ASC 410 (FAS No. 143)
Accounting for
Asset Retirement Obligations
ASC 410 (FAS 143): OVERVIEW
A business must recognize
an asset retirement obligation
for a long-lived asset
at the point an obligating event takes place,
provided
it can reasonably estimate its fair value
(or at the earliest date it can make a reasonable estimate).
ASC 410 (FAS 143): OVERVIEW
Obligating Event
An offshore oil-and-gas-production facility
typically incurs its
removal obligation
when it begins operating.
ASC 410 (FAS 143): OVERVIEW
The entity must record the obligation at its fair
value, either the amount at which the liability
could be settled in a current transaction
between willing parties in an active market,
or-more likely-at a substitute for market value,
such as the present value of the estimated
future cash flows required to satisfy the
obligation.
ASC 410 (FAS 143): OVERVIEW
To offset the credit portion of the asset
retirement liability entry, businesses
must capitalize the asset retirement costs
as an increase in the carrying amount of
the related long-term asset.
ASC 410 (FAS 143): OVERVIEW
Businesses must include
certain costs in the income statement
during the asset's life, namely:
Depreciation on the asset, including
additional capitalized retirement costs,
and
Interest for the Accretion of
the asset retirement liability
due to the passage of time.
Accretion expense shall not be considered to be interest cost.
SFAS 143: RECOGNITION ISSUES
Businesses may incur retirement obligations at the
inception of an asset's life or during its operating life.
For example,
-an offshore oil-and-gas-production facility typically
incurs its removal obligation when it begins operating.
-A landfill or a mine, however, may incur a reclamation
obligation gradually over the life of the asset as space
is consumed with waste or the mine is dug.
A mere plan or intention to dispose of an asset does not
require recognition.
Obligations-such as environmental remediation liabilitiesrelated to the improper operation of an asset are not covered.
Overview
Issued: June 2001
This Statement amends FASB Statement No. 19, “Financial
Accounting and Reporting by Oil and Gas Producing
Companies.
Prior Practice (under SFAS 19) -Income-statement approach:
Recognizing the costs related to such obligations ratably over
an asset's life as a component of depreciation or expensing
the obligations as they are incurred.
FASB Statement no. 143 -Balance Sheet approach:
Balance-sheet based LIABILITY approach, requiring businesses
to recognize a liability for a retirement obligation when they
incur it and an associated asset retirement cost, -even if that
is far in advance of the asset's planned retirement.
ASC 410 (FAS 143): MEASUREMENT ISSUES
Under ASC 410, an entity must recognize an asset retirement
obligation (a liability) at its fair value.
However, since market for settling such obligations may not exist,
FASB permits entities to estimate the obligation's fair value
using the discounted cash flow techniques.
Companies must also estimate the amount and timing of the
related cash flows, incorporating explicit assumptions about:
-inflation,
-technology advances,
-profit margins,
-offsetting cash flows and
-other factors.
ASC 410 (FAS 143): MEASUREMENT ISSUES
A company must determine the extent to
which the amounts or the timing would vary
under different future scenarios and the
relative probabilities of each.
Companies must discount the estimated future cash
flows using a credit-adjusted risk-free rate -a rate (such
as that for zero-coupon U.S. Treasury instruments)
adjusted upward for the effect of the entity's credit
standing.
ASC 410 (FAS 143): MEASUREMENT ISSUES
SFAS Paragraph 3:
An entity shall recognize the fair value of a liability
for an asset retirement obligation in the period in
which it is incurred if a reasonable estimate of fair
value can be made.
If a reasonable estimate of fair value cannot be
made in the period the asset retirement obligation
is incurred, the liability shall be recognized when a
reasonable estimate of fair value can be made.
ASC 410 (FAS 143): MEASUREMENT ISSUES
SFAS Paragraph 11:
Upon initial recognition of a liability for an asset retirement
obligation, an entity shall capitalize an asset retirement cost
by increasing the carrying amount of the related long-lived
asset by the same amount as the liability.
An entity shall subsequently allocate that asset retirement
cost to expense using a systematic and rational method
over its useful life. =>Depreciation Expense
Application of a systematic and rational allocation method
does not preclude an entity from capitalizing an amount of
asset retirement cost and allocating an equal amount to
expense in the same accounting period.
ASC 410 (FAS 143): MEASUREMENT ISSUES
SFAS Paragraph 14:
An entity shall measure changes in the liability for an asset
retirement obligation due to passage of time by applying an
interest method of allocation to the amount of the liability
at the beginning of the period.
The interest rate used to measure that change shall be the
credit-adjusted risk-free rate that existed when the liability,
or portion thereof, was initially measured.
That amount (change in the amount of the liability)
shall be recognized as an increase in the carrying amount
of the liability and as an expense classified as an
operating item in the statement of income, hereinafter
referred to as accretion expense.
Accretion expense shall not be considered to be interest cost.