Recent Governmental Accounting Standards Board (GASB) guidance, Statement No. 83, Certain Asset Retirement Obligations (Statement 83), will require governmental entities to recognize a liability related to certain asset retirement obligations. Such liability should be legally enforceable and recognized at the time the liability is both incurred and reasonably estimable.
Previous guidance in GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, required that governments report pollution-related asset retirement obligations at the time of the retirement but did not address reporting during periods prior to the retirement. Prior to the issuance of Statement 83, there was no authoritative guidance regarding governmental accounting for asset retirement obligations associated with tangible capital assets.
Statement 83 indicates that the determination of when the liability is incurred should be based on the occurrence of events that requires a government to perform asset retirement activities. For instance, laws and regulations may require governments to take specific actions to retire certain capital assets at the end of their useful lives. Therefore, organizations would be required to evaluate whether current laws and regulations require specific actions to retire capital assets at the end of their estimated useful lives.
This new guidance requires that the asset retirement obligation be based on the best estimate of the current value of the obligation. The best estimate should include probability weighting of all potential outcomes when such information is available and can be obtained at a reasonable cost. If probability weighting is not feasible, the most likely amount of the liability should be used. A deferred outflow would be reported with a corresponding liability in the statement of net position.
The asset retirement obligation should be annually adjusted for the effects of inflation and any changes in laws, regulations, or similar factors subsequent to the initial recording of that obligation. The deferred outflow of resources should be reduced and recognized as an outflow of resources (and expense) in a systematic and rational manner over the estimated useful life of the tangible capital asset.
Statement 83 is effective for reporting periods beginning after June 15, 2018, with earlier application encouraged. If practical, all previously presented periods should be restated to conform with Statement 83. If not practical, then an adjustment to the beginning net position of the organization would be required in the year adopted.
There are also additional disclosure requirements with respect to the asset retirement obligations which governmental entities will need to consider in preparing their financial statements.
If you have any questions about Statement 83 and asset retirement obligations, or you would like to request a speaker on this topic for your organization or event, contact one of our executives below, at (800) 270-9629.