In November 2016, the GASB issued Statement No. 83, Certain Asset Retirement Obligations. The new standard provides guidance to state and local governments on recognition of liabilities and corresponding deferred outflows of resources related to asset retirement obligations (AROs). The objective of the new standard is to enhance comparability of financial statements among governments by instituting uniform criteria for recognition and measurement of AROs. The GASB notes that this may result in recognition of pre-existing AROs that were not previously reported. In addition, the GASB hopes to improve the usefulness of financial statements with new disclosures on AROs.
What Is an ARO?
An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. The term retirement indicates that the asset is permanently removed from service. Retirement may include sale, abandonment, recycling, or other disposal. It does not apply to temporary idling of an asset. An ARO may also result from disposal of a replaced part that is a component of an asset or from environmental remediation activities associated with an asset retirement. Asset owners or legally bound lessors may be responsible for recording and reporting an ARO under GASBS No. 83.
Recognition and Measurement of an ARO
GASBS No. 83 discusses the circumstances that would lead a state or local government to recognize an ARO. First, it notes that governments may be required by law or regulation to take certain actions to retire assets at the conclusion of their useful lives, such as dismantling sewage treatment plants, disposing of medical or laboratory equipment, or in much rarer circumstances, decommissioning nuclear reactors. In other cases, the standard notes that the obligation may arise from contracts or court judgments. Finally, the standard discusses obligations that may arise internally, such as when a contamination event occurs requiring clean-up, when a new asset is placed into operation that will ultimately require outlays at retirement, or when an asset with an existing ARO is acquired.
GASBS No. 83 requires that an ARO be recognized when the liability is incurred and reasonably estimable. A liability may be incurred due to laws and regulations, contract terms, court judgments, or internal events, as discussed in the previous paragraph. The standard states that the ARO should be measured based on the best estimate of the current value (as opposed to discounted value) of outlays expected to be incurred. Current value is defined as the amount that would be paid at the end of the current reporting period to acquire the equipment, facilities, and services included in the estimate. This estimate should include weighting of all potential outcomes based on probability, if such information is available or can be obtained at reasonable cost. In the event that probability weighting is not feasible, the most likely scenario should be used to estimate the outflow amount.
Once recorded, the standard requires that the ARO be maintained at current value, with adjustments for general inflation/deflation at least annually. It also requires the government analyze, at least annually, any relevant factors that may significantly change the estimated ARO outlays and remeasure the ARO if (and only if) evaluation of such factors indicates that there is, in fact, a significant change. Examples of factors to consider include increases/decreases outside of general inflation/deflation in the prices of specific components included in the estimated outlays; changes due to legislation, regulations, amended contract terms, or court judgments; changes in the type of equipment, facilities, or services to be used in the asset retirement; and changes in technology.
GASBS No. 83 also addresses situations where the government has only a minority ownership interest, defined as less than 50%, in an asset with an ARO, and a nongovernmental entity has majority ownership or, if there is no single majority owner, the operational responsibility for the asset. In such cases, the nongovernmental entity would measure and report the ARO in accordance with their own financial accounting and reporting framework, such as FASB standards. In such scenarios, the GASB standard states that the government should report its minority share of the ARO using the measurement developed by the nongovernmental majority owner/operating entity, and it should not adjust the ARO in any way to conform to the requirements of GASBS No. 83.
GASBS No. 83 does not apply to any type of landfill closure and postclosure care obligations, whether included in GASBS No. 18 or not. It does apply to pollution remediation obligations (GASBS No. 49) prior to their retirement.
Deferred Outflows Recognition
GASBS No. 83 also requires that a deferred outflow of resources be recorded with the obligation, initially measured as the amount of the corresponding ARO liability. These deferred outflows should then be reduced and recognized as an outflow of resources, generally as an expense, systematically over the estimated useful life of the associated asset. In the event that the associated asset is permanently abandoned before ever being placed into service, the government should immediately report the outflow of resources.
Adjustments to the amount of an ARO due to inflation/deflation or remeasurement should be recognized with a corresponding change in the deferred outflows. If, however, there is an increase or decrease in the ARO amount at or after retirement, when the deferred outflows have already been fully recognized, the government would recognize the change in the period incurred.
The new standard requires certain disclosures for each ARO, including the following:
- Description of the ARO and associated assets.
- Basis of the obligation (for example law, regulation, contract, or court judgment).
- Methods and assumptions used to estimate the ARO liability.
- Estimated remaining useful life of the associated assets.
- How legally required funding and assurance provisions are being met, such as with insurance policies, letters of credit, surety bonds, trusts, or guarantees from third parties.
- Amount of any assets restricted for payment of AROs, if the restricted assets are not separately displayed in the financial statements.
In the event that a government incurs an ARO but has not yet recognized it because reasonable estimates are not available to facilitate measurement, this fact must be disclosed along with the reasons an estimate cannot currently be made. Similar disclosures are required for a government’s minority shares of AROs.
Effective Date and Transition
GASBS No. 83 applies to the financial statements of all state and local governments and is effective for reporting periods beginning after June 15, 2018. However, the GASB is encouraging earlier application. Changes adopted to conform to the new standard should be applied retroactively, with restatement for all prior periods presented in the financial statements.