Project Pages

Asset Retirement Obligations

Project Description: The objective of this project would be to improve financial reporting by developing requirements on recognition and measurement for asset retirement obligations (ARO), other than landfills. The achievement of this objective would reduce inconsistency in current reporting and, therefore, enhance comparability between governments. The project also will improve the usefulness of information for decisions and analysis of various users of external financial reports of governments by developing disclosure requirements for AROs.

Status:
Exposure Draft approved: December 2015
Added to Research Agenda: December 2013
Added to Current Agenda: August 2014

ASSET RETIREMENT OBLIGATIONS—PROJECT PLAN

Background: The most common AROs encountered by governments may be those for landfill closure and post-closure care. The guidance for recognizing, measuring, and reporting those obligations is provided in Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs. However, Statement 18 does not apply to the retirement of other capital assets, such as nuclear power plants, coal-fired power plants, or sewage treatment facilities. Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations addresses governments’ obligations to clean up pollution, but does not apply to costs that are an unavoidable part of the cost of retiring a capital asset.

The Financial Accounting Standards Board (FASB) issued FASB Statement No. 143, Accounting for Asset Retirement Obligations in 2001 (now Accounting Standards Codification (ASC) 410, Asset Retirement and Environmental Obligations). In the absence of government-specific guidance that directly addresses asset retirement obligations other than landfills, governments are allowed to apply “other accounting literature” that does not conflict with or contradict GASB standards, according to GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GAAP hierarchy).This includes FASB Statement 143. The GASB staff occasionally receives technical inquiries related to AROs, principally asking whether a governmental entity can or should apply FASB Statement 143 or Statement 18 to its AROs.

The topic of AROs was raised by stakeholders during the Board’s consideration of matters related to Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. Although AROs were outside the scope of Statement 62, respondents to the Exposure Draft asked for further guidance.

The Government Accounting Standards Advisory Council (GASAC) has considered this project during its annual discussion of project priorities. For 3 of the last 4 years, this topic has ranked in the top 10 non-reexamination projects, ranging as high as sixth among all potential topics and pre-agenda research activities in March 2014. At the October 2013 GASAC meeting, GASAC members commented favorably on the potential addition of pre-agenda research activities relating to business-type activities, including AROs.

Accounting and Financial Reporting Issues: One major topic expected to be addressed will be what constitutes an ARO and what the term retirement should encompass in the guidance. The project will determine a general approach to recognition and measurement of an ARO, considering existing practice among governments and feedback received from preparers and auditors regarding their concerns about complexity, comparability, and the balance of costs and benefits. The project also will consider the following issues:
  • Should costs, if any, associated with AROs be capitalized? If so, how should these costs be recognized and measured?
  • What information about AROs should be disclosed in the notes to the financial statements?
Project History:
  • Pre-agenda research approved: December 2013
  • Added to the current technical agenda: August 2014
  • Task force established? Yes
  • Deliberations began: November 2014
  • Task force meeting held: October 2015
  • Exposure Draft issued: December 2015
  • Comment period: December 2015–March 2016
Current Developments: At its September 2015 meeting, the Board deliberated issues related to note disclosures. At its October meeting, the Board completed deliberations on asset retirement obligation issues. The Board also reviewed and deliberated a draft standards section of a proposed Statement. At its November 2015 meeting, the Board discussed a preballot draft of a proposed Exposure Draft, Accounting and Financial Reporting for Asset Retirement Obligations. At its December 7th 2015 teleconference, the Board approved the issuance of the Exposure Draft.

Board Meetings Topics to be considered
January­-March 2016: Comment period.
April-­August 2016: Redeliberate issues based on respondent feedback.
September 2016: Review preballot draft of final Statement.
October 2016: Review ballot draft and issue final Statement.

ASSET RETIREMENT OBLIGATIONS—RECENT MINUTES


Minutes of Teleconference, December 7, 2015

The Board reviewed the ballot draft of a proposed Statement, Certain Asset Retirement Obligations. The Board also provided clarifying edits. The Board then voted six to one to approve the issuance of the Exposure Draft.

Minutes of Meetings, November 18-20, 2015

The Board reviewed and provided clarifying edits on a preballot draft of the proposed Exposure Draft, Accounting and Financial Reporting for Asset Retirement Obligations. The Board then agreed to move forward with a ballot draft of a proposed Statement.

Minutes of Meetings, October 6-8, 2015

The Board continued deliberations on the Asset Retirement Obligations project and reviewed a draft Standards section of an Exposure Draft. The Board provided edits and added clarifying language to the proposed guidance and tentatively concluded that illustrations are not needed in the Exposure Draft.

With regard to the effective date, the Board tentatively decided that the Exposure Draft should propose an effective date for fiscal years beginning after December 15, 2017.

The Board also discussed cost-benefit considerations and tentatively agreed that the expected benefits of the proposed standard will exceed the perceived costs of implementation and compliance.

Furthermore, the Board discussed the characteristics of the financial information that would be provided as a result of the proposed standard. The Board tentatively agreed that the proposed guidance would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, September 1-3, 2015

The Board continued deliberations on the Asset Retirement Obligations (ARO) project with discussion of potential note disclosures. The Board considered the note disclosures currently required by GASB Statements No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, and No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, and FASB Statement No. 143, Accounting for Asset Retirement Obligations, as well as disclosure requirements for similar obligations of other standards setters, to identify potential note disclosures that could be proposed for governments that report ARO liabilities.

The Board tentatively decided to propose that a general description of the ARO, the associated capital assets, and the source of the ARO (federal, state, or local laws and regulations, contracts, or court judgments) be disclosed. The Board also tentatively decided to propose that the amount of each significant addition and reduction of the estimated ARO liabilities in the reporting period as well as the factor(s) that caused the significant change be disclosed.

In addition, the Board tentatively decided to propose that the estimated remaining useful life of the capital assets associated with AROs be disclosed. The Board also tentatively agreed to propose that information about how financial assurance requirements, if any, are being met be disclosed.

The Board discussed a potential disclosure of information related to the nature of estimates in ARO liabilities and tentatively decided to propose that the methods and assumptions used to determine ARO liabilities be disclosed. The Board concluded the discussion by tentatively deciding to propose that for AROs or portions of AROs that are incurred but not yet recognized because they cannot be reasonably estimated, that fact and the reasons therefor be disclosed.
In addition, the Board considered but decided not to propose the following disclosure requirements in the proposed ARO guidance:
  • The internal obligating event that led to recognition of an ARO liability
  • The estimated total current cost of AROs remaining to be recognized
  • A reconciliation of the beginning and ending balance of the aggregate ARO liabilities separate from a government’s overall long-term liabilities reconciliation schedule
  • A specific disclosure of the deferred outflows of resources associated with AROs
  • The percentage of the capital asset’s useful life that has already been used to date
  • The potential for changes in an ARO liability
  • Information about expected recoveries related to ARO liabilities, if any.
Minutes of Meetings, July 21-23, 2015

The Board continued deliberations on the Asset Retirement Obligations (ARO) project, focusing on issues related to subsequent measurement as well as fiscal funding and assurance provisions.

The Board began its deliberations with discussion of the general approach for subsequent measurement of an ARO liability. The Board tentatively decided to propose that the general approach be to periodically evaluate various factors to determine whether any of those factors indicate an increase or decrease in estimated outlays, and to remeasure the ARO liability only when the results of the evaluation of those factors indicate there is a change to the estimated outlays. The Board also tentatively agreed to propose that the following factors that suggest remeasurement of an ARO liability is needed be provided as examples in the proposed ARO guidance: (a) general inflation or deflation; (b) price increases or reductions for specific outlay elements; (c) changes in technology; (d) changes in laws, regulations, contracts, or court judgments; and (e) changes in the type of equipment, facilities, and services that will be used.

In addition, the Board tentatively agreed to propose that changes in an ARO liability arising from inflation or deflation be reported as a deferred outflow of resources and recognized as expense over a period equal to the remaining useful life of the capital asset. The Board also tentatively agreed to propose that, for changes in an ARO liability that occur before the time of the retirement of the asset, a government adjust the corresponding deferred outflow of resources, and the remaining balance of the deferred outflow of resources should subsequently be recognized as an expense in a systematic and rational manner over a period equal to the remaining useful life of the asset. Additionally, the Board tentatively agreed to propose that changes in an ARO liability at or after the time of the retirement of the asset be accounted for as outflows of resources or inflows of resources.

The Board next discussed fiscal funding and assurance provisions and tentatively agreed that the proposed guidance would address only assets that are restricted for asset retirement activities, using the current definition of restricted in GASB guidance. The Board tentatively agreed to propose that governments not be permitted to offset ARO liabilities with assets restricted for payment of those liabilities.

The Board tentatively agreed to propose that assets restricted for payment of ARO liabilities not be required to be reported as a separate line-item within their own category of restriction on the face of the financial statements, but that governments be required to disclose those restricted assets in the notes to the financial statements if not apparent from the financial statements.

Finally, the Board tentatively agreed to propose that the costs to comply with fiscal funding and assurance provisions be separately accounted for as period costs and excluded from the ARO liability.

Minutes of Teleconference, March 30, 2015

The Board continued deliberations on asset retirement obligations (ARO), focusing on issues related to initial measurement of an ARO liability.

The Board began with discussion of whether the measurement approach for measuring the current cost of an ARO liability should be the expected-cash-flow approach as defined by FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, the best-estimate approach as defined by FASB Concepts Statement 7, or a hybrid measurement approach that is tailored to the needs of the proposed ARO guidance. The Board tentatively agreed to propose that the measurement approach to measure the current cost of an ARO liability be a hybrid measurement approach. The Board then discussed what the hybrid measurement approach to measure the current cost of an ARO liability should be. The Board tentatively agreed to propose that the hybrid measurement approach be a best-estimate approach, which refers to management’s best estimate in a broad sense, using all available evidence, including the likelihood of all potential cash flows that are reasonably estimable given cost constraints. Thus, the best estimate approach in the proposed ARO guidance would include probability weighting of potential outcomes when sufficient evidence is available or can be obtained at reasonable cost. When probability weighting cannot be produced at reasonable cost, the most likely amount in the range of potential outcomes would be used. That amount still would consider all other available evidence that can be obtained at reasonable cost, including the potential for higher or lower outcomes.

Minutes of Meetings, March 10-12, 2015

The Board continued deliberations on the Asset Retirement Obligations (ARO) project, focusing on various issues related to initial measurement of an ARO liability and recognition of expenses.

The Board began with discussion of whether the proposed approach for determining which activities and costs to include in the measurement of an ARO liability should be a specific guidance-based approach, a general guidance-based approach, or a hybrid approach that includes a general principle with some specifics covered in the scope of the project. The Board tentatively agreed that the proposed approach for determining which activities and costs to include in the measurement of an ARO liability should be a hybrid approach. The Board then discussed what the general principle should be for the initial measurement of an ARO liability and tentatively concluded that the proposed general principle should be to measure an ARO liability when it is incurred and reasonably estimable. The Board then discussed two measurement techniques used to measure similar liabilities in current accounting literature—current cost and present value. The Board tentatively agreed that the proposed measurement technique for an ARO liability should be current cost. Next, the Board considered whether to clarify the term contamination used in the tentatively proposed obligating events for recognition of AROs. The Board tentatively concluded that the proposed term contamination should be clarified by adding the term to the glossary of the proposed ARO guidance, including the discussion provided by the U.S. Nuclear Regulatory Commission on its website. The Board also tentatively agreed to add an explanation for the use of the proposed term contamination in the Basis for Conclusions.

The Board then discussed the pattern and timing of recognition of the deferred outflow as outflows of resources, that is, the reporting of ARO expenses. The Board tentatively agreed to propose that the pattern used for recognizing ARO expenses be a systematic and rational manner over the useful life of the asset. The Board also tentatively agreed to propose that ARO costs begin to be recognized as outflows of resources once deferred outflows of resources related to the ARO are recognized, rather than when the actual ARO disbursements are made. Next, the Board considered reporting in governmental funds, and tentatively agreed to propose that the principles of current financial resources be applied to the proposed ARO guidance for the financial reporting in governmental funds.

Minutes of Meetings, January 27-29, 2015

The Board continued deliberations on the Asset Retirement Obligations (ARO) project, focusing on various issues related to recognition of AROs.

The Board began with discussion of the criteria for recognition of a liability and tentatively agreed that an ARO meets the criteria for potential recognition as a liability. The Board then discussed what should be recognized on the debit side of the transaction (the asset retirement cost) when recognizing an ARO liability. The Board tentatively concluded that asset retirement costs should not be recognized as an asset. The Board also tentatively agreed that for a capital asset that is ready for use, the asset retirement costs should be recorded by governments as a deferred outflow of resources. The Board then discussed what should be recorded by governments in situations in which capital assets have been permanently abandoned prior to being ready for use, and it tentatively decided that the asset retirement costs in these scenarios should be recorded as an outflow of resources. Next, the Board considered how the ARO guidance should address regulatory accounting. The Board tentatively agreed that the ARO guidance should refer to the guidance for regulatory accounting as provided in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, as amended.

The Board then discussed the pattern and timing of initial recognition of an ARO liability. First, the Board considered the general approach for the pattern of recognition of an ARO liability and tentatively concluded that it should be based on when the liability is incurred. The Board also tentatively agreed that the general approach for the timing of initial recognition of an ARO liability should be a hybrid approach, based on when the liability is incurred and reasonably estimable with specific obligating events provided as needed. The Board continued deliberations by discussing external and internal obligating events that, together, would indicate a legal obligation to perform asset retirement activities that should be recognized as an ARO liability. The Board tentatively agreed that the ARO guidance should require an external obligating event for initial recognition of an ARO liability and that an external obligating event could be the approval of laws or regulations, the creation of a contract, or a court judgment that imposes a legal obligation on a government to retire a capital asset.

The Board discussed internal obligating events and tentatively concluded that the completion of a retirement plan should not be considered an internal obligating event for initial recognition of an ARO liability. Next, the Board tentatively decided that the occurrence of contamination should constitute an internal obligating event for initial recognition of a contamination-related ARO liability.

The Board then discussed internal obligating events for AROs that are not related to contamination. The Board tentatively agreed that an ARO liability generally should not be recognized before the capital asset is ready for operation. The Board then considered the internal obligating events for situations in which the capital asset has been put into operation. The Board tentatively decided to propose that an internal obligating event can be any of the following:
  • For contamination-related AROS: the occurrence of contamination
  • For AROs that are not related to contamination:
    • Putting the capital asset into operation:
      • If the pattern of incurrence of the liability is based on the use of the asset, putting the capital asset into operation and consuming a portion of the usable capacity by the normal operations of the capital asset
      • If the pattern of incurrence of the liability is not based on the use of the asset, putting the capital asset into operation
    • Permanent abandonment of the capital asset before it is put into operation
    • For acquired AROs: the acquisition itself (the acquisition date).
Overall, the Board also tentatively decided that guidance should require an internal obligating event in addition to an external obligating event for the initial recognition of an ARO liability.

The Board tentatively agreed that determining when a liability for an ARO is reasonably estimable should be left to professional judgment. The Board concluded deliberations by tentatively deciding that the debit side of the transaction (the asset retirement cost) should be recognized at the same time as initial recognition of the ARO liability.

Minutes Archive

ASSET RETIREMENT OBLIGATIONS—TENTATIVE BOARD DECISIONS TO DATE


The Exposure Draft, Certain Asset Retirement Obligations, was approved in December 2015.