Authored by: Russ Hissom
In November 2016, the Governmental Accounting Standards Board (GASB) issued Statement No. 83 – Certain Asset Retirement Obligations. An Asset Retirement Obligation (ARO) is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this statement.
The effective date of the statement is for reporting periods beginning after June 15, 2018. Earlier application is encouraged by GASB.
The statement requires the measurement and recognition of a legally enforceable liability for retirement of an asset. This estimate for additional retirement costs is usually based on laws and regulations that require certain activities be done, such as decommissioning power plants or removing sewage treatment plants.
Statement No. 83 requires the measurement of an ARO be based on the best estimate of the current value of outlays to be incurred. This estimate should include the probability weighting of all potential outcomes, when the information is available or can be obtained at a reasonable cost. If probability weighting is not feasible at a reasonable cost, a most likely amount should be used. The statement requires that a deferred outflow of resources be measured at the amount of the corresponding liability upon initial measurement. The statement then requires that the current value of the ARO be adjusted for the effects of general inflation or deflation at least annually. The factors that were used in determining the ARO should also be evaluated annually.
Measuring the liability at the current value of outlays is an important difference from the FASB ARO standard. However, the GASB standard has an important exemption for those governmental organizations (generally electric utilities) that have joint ownership interests in a tangible capital asset with a non-governmental entity that reports the asset’s ARO using the FASB ARO guidance. In that case, if the government is a less than 50 percent co-owner of the facilities it should use the non-government majority owner or operator’s measurement value, instead of the measurement criteria in GASB 83. In other words, the FASB standard applies to measurement in these circumstances. Although, you will still need to include the GASB 83 disclosures.
Other areas in the standards that could affect your organization
- The liability should be recognized when it is incurred and possible to estimate
- This can come about through an external or internal obligating event. An obligating event refers to an event whose occurrence determines the timing for recognition of an ARO. Plainly speaking if you know your asset needs an ARO, it should be adjusted and recognized throughout the asset’s life (this is important for rate recovery of these future costs)
- Current value determination of the ARO is the amount that would be paid if all equipment, facilities and services included in the estimate were acquired at the end of the current reporting period.
- For asset minority owners that use a majority owner’s ARO measurement the measurement date of that ARO should be no more than one year and one day prior to the government’s financial reporting date.
- The statement lays out in detail the reporting requirements in the notes to the financial statements.
Next steps to consider?
If you have current ARO’s under the FASB standard you’ll need a transition plan to measure the ARO’s under the GASB current value method. Determining whether your estimate will be made by an independent third party or internally is also a consideration.
If you are the minority owner of a capital asset and the majority owner or operator is a non-governmental entity, keep on doing what you’re doing – no changes in your measurement approach are needed. However, you will need to evaluate GASB Statement No. 83 for disclosure requirements.
For more information on this topic, or to learn how Baker Tilly's energy and utilities practice can help, contact our team.