GASB Releases Guidance on Asset Retirement Obligations
The Governmental Accounting Standards Board has published guidance for state and local governments on the subject of liabilities known as “asset retirement obligations.”
Asset retirement obligations, or AROs, are legally enforceable liabilities associated with the retirement of a tangible capital asset. GASB Statement No. 83, Certain Asset Retirement Obligations, provides guidance to help local and state governments decide on the timing and pattern of recognition for liabilities and corresponding deferred outflow of resources related to AROs.
State and local governments are already required under law to take specific actions to retire some types of capital assets, as when they decommission nuclear reactors and dismantle and remove sewage treatment plants. Other obligations to retire certain capital assets can occur as the result of court judgments or contracts.
Under the new guidance, in Statement 83, a government that has legal obligations to perform future asset retirement activities pertaining to its tangible capital assets needs to recognize a liability and a corresponding deferred outflow of resources. The document also describes the circumstances that trigger recognition of these transactions.
The guidance requires the measurement of an asset retirement obligation to be based on the best estimate of the current value of outlays expected to be incurred. The deferred outflow of resources associated with an ARO will be measured in accordance with the amount of the corresponding liability upon initial measurement. Generally it will be recognized as an expense during the reporting periods when the asset provides service.
The disclosure requirements include a general description of the ARO and tangible capital assets associated with it, along with the source of the obligation to retire the assets, the methods and assumptions used to measure the liability, and other pertinent information.
“This Statement establishes clear and consistent accounting and financial reporting guidance for certain asset retirement obligations, where little guidance existed before for state and local governments,” said GASB chair David A. Vaudt in a statement. “This will result in increased certainty in application for governments, enhanced consistency in financial reporting, and more meaningful information for users of financial statements.”
The requirements take effect for reporting periods beginning after June 15, 2018. GASB is also encouraging earlier application of the guidance.