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.
Exposure Draft approved: December 2015
Added to Current Agenda: August 2014
Added to Research Agenda: December 2013
- Project Plan
- Recent Minutes
- Tentative Board Decisions to Date
- Project staff:
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?
- Pre-agenda research approved: December 2013
- Added to 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
- Field test completed: March 2016
- Redeliberations began: May 2016
Current Developments: The comment period for the Exposure Draft, Certain Asset Retirement Obligations, and the field test both ended on March 31, 2016.
|Board Meetings||Topics to be considered|
|June 2016||Discuss field test results summary memo, additional scope and applicability issues, including a government’s minority interest ownership, and redeliberate recognition and initial measurement.|
|August 2016:||Redeliberate subsequent measurement and recognition—liability; subsequent measurement and recognition—deferred outflow of resources; notes to financial statements; and effective dates and transition.|
|September 2016:||Redeliberate illustrations of presentation and note disclosures; codification instructions; other issues; and cost benefit reconsiderations.|
|October 2016:||Review preballot draft of final Statement.|
|November 2016 (T/C):||Review ballot draft and issue final Statement.|
ASSET RETIREMENT OBLIGATIONS—RECENT MINUTES
Minutes of Meetings, May 10-11, 2016
The Board began redeliberations of the Exposure Draft, Certain Asset Retirement Obligations, by considering responses about the general approach to the project, as well as issues that were raised related to the introduction and the scope of the Exposure Draft.
The Board first considered responses relating to the general approach of the project. Some respondents requested that the general approach be expanded to include reexamination of guidance currently provided in Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, and Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations. The Board tentatively decided to reaffirm the general approach of excluding Statements 18 and 49 from the scope of this project.
Next, the Board considered comments requesting that additional clarification be provided for certain items that are discussed in the Scope section of the Exposure Draft. The Board tentatively decided to carry forward the language from the Scope section of the Exposure Draft. The Board also tentatively decided to add an additional example of an asset retirement obligation (retirement of x-ray machines) to the Introduction section of the proposed Statement.
The Board also considered respondent feedback related to the effects of funding and assurance provisions. The Board tentatively decided to carry forward the provisions of the Exposure Draft requiring disclosure of assets that are legally restricted for the funding of asset retirement obligations, if the amount is not separately displayed in the financial statements, as well as disclosure of how legally required funding and assurance provisions are being met. The Board also considered comments requesting that governments be allowed to offset asset retirement liabilities with assets that are restricted for the payment of those liabilities and tentatively decided to carry forward the provisions that do not permit governments to offset asset retirement liabilities with restricted assets.
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.
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.
ASSET RETIREMENT OBLIGATIONS—TENTATIVE BOARD DECISIONS TO DATE
The Exposure Draft, Certain Asset Retirement Obligations, was approved in December 2015.