Governmental Accounting Standards Board Statement No. 83 (GASBS 83) – Certain Asset Retirement Obligations
ASSET RETIREMENT OBLIGATION DEFINITION
An asset retirement obligation (ARO) is a legally enforceable liability associated with the retirement (i.e., permanent removal from service) of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on GASBS 83. Assets with possible asset retirement obligations include:
- Sewage treatment plants
- Water treatment plants
- Petroleum bulk storage tanks
- X-ray machines
- Certain laboratory equipment
This is not an exhaustive list. Agencies should consider the possibility of AROs when acquiring new capital assets.
Per Paragraph 6 of GASBS 83, the following items do not fall within scope:
- Obligations that arise solely from a plan to sell or dispose of a tangible capital asset
- Obligations resulting from the preparation of a tangible capital asset for an alternative use
- Obligations for pollution remediation that result from other-than-normal operation of a tangible capital asset
- The cost of a tangible capital asset replacement part
- Landfill closure and post-closure care obligations
- Conditional obligations to perform asset retirement activities
RECOGNITION OF ASSET RETIREMENT OBLIGATIONS
GASBS 83 requires that recognition of the liability occur when it is both incurred and reasonable estimable. In order for a liability to be considered incurred, there must be both an external obligating event and an internal obligating event resulting from normal operations.
External Obligating Events
AROs must be legally enforceable. Activities associated with the retirement of a tangible capital asset can become legally enforceable due to an external obligating event. Per paragraph 9 of GASBS 83, external obligating events include:
- Approval of federal, state, or local laws or regulations
- Creation of a legally binding contract
- Issuance of a court judgement
There must be an external obligating event to recognize an ARO. Obligations that arise solely from a plan to sell or dispose of a tangible capital asset should not be reported.
Internal Obligating Events
In order to recognize an ARO, there must also be an internal obligating event. Internal obligating events vary depending on the type of ARO and the ARO liability’s pattern of incurrence. Internal obligating events can include:
- The occurrence of contamination resulting from normal operation of a tangible capital asset (in the case of contamination-related AROs)
- Placing a tangible capital asset into operation
- Placing a tangible capital asset into operation and consuming a portion of the asset’s usable capacity
- The permanent abandonment of a tangible capital asset before it is placed into operation
- The acquisition of a tangible capital asset with an existing ARO
REPORTING ASSET RETIREMENT OBLIGATIONS
In order to prepare ARO-related journal entries and notes to the financial statements, OSC will collect the following information about AROs from agencies annually:
- Asset name and address/location
- Brief description of the ARO
- External obligating event
- Statutory reference (if the external obligating event is a law or regulation)
- Asset’s remaining useful life
- Estimated ARO liability
- Method/assumptions used to estimate the ARO liability
- Any additions/reductions to the ARO liability in the current year
- If the asset was retired from service in the current year, any amounts that remain to be paid in future fiscal years
- Information about any assets restricted for the payment of the ARO
AROs should be initially measured based on the best estimate of their current value. Per paragraph 15 of GASBS 83, current value is the amount that would be paid if all equipment, facilities, and services included in the estimate were acquired at the end of the current reporting period.
Agencies should also annually evaluate the values of AROs to determine if there are any factors that would significantly increase or decrease estimated outlays. Relevant factors to consider include price increases/decreases (due to factors other than general inflation or deflation); technological changes; changes in legal or regulatory requirements; and changes in the type of equipment, facilities, or services that will be used to retire the tangible capital asset.
OSC will use the information provided by agencies to record an ARO liability and a corresponding deferred outflow of resources, which is amortized over the remaining useful life of the asset. This ARO liability will be adjusted annually to capture the effects of general inflation or deflation.
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