Asset Retirement Obligations
Research Description: The initial objectives of this research are (1) to research the various types of asset retirement obligations currently encountered in practice and (2) to determine whether current accounting and reporting requirements are sufficient or whether additional guidance needs to be developed for such obligations. The research should provide the Board with the information necessary to consider whether additional guidance is needed and, if so, support deliberations over developing specific accounting and financial reporting standards.
Status: Added to Research Agenda: December 2013
ASSET RETIREMENT OBLIGATIONS—PROJECT PLAN
In the absence of government-specific guidance, GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GAAP hierarchy), allows governments to apply “other accounting literature” including FASB standards issued after November 30, 1989, which did not conflict with or contradict GASB standards.
Background: The most common obligations associated with the retirement of a tangible long-lived asset that are encountered by governments may be those for landfill closure and postclosure care. The guidance for recognizing and measuring those obligations is contained in GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, which was issued 20 years ago (1993). Statement 18, however, does not apply to the retirement of any other public sector capital assets, such as nuclear power plants or sewage treatment facilities. Although GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, would apply to a government’s obligation to clean up pollution associated with non-landfill public capital assets, those standards are not specifically applicable to obligations related to the closure of a capital asset. Furthermore, the Statement 49 provisions would only capture pollution that has already become evident, whereas asset retirement obligations are often associated with actions to prevent pollution from occurring rather than remediate pollution after the fact.
Issued in 2001, FASB Statement No. 143, Accounting for Asset Retirement Obligations (now ASC 410, Asset Retirement and Environmental Obligations “addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. … It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees.” A legal obligation is defined as “an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel.” (Summary of FASB Statement 143)
Major Research Issues: Governments incur costs to retire certain assets after the service capacity of those assets has been exhausted. Retirement costs are incurred for assets as diverse as landfills and nuclear power plants.
Research on this topic will identify the types of assets retirement obligations currently encountered in the government environment and attempt to quantify the significance of those events. The research also will identify current and potential recognition and measurement alternatives and disclosure deficiencies.
The following issues will be considered:
- What types of asset retirement obligations currently exist? How prevalent are these obligations?
- How are asset retirement obligations currently being accounted for and reported by state and local governments? How significant are the amounts associated with these obligations?
- When should asset retirement obligations be recognized?
- Does incurring an asset retirement obligation increase the service capacity of the related asset? Should this increase, if any, be recognized?
- How should this obligation be measured?
- Does the current disclosure for these obligations provide adequate information to the users of financial statements to allow them to understand their economic substance?
- Should additional financial reporting or disclosure requirements be considered?
The asset retirement obligations topic was added to the potential projects list in the technical plan in 2010. The topic has been ranked in the top half of potential projects and research activities in the three years it has been included in the Governmental Accounting Standards Advisory Council’s (GASAC) annual prioritization.
Research Work Plan: The research will consist of a literature review, archival research, and stakeholder interviews. The literature review will explore the requirements of FASB Statement No. 143, Accounting for Asset Retirement Obligations (now ASC 410, Asset Retirement and Environmental Obligations) and the guidance of other standards setters, as well as any existing evidence regarding the experience in practice of applying those standards. The review also will encompass non-accounting literature that describes the nature of the asset retirement obligations that governments encounter and the relevant statutory and regulatory provisions under which governments operate. The archival research will examine the financial reports of governments that are likely to have asset retirement obligations.
The research will conclude with a set of interviews with preparers of financial statements for governments with asset retirement obligations and auditors of such governments, as well as with users of those governments’ financial reports (for instance, bond analysts and staff of regulatory bodies). The purpose of these interviews will be to explore what issues, if any, governments and auditors have had in applying FASB Statement 143, and to identify what information, if any, users require regarding asset retirement obligations.
|Board Meetings||Research Activities
Review relevant literature and guidance of other standards setters; archival research.
|February–March 2014:||Develop interview instruments.|
|April 2014–June 2014 (T/C):||Conduct interviews and draft research memorandum.|
|July 2014 (T/C):||Review results of research with the Board.|
|August 2014:||Consider addition of project to the current agenda.|