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, and it would improve the usefulness of information for decisions and analysis of various users of external financial reports of governments by developing disclosure requirements for these obligations.

Status:
Currently being deliberated
Added to Research Agenda: December 2013
Added to Current Agenda: August 2014

ASSET RETIREMENT OBLIGATIONS—PROJECT PLAN

Background: The most common asset retirement obligations (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 asset retirement obligations.

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 should 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
Current Developments: At the July teleconference, Board reviewed an educational memorandum summarizing the results of pre-agenda research on this topic.

Board Meetings Topics to be considered
December 2014: Discussion of the general approach in developing new guidance.
January 2015: Discussion of recognition of asset retirement obligations.
March 2015: Discussion of initial measurement of asset retirement obligations.
March 2015 (T/C): Continue discussion of initial measurement of asset retirement obligations.
June 2015 (T/C): Discussion of subsequent measurement of asset retirement obligations.
July 2015: Continue discussion of subsequent measurement of asset retirement obligations.
August 2015 (T/C): Discussion of other topics related to asset retirement obligations, including regulatory accounting and lease-related issues.
September 2015: Discussion of note disclosures.
October 2015: Discussion of transition, effective date, cost-benefit consideration, and draft standards section.
November 2015: Review preballot draft of Exposure Draft.
December 2015 (T/C): Review ballot draft and issue Exposure Draft.
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 Meetings, November 11-13, 2014

The Board began deliberations of the Asset Retirement Obligations (ARO) project by focusing on the definition of an ARO and the scope of items that will be covered by the ARO project.

The Board discussed whether the definition of an ARO should be based on FASB Accounting Standards Codification Topic 410, Asset Retirement and Environmental Obligations, or on Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, and tentatively decided to base the definition on FASB Codification Topic 410. The Board then discussed legal obligations and other-than-legal obligations, including constructive obligations. The Board tentatively decided that the limiting factors for determining the existence and nature of a legal obligation in the context of defining an ARO should be based on applicable federal, state, or local laws or regulations that have been approved as of the balance sheet date, regardless of their effective date. The Board also tentatively decided that the definition of an ARO should include legal obligations and exclude constructive obligations.

The Board tentatively decided to define the term retirement of a capital asset as “the other-than-temporary removal of a capital asset from service.” That term encompasses sale, abandonment, recycling, or disposal in some other manner. However, it does not encompass the temporary idling of a capital asset. The Board also tentatively decided to define an asset retirement obligation as “a legal obligation associated with the retirement of a capital asset.”

The Board continued deliberations by discussing what should be included in the scope of the ARO project. The Board tentatively decided that the scope should include (a) legal obligations associated with the retirement of a tangible capital asset that result from the acquisition, construction, or development of a capital asset; (b) legal obligations associated with the retirement of a tangible capital asset that result from the normal operation of a capital asset; (c) legal obligations that require disposal of a replaced part that is a component of a tangible capital asset; (d) environmental remediation liabilities that result from the normal operations of capital assets and that are associated with the retirement of those assets; and (e) obligations of a lessor in connection with a leased property that meets the criteria of an ARO.

The Board concluded deliberations by discussing what should be excluded from the scope of the ARO project. The Board tentatively decided that the scope should exclude (a) obligations that arise solely from a plan to sell or otherwise dispose of a capital asset; (b) items covered by Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, including an environmental remediation liability that results from the improper operation of a capital asset; (c) activities necessary to prepare an asset for an alternative use; (d) obligations of a lessee in connection with the leased property to make lease payments; (e) obligations for asbestos removal that result from the other-than-normal operation of an asset; (f) obligations associated with maintenance, rather than retirement, of a capital asset; (g) the cost of a replacement part that is a component of a capital asset; (h) pollution prevention or control obligations with respect to current operations, and fines, penalties and other nonremediation outlays that are being excluded from Statement 49; (i) landfills, including those not covered by Statement 18; and (j) conditional obligations to perform asset retirement activities.

ASSET RETIREMENT OBLIGATIONS—TENTATIVE BOARD DECISIONS TO DATE


The Board tentatively agreed to propose that:
  • The definition of an asset retirement obligation (ARO) be based on FASB Codification Topic 410.
  • Limiting factors for determining the existence and nature of a legal obligation in the context of defining an ARO be based on applicable federal, state, or local laws or regulations that have been approved as of the balance sheet date, regardless of their effective date.
  • The definition of an ARO include legal obligations and exclude constructive obligations.
  • The definition of retirement of a capital asset be “The other-than-temporary removal of a capital asset from service.” That term encompasses sale, abandonment, recycling, or disposal in some other manner. However, it does not encompass the temporary idling of a capital asset.
  • The definition of an asset retirement obligation be “A legal obligation associated with the retirement of a capital asset.”
  • The scope of the ARO project include:
    1. Legal obligations associated with the retirement of a tangible capital asset that result from the acquisition, construction, or development of a capital asset
    2. Legal obligations associated with the retirement of a tangible capital asset that result from the normal operation of a capital asset
    3. Legal obligations that require disposal of a replaced part that is a component of a tangible capital asset
    4. Environmental remediation liabilities that result from the normal operations of capital assets and that are associated with the retirement of those assets
    5. Obligations of a lessor in connection of a leased property that meet the criteria of an ARO.
  • The scope of the ARO project exclude:
    1. Obligations that arise solely from a plan to sell or otherwise dispose of a capital asset
    2. Items covered by Statement 49, including an environmental remediation liability that results from the improper operation of a capital asset
    3. Activities necessary to prepare an asset for an alternative use
    4. Obligations of a lessee in connection with the leased property to
    5. make lease payments
    6. Obligation for asbestos removal that results from the other-than-normal operation of an asset
    7. Obligations associated with maintenance, rather than retirement, of a capital asset
    8. The cost of a replacement part that is a component of a capital asset
    9. Pollution prevention or control obligations with respect to current operations, and fines, penalties and other nonremediation outlays that are being excluded from Statement 49
    10. Landfills, including those not covered by Statement 18
    11. Conditional obligations to perform asset retirement activities.