The Financial Accounting Standards Board today issued Statement #143, Accounting for Asset Retirement Obligations.
Originally initiated seven years ago to deal with nuclear decommissioning, the scope of the project has been expanded over the years to include the accounting for similar closure costs of other assets at any time during their life.
According to the FASB press release, the standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
How will this statement change current financial statements?
There is a large diversity in the accounting of retiring assets across a number of different entities and industries. In general, this statement changes the current practice in the following ways:
- Total liabilities generally will increase because more retirement obligations will be recognized. For some entities, obligations will be recognized earlier, and they will be displayed as liabilities rather than as contra-assets. In certain cases, the amount of a recognized liability may be lower than that recognized in current practice because a fair value measurement entails discounting.
- The recognized cost of assets will increase because asset retirement costs will be added to the carrying amount of the long-lived asset. Assets also will increase because assets acquired with an existing retirement obligation will be displayed on a gross rather than on a net basis.
- The amount of expense (accretion expense plus depreciation expense) will be higher in the later years of an asset’s life than in earlier years.
The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged.
Copies of FASB Statement #143 may be ordered online for $12.75 each.