The Financial Accounting Standards Board (FASB) has published an Exposure Draft, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, in response to the diverse accounting practices that have developed with respect to the timing of liability recognition for conditional asset retirement obligations. The proposal seeks to provide more consistent recognition of liabilities relating to asset retirement obligations and more information about future cash outflows relating to these obligations.

The exposure draft clarifies that a legal obligation to perform an asset retirement activity that is conditional on a future event is within the scope of Statement No. 143. Under the Board’s proposal, an entity would be required to recognize a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability’s fair value can be estimated reasonably. The ability of an entity to indefinitely defer settlement of the obligation or the ability of an entity to sell the asset prior to its retirement does not relieve an entity of the obligation. Uncertainty surrounding the timing and method of settlement that may be conditional on events occurring in the future would be factored into the measurement of the liability rather than the recognition of the liability. The proposal would be effective no later than the end of the fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year enterprises).

The comment period for the exposure draft ends August 1, 2004. The document is available on the FASB’s website at www.fasb.org.

FASB Board member George Batavick, who serves as the Board collaborator on the project, said: “This interpretation improves financial reporting by adding consistency to the recognition and measurement of asset retirement obligations.”