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 Current Agenda: August 2014
Added to Research Agenda: December 2013

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 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: April 2016
  • Redeliberations began: May 2016

Current Developments
: In May, the Board discussed the general approach to be used for the recognition and measurement of AROs and the scope and applicability of a final Statement and the effects of funding and assurance provisions. At the June meeting, the Board discussed AROs associated with a government’s minority interest ownership and initial recognition and measurement issues. In August, the Board discussed subsequent recognition and measurement issues, deferred outflows of resources, notes to the financial statements, and effective date and transition issues.

Work Plan:

Board Meetings Topics to be considered
November 2016 (T/C): Review ballot draft and consider a final Statement for approval.

ASSET RETIREMENT OBLIGATIONS—RECENT MINUTES


Minutes of Meetings, October 25-27, 2016

The Board first discussed whether termination benefits associated with the retirement of a tangible capital asset should be specifically addressed in the final Statement and tentatively decided no specific guidance should be provided in the final Statement.

The Board reviewed a preballot draft of the proposed Statement, Certain Asset Retirement Obligations, and provided clarifying edits on the draft document. The Board then agreed to move forward with a ballot draft of a final Statement.

Minutes of Meetings, September 13-15, 2016

The Board continued redeliberations of the Exposure Draft, Certain Asset Retirement Obligations, by considering illustrations and other issues, effective date and transition, the GASB’s scope of authority, and cost–benefit reconsiderations. The Board also reviewed the draft text of a Standard’s section addressing a government’s minority share of an asset retirement obligation (ARO) based on the Board’s tentative decisions made at the June Board meeting.

The Board discussed respondent requests to include illustrations in the final Statement and tentatively decided not to include illustrations.

The Board then discussed respondent proposals suggesting that certain new projects be added to the GASB technical agenda. The Board tentatively decided that adding new projects to the GASB technical agenda should not be addressed in the ARO project.

The Board redeliberated the recognition of a corresponding deferred outflow of resources when an ARO liability is recognized and tentatively decided to carry forward the provisions related to the recognition of a deferred outflow of resources.

The Board considered a suggestion to include a discussion of materiality in the list of scope exceptions in paragraph 6 of the Exposure Draft and tentatively decided not to include such an exception.

The Board redeliberated the effective date of the final Statement. The Exposure Draft proposed an effective date for reporting periods beginning after December 15, 2017. The Board tentatively decided to extend the effective date to June 15, 2018. The Board then discussed and tentatively decided to carry forward the provisions encouraging earlier application.

The Board considered a request from a respondent to replace the term practicable used in the transition provisions in paragraph 28 of the Exposure Draft with the term practical, as used in GASB statements prior to December 2015. The Board tentatively decided to carry forward the use of the term practicable.

The Board also considered a respondent request to allow prospective application of the final Statement. The Board tentatively decided not to allow prospective application but to carry forward the retroactive application provisions from the Exposure Draft.

The Board next discussed the remaining transition provisions in the Exposure Draft and tentatively decided to carry those provisions forward to the final Statement.

The Board redeliberated whether the proposed accounting and financial reporting provisions, including the new provisions for a government’s minority share of AROs, fall within the GASB’s scope of authority. The Board tentatively decided that the proposed provisions are within the GASB’s scope of authority.

Finally, the Board discussed the due process comments related to cost–benefit concerns and reconsidered the perceived benefits and expected costs of the proposed Statement as a whole. The Board tentatively decided that the intended benefits of the proposed ARO Statement justify the anticipated costs of implementation and ongoing compliance.

The Board then agreed to move forward with a preballot draft of a final Statement.

Minutes of Meetings, August 10-12, 2016

The Board continued redeliberations of the Exposure Draft, Certain Asset Retirement Obligations, by considering subsequent measurement and recognition of liabilities, subsequent measurement and recognition of deferred outflow of resources, and note disclosures.

The Board first discussed annual remeasurement of the current value of the liability associated with an asset retirement obligation (ARO) for the effects of general inflation or deflation. The Board tentatively decided to carry forward the provisions in paragraph 18 of the Exposure Draft with edits to clarify that the referenced inflation/deflation is for the general economy and involves an adjustment to the liability rather than remeasurement.

The Board tentatively decided that no additional clarifying language should be provided in paragraph 19 regarding what constitutes significant. The Board also tentatively decided not to define the term significant in the final Statement.

The Board then discussed issues raised about the provisions for remeasurement in paragraph 19 and tentatively decided to carry forward the provisions with clarifying edits, which require governments to annually evaluate all relevant factors and to remeasure the ARO liability only when the effects of one or more of those factors are “expected” to significantly change the estimated outlays.

The Board redeliberated whether subsequent increases to the liability should be measured as separate layers (a “layering approach”) and tentatively decided not to require this approach.

The Board discussed issues relating to subsequent measurement and recognition of a deferred outflow of resources in various scenarios. The Board tentatively concluded that the guidance in paragraphs 20 and 21 is generally sufficient and, therefore, tentatively decided not to provide further guidance in the final Statement to address the following scenarios: (1) subsequent recognition when the capital asset has an extended estimated useful life, (2) subsequent recognition when a capital asset is fully depreciated and is still in use, (3) subsequent recognition upon a new external obligating event when a capital asset is not fully depreciated.

The Board also considered a request to clarify whether subsequent recognition of a deferred outflow of resources should be over the entire estimated useful life or over the remaining estimated useful life of the capital asset. The Board tentatively decided to carry forward the provisions in paragraph 21 with clarifying edits to address that request.

Finally, the Board discussed issues relating to clarification of certain note disclosures. The Board tentatively decided to carry forward the note disclosure provisions in paragraphs 25 and 26 of the Exposure Draft. The Board tentatively decided it was not necessary to provide clarifying guidance regarding the disclosure of (1) factors that caused a change to the ARO liability and (2) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, paragraph 14 requirements. The Board also tentatively decided that disclosure of internal obligating events related to AROs should not be required in the final Statement.

Minutes of Meetings, June 22-23, 2016

The Board continued redeliberations of the Exposure Draft, Certain Asset Retirement Obligations, by considering recognition and initial measurement of asset retirement obligations (AROs), and governments with minority interests in capital assets with AROs.

The Board first discussed whether a liability should be recognized for AROs. The Board tentatively decided to carry forward the general recognition principle that governments should recognize AROs as liabilities when the liability is incurred and reasonably estimable.

The Board then discussed whether the external and internal obligating events approach used in the Exposure Draft should be carried forward to the final standard as a way to operationalize the recognition guidance. The Board tentatively decided to carry forward the provisions requiring that ARO liabilities be recognized when they are incurred, as manifested by the occurrence of both external and internal obligating events.

The Board then discussed whether an external obligating event should be defined as provided in the Exposure Draft. The Board tentatively decided to carry forward those provisions, which specify external obligating events as the approval of federal, state, or local laws or regulations; the creation of a legally binding contract; or the issuance of a court judgment that imposes a legally enforceable liability on a government to retire a tangible capital asset.

The Board considered whether the guidance in paragraph 11, which states that completing a retirement plan is not an obligating event, should be carried forward to the final standard. The Board tentatively decided to carry forward the guidance in paragraph 11 with clarifying edits. The Board then discussed and tentatively decided to carry forward the provisions related to internal obligating events as provided in paragraph 10 of the Exposure Draft, with clarifying edits.

The Board discussed and tentatively decided to carry forward the provisions of the Exposure Draft requiring governments to generally recognize a deferred outflow of resources when an ARO liability is recognized. The Board also considered whether guidance should be provided in the final standard to address whether the “outflow of resources” recognized in accordance with paragraph 13 of the Exposure Draft should be classified as operating expenses or nonoperating expenses, and tentatively decided not to provide that level of prescriptive guidance in the final standard.

The Board discussed and tentatively decided not to include guidance to address the costs that arise solely from a plan to sell or otherwise dispose of a tangible capital asset in the final standard.

The Board then considered feedback received regarding the initial measurement of an ARO liability. The Board first discussed and tentatively decided that settlement amount is the appropriate measurement attribute and should be carried forward to the final standard. The Board then discussed and tentatively decided that the current value measurement approach should be carried forward to the final standard for measuring ARO liabilities. The Board discussed and tentatively decided that the Basis for Conclusions should further explain the consistency of the current value measurement approach between the proposed standard and 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.

The Board discussed and tentatively decided that the Exposure Draft’s guidance for which costs to include in “current value” was appropriate and that no further clarifying edits are needed.

The Board then discussed and tentatively decided the measurement approach described as “best estimate” in paragraphs 15 and 16 of the Exposure Draft should be carried forward to the final standard.

The Board discussed whether the measurement approach described in paragraph 16 should be labeled as a “hybrid approach” in the final standard and tentatively decided not to label it as such. The Board then discussed and tentatively decided that no additional guidance should be provided on the measurement approach described in paragraph 16 in the final standard.

The Board discussed whether the final standard should address reporting of AROs arising from governments’ minority interest ownership (referred to as “undivided interests”) when the majority interest owner is a FASB reporting entity. The Board tentatively decided that the final standard should address this issue. The Board then discussed possible ways to provide guidance on how to measure governments’ minority interests in AROs. The Board tentatively decided that the final standard should provide an exception to the initial and subsequent measurement provisions for governments that have a minority interest in an ARO, when the majority owner reports under FASB guidance. The exception would allow these governments to report their minority share of an ARO liability using the measurements provided by the FASB majority owners without adjustment.

The Board discussed whether governments with minority interests in ARO liabilities should be required to disclose all the information proposed in paragraphs 25a–25e of the Exposure Draft. The Board tentatively decided that those governments should be required to disclose only the information required in paragraphs 25a, 25d, and 25e of the Exposure Draft, and that the general description of the government’s minority interest as required by paragraph 25a also should include information about the total ARO liability shared by the majority and the minority interest owners, the percentage of the reporting government’s minority interest share of the overall ARO liability, as well as the dollar amount of the reporting government’s minority interest share of the overall ARO liability. The Board then discussed whether the measurement date of the majority owner’s financial report from which the governmental minority owner receives information about its minority interest in AROs should be disclosed and tentatively decided not to require that disclosure.

Finally, the Board discussed a potential requirement for how recent the majority owner’s financial report should be from which the reporting government’s ARO measurement is taken. The Board tentatively decided a government with a minority interest in AROs should be required to use the financial report from the majority owner dated no more than one year and one day prior to the reporting government’s own financial reporting date.

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 Archive

ASSET RETIREMENT OBLIGATIONS—TENTATIVE BOARD DECISIONS TO DATE


These tentative decisions have been made since the issuance of the Exposure Draft and in anticipation of the final Statement. The Board tentatively agreed that the final Statement should carry forward from the Exposure Draft:
  • The general approach to exclude reexamination and modification of the basic guidance in 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
  • The definition of retirement of a tangible capital asset
  • The scope inclusions and exclusions
  • The provisions for effects of funding and assurance provisions, including:
    • Disclosure of how funding and assurance provisions associated with asset retirement obligations, if legally required, are being met
    • Disclosure of the assets restricted for payment of the asset retirement obligations, when the amount is not separately displayed in the financial statements
  • The guidance that governments not be permitted to offset asset retirement liabilities with restricted assets set aside for funding of the liabilities
  • The general recognition principle that governments should recognize AROs as liabilities when the liability is incurred and reasonably estimable
  • The provisions requiring that ARO liabilities be recognized when they are incurred, as manifested by the occurrence of both external and internal obligating events
  • The provisions which specify external obligating events as the approval of federal, state, or local laws or regulations; the creation of a legally binding contract; or the issuance of a court judgment that imposes a legally enforceable liability on a government to retire a tangible capital asset.
  • Paragraph 11 with clarifying language
  • The provisions related to internal obligating events with clarifying edits.
  • The provisions requiring governments to generally recognize a deferred outflow of resources when an ARO liability is recognized
  • The settlement amount as the measurement attribute to measure a liability for an ARO
  • The current value measurement approach for ARO liabilities
  • The measurement approach described as “best estimate” of expected outlays in paragraphs 15 and 16
  • The provisions regarding subsequent measurement and recognition of a liability in paragraph 18 with clarifying edits, which require annual adjustment of current value of the ARO liability for the effects of general inflation or deflation; in paragraph 19 with clarifying edits, which require that remeasurement of the ARO liability be performed only when an annual evaluation of one or more relevant factors are expected to significantly increase or decrease the estimated outlay associated with the ARO liability; and in paragraph 20, which require changes in the estimated outlays to be recognized as an increase or decrease in the carrying amount of the liability
  • The provisions in paragraph 21 with clarifying edits, which require subsequent recognition of the deferred outflow of resources resulting from an ARO liability over the entire or the remaining estimated useful life of the capital asset, as appropriate.
  • The note disclosure requirements in paragraphs 25 and 26.
  • The transition provisions in paragraph 28.
In addition, the Board tentatively agreed that the final Statement should provide:
  • Guidance on reporting AROs arising from a government’s minority interest ownership (referred to as “undivided interests”) when the majority interest owner reports under the guidance of another recognized accounting standards setter, or when there is no majority interest owner and a nongovernmental minority owner that has the operational responsibility of the jointly owned tangible capital asset reports under the guidance of another recognized accounting standards setter.
  • An exception to the initial and subsequent measurement provisions for governments that have a minority share of an ARO in which the nongovernmental majority owner reports under the guidance of another recognized accounting standards setter. Such governments would report their minority share of an ARO using the measurement provided by the nongovernmental majority owner or the nongovernmental minority owner that has the operational responsibility without adjustment to the measurement and recognition provisions of the final Statement.
  • Governments with minority shares of AROs should disclose only the information in paragraphs 25a, 25d, and 25e of the Exposure Draft. The general description of the government’s minority interest as required by paragraph 25a also should include information about the total ARO shared by the majority and the minority interest owners, the percentage of the reporting government’s minority interest share of the overall ARO, as well as the dollar amount of the reporting government’s minority interest share of the overall ARO.
  • Governments with minority shares of AROs should use the ARO measurement from a financial report of the nongovernmental majority owner or the nongovernmental minority owner that has the operational responsibility dated no more than one year and one day prior to the reporting government’s own financial reporting date.
  • An effective date of reporting periods beginning after June 15, 2018.
The Board agreed to move forward with a ballot draft of a proposed Statement.