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Asset Retirement Obligations (Portfolio 5143)

BNA Tax and Accounting Portfolio 5143, Asset Retirement Obligations (Accounting Policy and Practice Series), discusses the calculation, presentation, and disclosure of asset retirement obligations and presents the differences between U.S. GAAP and IFRS in accounting for these items.

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BNA Tax and Accounting Portfolio 5143, Asset Retirement Obligations (Accounting Policy and Practice Series), discusses the calculation, presentation, and disclosure of asset retirement obligations and presents the differences between U.S. GAAP and IFRS in accounting for these items. The Portfolio provides in-depth, practical examples.
All companies' financials must acknowledge that at the end of a long-lived asset's life cleanup activities may be legally required. In the financial accounting sense, many of those activities become liabilities early in the asset's life, often in conjunction with acquisitions. Under U.S. GAAP, the requirements concerning these “asset retirement obligations” are contained in FASB Accounting Standards Codification (ASC) 410-20 (based largely on rules in FASB Statement No. 143, Accounting for Asset Retirement Obligations, as supplemented by FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations). The liability must be measured in accordance with the provisions of ASC 820-10 (based largely on principles in FASB Statement No. 157, Fair Value Measurements). Under IFRS, parallel but unidentical requirements are set forth in IASC International Accounting Standard 37, Provisions, Contingent Liabilities and Contingent Assets. This Portfolio compares and contrasts ASC 410-20 and IAS 37.
Asset retirement obligations essentially must be accounted for as follows. Entities recognize a liability for an asset retirement obligation when incurred if its fair value reasonably can be estimated. Entities at the same time must recognize an offsetting asset retirement cost by increasing the carrying amount of the related long-lived asset. In periods subsequent to initial recognition, entities must recognize period-to-period changes in the asset retirement obligation liability resulting from the passage of time (accretion expense) and revisions in the timing and amount of the underlying expected cash flows. Further, entities must recognize depreciation expense resulting from the systematic and rational allocation of the asset retirement cost.
This Portfolio details the requirements of ASC 410-20 focusing on definitions within this Codification Subtopic 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. The Portfolio also discusses other issues related to asset retirement obligations, including IFRS and ongoing FASB projects, environmental remediation liabilities, and SEC issues. That is followed by an explanation of how to apply the fair value measurement principles in ASC 820-10 in accounting for asset retirement obligations. The Portfolio concludes by providing detailed examples illustrating the provisions of ASC 410-20. The Worksheets provide excerpts from financial statements of various public companies illustrating their accounting for asset retirement obligations.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5143, Mazza and McEwen, Asset Retirement Obligations (Accounting Policy and Practice Series).


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AUTHORS

CHERI R. MAZZA, PH.D.
Cheri R. Mazza is an Associate Professor of Accounting at Fordham University where she teaches graduate and undergraduate financial accounting courses. She also serves as an outside Director and Audit Committee Chairperson of a bank. Dr. Mazza received a Ph.D. in Accounting from the University of North Texas, an MS in Accounting from Illinois State University, and a B.S. in Business Education from Indiana University of Pennsylvania. She is a Certified Public Accountant and a Certified Management Accountant. Before joining Fordham, Dr. Mazza served as a project manager at the Financial Accounting Standards Board (FASB). Her academic experience also includes Assistant Professorships at Virginia Commonwealth University and Midwestern State University in Texas. In addition, she has experience in the corporate taxation area of public accounting and has worked with mid-sized public firms in Texas. Dr. Mazza's research encompasses issues in contemporary financial reporting, standard setting, and quality of earnings. She has published numerous articles in academic and professional journals, including The Accounting Review, Accounting Horizons, Journal of Accountancy, Financial Analyst's Journal, and The Journal of Corporate Accounting and Finance.

RUTH ANN MCEWEN, PH.D.
Ruth Ann McEwen, Ph.D. (Industrial Management, concentration in Accounting) and Masters (Industrial Management), Georgia Institute of Technology; and B.S., Alabama A&M, is the Associate Dean of Accreditation and Administration and Professor of Accounting for the Sawyer Business School at Suffolk University. She also serves as a consultant to the Financial Accounting Standards Board and has been deeply involved with the FASB's project to codify Generally Accepted Accounting Principles (“Codification Project”). Dean McEwen has taught graduate Financial Accounting at the Intermediate and Doctoral levels for more than 20 years. She has authored or coauthored more than 25 articles dealing with ethics and the usefulness of accounting information to the investment community. Dean McEwen has published in a number of journals, including The Accounting Review, Decision Sciences, Accounting Horizons, CPA Journal, International Journal of Accounting, and Journal of Business Ethics. In 1998, she presented a series of papers focusing on current financial reporting and the usefulness of GAAP accounting information to the Financial Accounting Standards Board and the Governmental Accounting Standards Board.

TABLE OF CONTENTS

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


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