The Government Accounting Standards Board (GASB) recently issued a new standard, GASB Statement 83, to provide accounting guidance on asset retirement obligations (AROs). The GASB issued this standard because many governments have not been reporting these liabilities or may have been applying other guidance (such as FAS 143). The standard is expected to resolve these inconsistencies and may result in some governments recording potentially significant liabilities.
The new standard is effective for financial statements on years ending after June 15, 2018, with early implementation encouraged. The pronouncement is available online at www.gasb.org.
What is an asset retirement obligation?
An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. Examples of potential AROs include:
- An asset that may require decommissioning at a substantial cost to a government such as power plants, nuclear reactors or sewage treatment plants.
- Assets of governments that operate in special industries such as an X-ray machine that may require special disposal due to radioactive material.
Landfills are a common ARO, but they are already covered in GASB Statement 18 and will not be changed by GASB Statement 83.
When do I have to report an asset retirement obligation?
A government should recognize an ARO when the liability is incurred and reasonably estimable. A liability has been incurred when there has been an external and internal obligating event:
- External obligating events are those that place an enforceable legal obligation upon a government to perform asset retirement activities. Examples of these events include an approved law or regulation, court ruling or legally binding contract.
- Internal obligating events include placing an asset into operation or starting to use it, abandoning an asset, or the incurrence of contamination (such as with a nuclear reactor).
This Statement also applies to legally enforceable liabilities of a lessor in connection with the retirement of its leased property if those liabilities meet the definition of an ARO.
How will this affect the financial statements?
An ARO will be an estimate of the decommissioning costs (equipment, facilities, or services) as if it were to be acquired at the end of the reporting period, otherwise termed “current value” of outlays. The probability weighting of potential outcomes should be used, but if this is not possible, then the most likely amount in the range of potential outcomes can be used as an alternative.
An asset retirement obligation (liability) is offset with a deferred outflow of resources except for in the case of an abandonment for which an expense should be reported at initial recognition. Over the asset’s useful life, the deferred outflow should be reduced and a corresponding expense recognized in a systematic and rational manner.
How should governments prepare?
Governments should review this new pronouncement and evaluate any potential AROs against GASB Statement 83 recognition criteria. If any obligations are identified, the government should have a plan for calculating liabilities in time for implementation by year end of fiscal 2018.