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:
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 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 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
  • Added to the current technical agenda: August 2014
  • Task force established? Yes
  • Deliberations began: November 2014
Current Developments: At its November 2014–March 2015 meetings and March 2015 teleconference, the Board deliberated on issues related to key definitions, scope of the ARO project, and recognition and initial measurement.

Board Meetings Topics to be considered
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 effects of funding and assurance provisions 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 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 of Meetings, December 15-17, 2014

The Board continued deliberations of the Asset Retirement Obligations (AROs) project by discussing issues regarding the general direction of the project.

The Board discussed whether the overall approach used to develop guidance for AROs should be to address specific regulations for the various types of AROs (a specific guidance-based approach), to provide conceptually based general guidance that could be applied to all AROs (a general guidance-based approach), or a combination of the two approaches (a hybrid approach). The Board tentatively agreed that the overall approach to developing guidance for AROs should be a hybrid approach that is based on general guidance with specific guidance added as needed to operationalize the principles.

The Board then discussed whether the measurement attribute for liabilities recognized as AROs should be based on a form of settlement amount or fair value. The Board tentatively agreed that the measurement attribute for liabilities recognized as AROs should be based on a form of settlement amount.

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 make lease payments
    5. Obligation for asbestos removal that results from the other-than-normal operation of an asset
    6. Obligations associated with maintenance, rather than retirement, of a capital asset
    7. The cost of a replacement part that is a component of a capital asset
    8. Pollution prevention or control obligations with respect to current operations, and fines, penalties and other nonremediation outlays that are being excluded from Statement 49
    9. Landfills, including those not covered by Statement 18
    10. Conditional obligations to perform asset retirement activities.
  • The overall approach to developing ARO guidance be a general guidance-based approach with specific guidance added as needed to operationalize the principles.
  • The measurement attribute for liabilities recognized as AROs be based on a form of settlement amount.
    • An ARO meet the criteria for potential recognition as a liability.
    • Asset retirement costs do not meet the definition of an asset.
    • For a capital asset that is ready for use, the debit side of the transaction (the asset retirement cost) be reported as a deferred outflow of resources.
    • For a capital asset that is permanently abandoned before it is ready for use, the debit side of the transaction (the asset retirement cost) be reported as an outflow of resources.
    • The ARO guidance refer to the guidance for regulatory accounting in Statement 62, as amended.
    • The general approach for the pattern of recognition of an ARO liability be based on when the liability is incurred.
    • The general approach for the timing of initial recognition of an ARO liability be a hybrid approach based on when the liability is incurred and reasonably estimable, with specific obligating events provided when needed.
    • The ARO guidance require both an external and an internal obligating event for initial recognition of an ARO liability.
    • An external obligating event would 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 completion of a retirement plan not be an internal obligating event for initial recognition of an ARO liability.
    • The ARO guidance require an internal obligating event in addition to an external obligating event for the initial recognition of an ARO liability.
    • An internal obligating event can be any of the following:
      • For contamination-related AROs: the occurrence of contamination
      • For non-contamination-related AROs:
        • 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 the 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
      • Determining when an ARO is reasonably estimable be left to professional judgment.
      • The debit side of the transaction (the asset retirement cost) be recognized at the same time as the initial recognition of the ARO liability.
        • The approach for determining which activities and costs to include in the measurement of an ARO liability be a hybrid approach that includes a general principle with some specifics covered in the scope of the project.
        • The general principle for the initial measurement of an ARO liability be to measure an ARO liability when it is incurred and reasonably estimable.
        • The measurement technique for an ARO liability be current cost
        • The ARO guidance clarify the use of the term contamination by (1) including the term contamination in the glossary together with the discussion provided by the U.S. Nuclear Regulatory Commission on its website and (2) adding an explanation in the Basis for Conclusions for the use of the term contamination in setting obligating events for different types of AROs.
        • The pattern for recognizing ARO expenses be a systematic and rational manner over the useful life of the asset.
        • ARO costs start to be recognized as expenses once the deferred outflows of resources related to the ARO are recognized.
        • The principles of current financial resources be applied to the ARO guidance for financial reporting in governmental funds.
          • The measurement approach to measure the current cost of an ARO liability be a hybrid 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. The best estimate approach 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.