3.4.19 Asset Retirement Obligations (AROs)
An asset retirement obligation is a legally enforceable liability associated with the retirement of a tangible capital asset.
- Legally enforceable refers to some legal requirement by a third party such as due to federal, state, or local laws or regulations; a legally binding contract with a third party, or issuance of a court judgement. Due to these legally enforceable liabilities, other parties could compel the government to fulfill an asset retirement obligation, leaving the government with little or no discretion to avoid the obligation.
An asset retirement obligation also must arise from normal operations of tangible capital assets associated with any one of the following:
- Retirement of a tangible asset (retirement encompasses its sale, abandonment, recycling or disposal in some other manner)
- Disposal of a replaced part that is a component of a tangible asset
- Environmental remediation associated with the retirement of a tangible asset that results from normal operation. For example, if you have an underground fuel tank that leaks a very small amount as part of its normal operation – then any environmental remediation resulting from this leakage would be included in an asset retirement obligation, assuming other criteria are met. However, if leakage was more than what occurs in normal operation, then this would not be an asset retirement obligation, but would fall under GASB Statement 49, Accounting and Financial Reporting for Pollution Remediation Obligations; also see BARS Manual 3.4.20, Pollution Remediation.
GASB Statement 83 describes the criteria for asset retirement obligations, gives some general examples, but does not describe all tangible assets that might qualify. This is a determination that must be made by the implementing government, based on research and evaluation. An additional resource regarding potential asset retirement obligations in Washington State can be found in the additional resources section below.
220.127.116.11 Criteria for ARO determination
A government should recognize a liability (for the asset retirement obligation) when it is incurred and reasonably estimatable.
An ARO is incurred when there is a legally enforceable obligation (see discussion above) for the retirement of a tangible capital asset, and when the tangible capital asset meets any one of the following:
a) Placed into operation (if you do not incur the liability based on the use of the tangible capital asset). For example, the act of installing a water well that will later have to be properly decommissioned at the end of its life. Regardless of how much you use the well, you will have to do the decommissioning activities the same regardless.
b) Placed into operation and the usable capacity has begun to be used (if the pattern of incurrence of the liability is based on use of the tangible capital asset). For example, a gravel mining operation where excavation has begun and therefore land reclamation will have to be done at the end of the useful life.
c) Contamination is occurring as a result of normal operation (such as nuclear power plant or other radioactive machinery that has been turned on and contaminated certain parts that will later require special disposal).
d) Acquisition of a tangible capital asset that has an existing ARO (such as the purchase of a used MRI machine that has an existing ARO).
e) The tangible capital asset is abandoned before it is placed in operation (we would expect this to be rare, but historically has happened in the electric industry where power plants were partially completed but due to falling demand and cost overruns, they were abandoned before completion)
An ARO must also be reasonable estimatable to be recognized. There might be uncertainty in estimating the ARO, and this would be addressed by weighting the probability of various outcomes (when sufficient evidence is available or can be obtained at a reasonable cost). Uncertainty, by itself does not preclude recognition.
The ability to estimate might be affected by whether you can reasonably estimate the period over which to amortize the deferred outflow (i.e. useful life of the tangible capital asset). If the assertion is that the asset will be maintained in perpetuity and end of life cannot be reasonably estimated, then this assertion must be supported by adequate evidence.
If you do not recognize an ARO because it is not reasonable estimatable, those reasons must be disclosed in the notes to the financial statements in conjunction with disclosure about the ARO. Support must be retained for any assertion by management that an ARO is not estimatable.
18.104.22.168 Calculating the ARO amount
The ARO is the estimated current cost of what it would take to meet the legal obligation – taking in all available evidence that can be obtained at a reasonable cost. The current cost should include all legally required outlays to be incurred, as if this obligation were to be taken care of at the end of the reporting period. It might require probability weighting of the various outcomes, or if this cannot be done at a reasonable cost, then the most likely amount in a range of potential outcomes should be used.
This estimate must be revisited at least annually, to adjust the ARO for inflation or deflation and to evaluate whether there has been a significant change in the estimated outlays associated with the ARO.
If you are minority owner in a tangible asset with an associated ARO, see paragraph 17 in GASB Statement 83 for further guidance.
22.214.171.124 Amortization of the deferred outflow
The deferred outflow will be amortized to expense in a systematic and rational manner over the entire estimated useful life of the tangible capital asset. If a deferred outflow is recognized after an asset has been placed into operation, the amortization would begin when the deferred outflow is recognized and occur over the remaining useful life of the tangible capital asset.
Disclaimer: The following are links to non-authoritative resources and are not prescribed as part of BARS Manual requirements.
- Identifying Asset Retirement Obligations, Center for Government Innovation (SAO Resources Database)