Finance and Planning
Financial Services
Accounting for Conditional Asset Retirement Obligations FIN 47
Table of Contents
01. Policy Statement ........................................................................................................................ 2
02. Reason for Policy ...................................................................................................................... 2
03. Who Needs to Know This Policy ............................................................................................... 2
04. Legal Obligations ....................................................................................................................... 2
05. Process Summary ..................................................................................................................... 3
06. Who Needs to Know This Procedure ........................................................................................ 3
07. Initial Adoption ........................................................................................................................... 3
08. Guidance on Changes in Estimates for and Applying Payments to Asset Retirement
Obligations ........................................................................................................................................ 4
09. Changes in ARO Due to Passage of Time or Amount (Statement 143, paragraph 15) ........... 4
10. Revisions to a previously recorded asset obligation (Statement 143 paragraphs A26 and
A27) .................................................................................................................................................. 4
11. Changes in Accounting Estimate (Statement 154, paragraph 19) ............................................ 5
12. Annual Review and Reporting ................................................................................................... 5
13. Explanation of Woodard & Curran Costs .................................................................................. 5
14. Example of ARO accounting with $1 million Asbestos Remediation Payment ......................... 6
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01. Policy Statement
In 2006 the University recorded conditional asset retirement obligations for the estimated costs
associated with asbestos removal for its relevant properties. The University will timely identify
and record new conditional asset retirement obligations as they arise, depreciate and continue to
accrete the interest on the ARO, and reevaluate the estimates used in the calulations for
appropriateness.
02. Reason for Policy
In 2001, FASB issued SFAS 143 requiring entities, including Universities, to record liabilities for
tangible long-lived assets that must be retired or disposed of in a specified way by law or
contract. Such liabilities are known as Asset Retirement Obligations (ARO’s). An ARO is an
unconditional legal obligation associated with the retirement (settling) of a tangible long-lived
asset and must be recognized even if the timing and/or method of the settlement of that obligation
is conditioned on a future event, provided that the liability’s fair value can be reasonably
estimated (www.fasb.org.) Due to diversity in practice and implementation, FASB issued
Interpretation 47 (FIN 47) in March 2005. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists around the timing and/or method of settlement.
The effective date for implementation is fiscal year 2006.
03. Who Needs to Know This Policy
Multi-discipline teams comprised of members from finance, physical plant, purchasing, and
general counsel.
04. Legal Obligations
FASB 143 Accounting for Asset Retirement Obligations (2001)
•
Requires entities to record liabilities for tangible, long-lived assets (e.g., buildings
containing asbestos) that must be retired or disposed in a specified way by law or
contract.
•
Such liabilities are Asset Retirement Obligations (AROs)
FIN 47 Accounting for Conditional Asset Retirement Obligations (2005)
•
Clarifies that FASB 143 applies to all entities with legal obligations to retire long-lived
assets.
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05. Process Summary
In 2006 the University recorded conditional asset retirement obligations for the estimated costs
associated with asbestos removal for its relevant properties. The University will timely identify
and record new conditional asset retirement obligations as they arise, depreciate and continue to
accrete the interest on the ARO, and reevaluate the estimates used in the caluculations for
appropriateness.
06. Who Needs to Know This Procedure
The Vice President Finance, Executive Director for Financial Reporting, Controller, and Vice
President for Facilities are responsible for quantifying the obligations and recognizing the
applicable depreciation and interest accretion. Legal Counsel and other persons knowledgeable
about buildings or specialized equipment may be consulted with final review and approval by the
Executive Director for Financial Reporting and Analysis and the Vice President for Finance.
07. Initial Adoption
The asset retirement cost is measured as of the date the asset retirement obligation is incurred,
and then rolled forward (by accreting the discount of the liability and depreciating the capitalized
retirement costs) to the date of the adoption of the interpretation. The amounts should be
measured using current information, current assumptions, and current interest rates.
Assumptions used by Pace at adoption:
Inflation: 3 %
Discount rate: 6.5%
Liability inception date: 1987
Estimated life of buildings: 90 years
Settlement dates of ARO: Various
The initial accounting of the adoption of this impacts balance sheet (assets and liabilities) and
statement of activities (cumulative effect of change in accounting)
A liability for any existing asset retirement obligation(s) adjusted for cumulative accretion
of the discount to the date of adoption of the interpretation
An asset retirement cost capitalized as an increase to the carrying amount of the
associated long-lived asset
Accumulated depreciation on the capitalized asset retirement cost
The following information was disclosed in the initial year of adoption of Interpretation 47:
The effect of adopting the interpretation on change in net assets before extraordinary
items and on changes in net assets for the period of adoption.
The income before extraordinary items and net income computed on a pro forma basis
for all the periods presented, as if the interpretation had been applied during all the
periods affected. The disclosure must appear on the face of the statement of activities.
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The amount of the liability for asset retirement obligations for the beginning of the earliest
year presented and the end of each year presented, as if the interpretation had been
applied during all the periods affected.
The pro forma amount of the liability for the asset retirement obligation(s) for each yearend presented and for the beginning of the earliest year presented.
08. Guidance on Changes in Estimates for and Applying Payments to Asset
Retirement Obligations
FIN 47, paragraph 7: Statement 143 provides guidance for adjusting the liability for revisions to
either the timing or the amount of the original estimate of undiscounted cash flows.
09. Changes in ARO Due to Passage of Time or Amount (Statement 143,
paragraph 15)
Changes resulting from revisions to the timing or the amount of the original estimate of
undiscounted cash flows shall be recognized as an increase or a decrease in (a) the carrying
amount of the liability for an asset retirement obligation and (b) the related asset retirement cost
capitalized as part of the carrying amount of the related long-lived asset. Upward revisions in the
amount of undiscounted estimated cash flows shall be discounted using the current creditadjusted risk-free rate. Downward revisions in the amount of undiscounted estimated cash flows
shall be discounted using the credit-adjusted risk-free rate that existed when the original liability
was recognized. If an entity cannot identify the prior period to which the downward revision
relates, it may use a weighted-average credit-adjusted risk-free rate to discount the downward
revision to estimated future cash flows. When asset retirement costs change as a result of a
revision to estimated cash flows, an entity shall adjust the amount of asset retirement cost
allocated to expense in the period of change if the change affects that period only or in the period
of change and future periods if the change affects more than one period as required by FASB
Statement No. 154, Accounting Changes and Error Corrections, (paragraphs 19-22), for a change
in estimate
10. Revisions to a previously recorded asset obligation (Statement 143
paragraphs A26 and A27)
Revisions to a previously recorded asset retirement obligation will result from changes in the
assumptions used to estimate the expected cash flows required to settle the asset retirement
obligation, including changes in estimated probabilities, amounts, and timing of the settlement of
the asset retirement obligation, as well as changes in the legal requirements of an obligation. Any
changes that result in upward revisions to the expected cash flows shall be treated as a new
liability and discounted at the current rate. Any downward revisions to the expected cash flows
will result in a reduction of the asset retirement obligation. For downward revisions, the amount of
the liability to be removed from the existing accrual shall be discounted at the credit-adjusted riskfree rate that was used at the time the obligation to which the downward revision relates was
originally recorded (or the historical weighted-average rate if the year(s) to which the downward
revision applies cannot be determined).
Revisions to the asset retirement obligation result in adjustments of capitalized asset retirement
costs and will affect subsequent depreciation of the related asset. Such adjustments are
depreciated on a prospective basis.
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11. Changes in Accounting Estimate (Statement 154, paragraph 19)
A change in accounting estimate shall be accounted for in (a) the period of change if the change
affects that period only or (b) the period of change and future periods if the change affects both. A
change in accounting estimate shall not be accounted for by restating or retrospectively adjusting
amounts reported in financial statements of prior periods or by reporting pro forma amounts for
prior periods.
12. Annual Review and Reporting
Management will review their estimates on an annual basis. The following actions will be taken:
1.
Finance will ask Facilities Management to identify possible asset requirements
obligations that may be relevant for buildings and property.
2.
Modify the data in the ARO excel spreadsheets. See example of ARO excel spreadsheet
below:
a. For subsequent years, depreciate the ARO and continue to accrete the interest on the
ARO
b. A new long-lived asset with legal obligations based on environmental issues
(underground tanks, lab equipment, chemical storage, etc.) is put into place.
c. Remediation is performed. Asset is removed using the same methodology employed
by Woodard and Curran. Cost estimates by category will be used to remove the
obligation. The liability is adjusted by the payment and the asset continues to be
depreciated until year of settlement.
d. There is a significant change in the market or in the unit rates.
The spreadsheets are maintained in the Controller2 Folder.
13. Explanation of Woodard & Curran Costs
Woodard & Curran was retained by Pace in October 2006 to assist in quantifying its asset
retirement obligations. Woodard & Curran relied on information in the Hall Kimbrell Asbestos
Assessment Report prepared February 1988.
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Financial Services
14. Example of ARO accounting with $1 million Asbestos Remediation Payment
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