board (GASB) tackles affects a majority of state and local governments. Prevalence is a key criterion for the GASB when deciding whether to address an issue through standards setting, but prevalence is not always based on how many governments are affected. Sometimes an issue is relevant to a relatively small group of governments but is considered prevalent because of the issue’s magnitude for those governments.

One such issue is asset retirement obligations (AROs). Very few governments are likely to have an ARO but, for those that do, it can represent a very large liability. In December 2015 the GASB proposed standards—contained in an Exposure Draft titled Certain Asset Retirement Obligations—to help governments determine if they have an ARO and, if they do, to measure and report it.

Comments on the proposal are requested by March 31, 2016.

What Is an Asset Retirement Obligation?

An asset retirement obligation is a legally enforceable requirement to perform certain actions in order to retire a tangible capital asset (referred to as a capital asset in this article) from service. These actions represent a permanent closing down, removal, abandonment, or disposal of the capital asset. The Board believes that this type of legal requirement constitutes a liability that should be recognized in the financial statements.

When certain capital assets are put into service, it already is known that the government will have to take specific actions in order to retire the capital asset at the end of its useful life. In certain cases, such a requirement may arise during the life of the asset. A government is required to perform the retirement actions pursuant to existing laws and regulations. The certainty of having to use resources to retire the capital asset is a significant factor in the conclusion that AROs are liabilities, which are defined as present obligations to sacrifice resources that a government has little or no discretion to avoid.

For example, governments are required by the federal government to seal and subsequently maintain municipal landfills in a particular manner when those landfills are closed down for good. GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, addresses those forms of AROs, but guidance for other types of AROs—such as those associated with nuclear reactors and sewage treatment plants—is not available in GASB standards. The proposed standards are intended to address that need for guidance.

Activities outside the Scope of the Proposal

In addition to retirement of landfills, which already is covered by existing standards, the following are not covered by this proposal:
  • Obligations that arise solely from a plan to sell or otherwise dispose of a capital asset
  • Obligations associated with preparing a capital asset for an alternative use
  • Obligations for asbestos removal that result from the other-than-normal operation of a capital asset
  • Obligations associated with maintenance, rather than retirement, of a capital asset
  • The cost of a replacement part that is a component of a capital asset
  • Conditional obligations to perform asset retirement activities—in other words, the obligation constitutes a liability only if something occurs in the future.

How Does a Government Know if It Has an ARO Liability?

Based on the GASB’s proposal, liabilities related to AROs would arise from the occurrence of both an external obligating event and an internal obligating event. The external obligating event is the source of the requirement to perform asset retirement actions, such as laws and regulations, contracts, and court judgments.

The internal obligating event results from the normal operation of the capital asset and is the focus of the requirement to perform asset retirement actions. An example of an internal obligating event would be contamination that results from the normal operation of a capital asset (and that is not included in the scope of Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations), such as nuclear contamination of a nuclear reactor vessel.

For AROs that are not related to contamination, the internal obligating events include:
  • If a capital asset is permanently abandoned before it is ready for use, the internal obligating event would be the permanent abandonment itself.
  • Placing a capital asset into operation and beginning to use some of the asset’s service capacity would be the internal obligating event if the ARO liability incurred based upon the extent of use of the capital asset.
If a capital asset with an ARO is acquired, the internal obligating event would be the acquisition. The completion of an asset retirement plan, however, would not be an internal obligating event.

Recognition and Measurement of an ARO Liability

A government would recognize an ARO liability in the accrual-basis financial statements (such as the government-wide statement of net position), assuming it can be reasonably estimated, when both an external obligating event and an internal obligating event have occurred. The government also would recognize a deferred outflow of resources equal to the liability. The deferral subsequently would be reduced and reported as an outflow of resources (such as expense) in a rational and systematic manner over the useful life of the capital asset. (If a capital asset is permanently abandoned before it is ready for use, however, the government would recognize an immediately outflow of resources, such as expense, rather than a deferred outflow of resources.)

The amount recognized for the ARO liability would be based on the best estimate of the current value of outlays expected to be incurred for the activities required to retire the asset. Current value is the amount that would be paid if all equipment, facilities, and services included in the estimate were acquired during the current reporting period. A best estimate takes into consideration all of the relevant information available and generally would include weighting the probabilities of various potential outlay amounts. If sufficient information is not available for probability weighting, a government would use the most likely outlay amounts among a range of potential outcomes.

At a minimum, the ARO liability would be remeasured annually for the effects of inflation (or deflation). A government also would annually evaluate the factors that were relevant to the initial measurement of the ARO liability, in order to determine if any changes in those factors indicate that the estimated outlays have increased or decreased significantly. If so, the government would revise the amount of the liability accordingly. Examples of factors that might significant affect estimated outlays include, but are not limited to: changes in laws, regulations, or contracts or new court judgments; changes in the technology for retiring a capital asset; and changes in what equipment or services will be used to retire the capital asset.

If the liability amount is revised before the asset is retired, a government also would revise the deferred outflow of resources by the same amount. On the other hand, if the liability amount is revised at or after the asset is retired, a government would recognize an outflow of resources (for example, an expense) in the same amount.

Governmental Funds

Under the modified accrual basis of accounting and current financial resources measurement focus, there would be no recognition of the ARO liability as in the accrual-basis financial statements. A liability would be recognized in the governmental funds only if goods or services related to the retirement activities had been delivered.

What Information Would Be Disclosed?

The GASB has proposed that governments with an ARO liability present the following information in notes to the financial statements:
  • A general description of the ARO and related capital asset, as well as the source of the legal requirement
  • Methods and assumptions used to measure the liability
  • Estimated remaining useful life of the related capital asset
  • If a government is required to provide funding and assurance related to the ARO liability, how it is doing so
  • The amount of assets, if any, restricted to financing the liability.
If a government has an ARO but did not recognize a liability because the amount could not be reasonably estimated, it would disclose why it did not.

Effective Date and Transition

The GASB has proposed that the standards would be effective for periods beginning after December 15, 2017—for instance, fiscal years ending December 31, 2018, or June 30, 2019. Governments would be encouraged to implement earlier.

As is typical for most GASB guidance, these proposed standards would be implemented retroactively. This is done by restating the financial statements for all prior years included and presenting a note to the financial statements about the nature of the restatement and its effect. However, if this is not practicable—in other words, if it cannot reasonably be accomplished—a government would instead restate the beginning net position of the earliest year presented in the financial statements and explain in the notes to the financial statements why the financial statements were not restated.

It should be noted that practicable is a new term that replaces the use of practical in prior standards. However, practicable should be understood to mean the same thing as practical. The change was made because practicable is a more precise definition of what always has been intended by the use of practical—able to be done.

Volunteer to Field Test the Proposed Standards

The GASB is conducting a field test of the Exposure Draft’s provisions as part of the due process in this project, and is looking for volunteers. Participants in a field test essentially go through the process of “implementing” the proposed standards and provide the GASB staff with feedback on issues that arose, the clarity of the guidance, and the estimated staff effort and non-staff costs necessary for implementation.

A fact sheet about the activities and benefits of a field test can be found on the GASB website. If you are a government that is likely to have an ARO and are interested in participating in the field test, please contact GASB Project Manager Jialan Su at as soon as possible. The deadline for completing the field test is March 31, 2016.

Share Your Views with the GASB

You are encouraged to read the Exposure Draft and let the GASB know what you like and do not like about it. Comments are due by March 31, 2016, and instructions for submitting them can be found at the front of the Exposure Draft. Comments can be submitted by email or traditional mail.

Substantial and diverse input from stakeholders is vitally important to establishing effective standards. The independent setting of accounting and financial reporting standards is unique in that it considers all comments objectively and with equal seriousness and diligence, no matter who the comments come from—taxpayer or governor, municipal bond analyst or government CFO, government auditor or partner from a Big-4 accounting firm. All stakeholders can play an integral role in the formation of the GASB’s standards.

The GASB members base their decisions on the substance of the comments received from stakeholders, rather than on how many stakeholders support one view compared with another. So, when you write to the GASB to share your views, be sure to explain the reasoning behind your opinions.

Download the Exposure Draft, Certain Asset Retirement Obligations

Send the GASB your comments on the Exposure Draft