Conditional Asset Retirement Obligations and FIN 47
In the past, companies were not required to report environmental liabilities, such as contaminated property, except in cases where a pending or threatening legal action involved the environmental liability, according to Mondaq.com. The Statement of Financial Accounting Standards No.143, Accounting for Asset Retirement Obligations (AROs) (FAS 143) was issued by the Financial Accounting Standards Board in 2001 to change this requirement.
FAS 143 requires the recognition of the fair value of ARO’s liability in the period in which it is incurred, if a reasonable estimate of fair value can be determined. AROs are legal obligations associated with the retirement of tangible long-lived assets. Mondaq reports that the financial reporting of environmental liabilities changed little with the implementation of FAS 143.
After FAS 143 was issued, many accounting firms decided that the standard did not apply to conditional AROs, such as most environmental cleanups are classified. Mondaq reports that these AROs are conditional on future events such as the timing and method of settlement of the obligation usually but not always within the control of the company. For example, it might be within the control of a company to delay the investigation of a property suspected of soil or groundwater contamination.
FIN 47 is a clarification of FAS 143, officially called Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. With its issuance in 2005, companies are now required to recognize a liability for the fair value of the conditional ARO. Mondaq.com reports that FIN 47 lists examples of environmental conditional AROs.
The FASB Summary of Interpretation No. 47 reads, “the obligation to perform the asset retirement activity is unconditional, even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settle may be conditional on a future event.”
As for a reasonable estimate of fair value, a company has sufficient information to estimate dates, methods, and costs of disposing of the property, in order to conform to environmental standards, according to the FASB Summary of Interpretation No. 47. A company is required to recognize these liabilities on the dates of purchase of the conditional ARO.
Mark Luscombe of CCH spoke with AccountingWEB.com about the tax implications of FIN 47. He said “[the implications] perhaps remains to be seen. The tax law eventually makes its own standard that doesn’t necessarily follow what the FASB says is a liability. But in a sense, the IRS is pushing in the direction of fewer differences between book and tax accounting and the various ways it helps the IRS. There is an IRS practice now of recording liabilities that weren’t recorded before that may push the IRS to be a little more generous in terms of allowing deductions, at least on an accrual basis.”
Luscombe also spoke about the potential future of FAS 143 and FIN 47. He said that, “I think FIN 47 does get into a lot of detail in how you do this and sort of set the standard and gives examples, but if they feel that people are still trying to keep too much off the books, they might come back and try to pin down a little more specifically in terms of what sort of data out there might constitute a reasonable basis to establish a liability’s valuation.”
FIN 47 is effective for companies reporting for a fiscal year ending after December 15, 2005 and December 31, 2005 for those reporting for a calendar year.