United States

Proposed accounting for certain asset retirement obligations

FINANCIAL REPORTING INSIGHTS  | 

Existing laws and regulations require state and local governments to take specific actions to retire certain capital assets, such as the removal and disposal of wind turbines in wind farms and the dismantling and removal of sewage treatment plants. Other obligations to retire certain capital assets may arise from contracts or court judgments. The Governmental Accounting Standards Board recently issued an Exposure Draft, Certain Asset Retirement Obligations, which, if finalized, would require a government that has legal obligations to perform future asset retirement activities related to its tangible capital assets to recognize a liability and a corresponding deferred outflow of resources. The proposed Statement would require that recognition occur when the liability is both incurred and reasonably estimable. The measurement of the liability for an asset retirement obligation would be based on the best estimate of the current value of outlays expected to be incurred.

The proposed Statement would require the current value of the liability for a government’s asset retirement obligations to be remeasured for the effects of inflation or deflation at least annually. In addition, it would require a government to evaluate all relevant factors at least annually to determine whether the effect of any of the factors indicates a significant change in the estimated asset retirement outlays. The proposed Statement also would require disclosures of descriptive information about the nature and timing of a government’s asset retirement obligations, the methods and assumptions used for the estimates of the liabilities, and the estimated remaining useful life of the associated tangible capital assets. If a liability for an asset retirement obligation (or portions thereof) has been incurred by a government but is not yet recognized because it is not reasonably estimable, the government would be required to disclose that fact and the reasons therefor.

If finalized, the requirements of the proposed Statement would be effective for reporting periods beginning after December 15, 2017. The Exposure Draft is available for comment until March 31, 2016.