Effective after year ending June 15, 2018, GASB has issued Statement No. 83 for AROs. It is intended to establish criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for asset retirement obligations (ARO.)
An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset.
This guidance is separate from the landfill closure and post-closure maintenance guidance (GASB Statement No. 18.) This will most likely affect special districts, such as hospital authorities that use imaging equipment that require radiation and sewage treatment plants that have laws or regulations requiring shutdown and dismantling in the future.
GASB 83 requires an ARO liability to be recognized when it is incurred and reasonably estimable, similar to other liabilities. The liability may occur as a result of external or internal obligating events. External events include approval of federal, state or local laws or regulations, establishment of a legally binding contract or as a result of a court judgment. Internal events may be a result of contamination or other events.
Recognition occurs by placing the asset into service. If a capital asset is purchased, an external event previously listed requires a liability, then the purchase of the asset triggers recognition. Once the ARO liability is recognized, the offsetting debit is a deferred outflow of resources, unless the capital asset is permanently abandoned prior to operation. Should this occur, the offsetting debit is to expense.
GASB 83 requires measurement of the liability upon recognition based on the best estimate of the current value of outlays expected to be incurred. This is based on the weighting of all potential outcomes, including the costs of all equipment, facilities and services needed. The deferred outflows of resources (or expense) would be the same number.
After the initial measurement, the government should adjust the current value of the ARO for inflation or deflation. They should also evaluate relevant factors that would adjust the estimated outlays, including, but not limited to changes in technology, laws, regulations, contracts, court judgments and other factors.
Should a liability increase or decrease before retirement of the capital asset, there is a similar adjustment to the related deferred outflows of resources. Should the adjustment occur at the time of retirement or after retirement, an expense is recognized in the period of occurrence.
The deferred outflow of resources will also amortize systematically and rationally over the period of the capital asset’s useful life. The period would shorten if the ARO was recognized initially after the asset was placed into service (amortize over the remaining estimated useful life.)
The footnote disclosures should disclose the following:
- general description of the ARO and associated capital assets with the source of the obligation (law or regulation, court ordered, etc.)
- methods and assumptions used to measure the liability
- remaining useful life of the asset
- description of how and required funding or assurance provisions are being met (review surety bond, letters of credit, etc.)
- if not separately presented in the Statement of Net Position, amount of assets restricted for the payment of the liability
This post is a summary of the pronouncement. You can visit the GASB website for the full statement.
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