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Asset Retirement Obligations (Portfolio 5143)

Product Code: TPOR45
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Asset Retirement Obligations, written by Cheri R. Mazza, Ph.D., Associate Professor of Accounting, Fordham University and Ruth Ann McEwen, Ph.D., Associate Dean of Accreditation and Administration and Professor of Accounting, Sawyer Business School, Suffolk University, discusses the calculation, presentation, and disclosure of asset retirement obligations under FAS 143 and IAS 37.  This Portfolio compares and contrasts the differences between U.S. GAAP and IFRS in accounting for these items and provides in-depth, practical examples. 

This Portfolio details the requirements of FAS 143, focusing on definitions within the standard as well as initial and subsequent recognition and measurement of asset retirement obligations. The explanation includes a discussion of fair value measurements and the recognition of conditional asset retirement obligations. Explanation of the major provisions is followed by a discussion of asset impairments, effects of funding and assurance provisions, information for rate-regulated entities, required disclosures, and transition provisions.  

This Portfolio also discusses other issues related to asset retirement obligations, including IFRS and ongoing FASB projects, environmental remediation liabilities, and SEC issues. An explanation of how to apply FAS 157, Fair Value Measurements, in accounting for asset retirement obligations under FAS 143 follows.  

Asset Retirement Obligations concludes by providing detailed examples illustrating the provisions of FAS 143. The Worksheets provide excerpts from financial statements of various public companies illustrating their accounting for asset retirement obligations.

Asset Retirement Obligations allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Scope and Purpose of Portfolio

Introductory Material

A. Accounting for Asset Retirement Obligations Summarized

B. Organization of Portfolio

II. Background on Accounting for Asset Retirement Obligations

Introductory Material

A. Diversity of Practice in Various Industries

B. Chronology of Standards Setters Projects and Activities

1. Generally Accepted Accounting Principles

a. Initial Exposure Draft

b. Revised Exposure Draft

c. Final Standard

2. International Financial Reporting Standards

III. Measuring and Recording Asset Retirement Obligations

Introductory Material

A. Key Definitions

1. In General

2. Limitation to Legal Obligations

B. Scope of FAS 143

1. In General

2. Electronic Equipment Waste

3. Voluntary Retirement Activities

4. Normal Operation Compared to Other Uses

5. Obligations Under Leases

6. Other Exclusions

7. Inclusions Subject to Adjustment of Fair Value

8. Partial Settlements

C. Initial Recognition

1. Incurrence of a Liability

a. Present Duty or Responsibility

b. Little or No Discretion to Avoid a Future Transfer or Use of Assets

c. Obligating Event

D. Conditional Asset Retirement Obligations

1. Purpose

2. Examples Illustrating Fundamental Principles

3. Necessity for Guidance

4. Need to Distinguish Categories of Uncertainty

5. Additional Examples

6. Procedures Required Upon Initial Adoption

a. Entries and Disclosures

b. Examples

E. Initial Measurement at Fair Value

1. General Rule

2. Conditional Asset Retirement Obligations

3. Support for Measuring Asset Retirement Obligations at Fair Value

4. Framework for Fair Value Measurements

a. Permissible Valuation Techniques Generally

b. Fair Value Hierarchy

5. Techniques for Measuring the Fair Value of Asset Retirement Obligations

a. Market Approach

b. Income Approach

F. Subsequent Recognition and Measurement

1. Accretion Expense

2. Revisions in Estimated Cash Flows

G. Relationship Between Asset Retirement Costs and Asset Impairment

H. Effects of Funding and Assurance Provisions

I. Rate-Regulated Entities

1. Entities Subject to FAS 143

2. Timing Differences

3. Impairments

J. Disclosures

1. Requirements

2. Examples

K. Transition Requirements

L. GAAP and IFRS Compared

IV. Other Issues Related to Asset Retirement Obligations

Introductory Material

A. Foreign Currency

B. Provisions, Contingent Liabilities, and Contingent Assets

C. Environmental Remediation

1. Superfund

2. Resource Conservation and Recovery Act of 1976 (RCRA)

3. The Emergency Planning and Community Right-to-Know Act (EPCRA)

4. Toxic Substances Control Act

D. SEC Staff Guidance on Full Cost Accounting

V. Fair Value Measurement of Asset Retirement Obligations

Introductory Material

A. Scope of FAS 157 and the Definition of Fair Value

B. Valuation Techniques

C. Inputs to Valuation Techniques

1. Fair Value Hierarchy

2. Application of Hierarchy to Measurements of Asset Retirement Obligations

D. Recurring Issues in Measuring Fair Value

VI. Examples of Accounting for Asset Retirement Obligations

Introductory Material

A. Example 1: Asset Retirement Obligation Incurred Upon Acquisition

1. Assumed Facts

2. Calculation of Fair Value Using Expected Present Value

3. Liability Amortization

4. Depreciation Expense (Straight-Line)

5. Journal Entries

B. Example 2: Asset Retirement Obligation Incurred With Production

1. Assumed Facts

2. Liability Amortization

3. Depreciation Expense (Straight-Line)

4. Journal Entries

C. Example 3: Recognition and Measurement of a Conditional Asset Retirement Obligation When There Is Uncertainty as to Whether the Entity Will Be Required to Perform

1. Assumed Facts

2. Analysis of Facts

3. Calculation of Fair Value Using Expected Present Value

4. Conclusion

D. Example 4: Recognition and Measurement of a Conditional Asset Retirement Obligation When There is Uncertainty as to the Timing of Settlement

1. Assumed Facts

2. Analysis of Facts

3. Calculation of Fair Value Using Expected Present Value

4. Liability Amortization

5. Depreciation Expense (Straight-Line) 2006â€"2009

6. Journal Entries

E. Example 5-Upward Revision in Expected Cash Flows

1. Part 1: Initial Asset Retirement Obligation

2. Part 2: Upward Revision in Cash Flow Estimate

3. Journal Entries

F. Example 6: Downward Revision in Expected Cash Flows

1. Part 1: Initial Asset Retirement Obligation

2. Part 2: Downward Revision in Cash Flow Estimate

3. Journal Entries

G. Example 7: Subsequent Measurement of an Asset Retirement Obligation in Which Fair Value Is Obtained From a Market Price

1. Assumed Facts

2. Procedure

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 FASB Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (June 2001)

Worksheet 2 FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (March 2005)

Worksheet 3 FASB Statement No. 157, Fair Value Measurements (September 2006)

Worksheet 4 International Accounting Standard 37, Provisions, Contingent Liabilities and Contingent Assets (July 1998)

Worksheet 5 Accounting for Asset Retirement Obligations: Sample Disclosures by Public Companies

Bibliography

OFFICIAL

FASB Statements of Financial Accounting Standards

FASB Concepts Statements

FASB Exposure Drafts

Proposed FASB Staff Positions

FASB Interpretations

Emerging Issues Task Force

Accounting Principles Board Opinions

Statements of Position

International Accounting Standards Board

Securities and Exchange Commission

UNOFFICIAL

Miscellaneous

Ruth McEwen
Ruth Ann McEwen, CPA; Ph.D., Industrial Management, with a concentration in Accounting, Georgia Institute of Technology; Masters, Industrial Management, Georgia Institute of Technology; and B.S., Alabama A&M University. Dean McEwen serves as the Associate Dean of Accreditation and Administration and Professor of Accounting at Suffolk University's Sawyer Business School. She has taught Financial Accounting at the Intermediate and Doctoral levels for more than 20 years.  Author and co-author of numerous articles dealing with ethics and the usefulness of accounting information to the investment community, Dean McEwen has published in premier journals including The Accounting Review, Decision Sciences, Accounting Horizons, The CPA Journal, The International Journal of Accounting, and the Journal of Business Ethics. Dean McEwen has presented practical applications of her research to numerous academic and practitioner groups. She also has presented to the FASB and the GASB a series of papers focusing on financial reporting and the usefulness of GAAP accounting information. Dean McEwen has also composed and assessed questions for the Uniform CPA Examination. Serving as a consultant to the FASB, Dean McEwen has been deeply involved with its project to codify Generally Accepted Accounting Principles. A member of Beta Gamma Sigma, she has received such honors as the 2001 Dean's Recognition Award for Research and the 2002 Graduate Student Association's Professor of the Year. She is a certified Medical Technologist, ASCP, and is licensed as a Certified Public Accountant in Georgia.