Overview
The Governmental Accounting Standards Board (GASB) has issued Statement No. 83 Certain Asset Retirement Obligations to establish uniform guidance for governments in recognizing and measuring certain Asset Retirement Obligations (ARO) and to require disclosures related to those AROs. An ARO is defined as a legally enforceable liability associated with the retirement of a capital asset. GASB 83 also discusses how AROS should be reported in instances in which a government may have a minority share of ownership in a tangible asset and the remaining owners are nongovernmental entities.
When is GASB 83 Effective?
GASB 83 is effective for reporting periods beginning after June 15, 2018. Earlier application is permitted and encouraged.
How Will GASB 83 Impact Your Financial Statements?
- Governments should recognize the ARO when the liability is incurred and reasonably estimable. The liability is incurred by both an external obligating event (i.e. external laws, a legal contract, or the issuance of a court judgement) and an internal obligating event that requires the government to retire the asset (i.e. contamination, abandonment, or placing into operation a tangible asset that is required to be retired). Developing a plan to retire an asset is not, by itself, an internal obligating event.
- ARO measurement is to be based on the best estimate of the current value of the outlays expected to be incurred. The current value 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.
- Governments should recognize a deferred outflow of resources when an ARO is recognized at the initial measurement value. Deferred outflows of resources should then be reduced and recognized as an outflow of resources (i.e. expense) in a rational manner over a period of time.
- After initial measurement, governments are required to adjust the current value of their AROs for the effects of inflation or deflation annually.
- Also, annually, governments are required to evaluate all relevant factors related to an ARO and to determine if any of those factors are expected to increase or decrease the estimated asset retirement outlays associated with an ARO.
- Governments should only remeasure an ARO when the results of this evaluation indicate a significant change in the estimated outlay. Some examples of significant change include changes in technology, legal or regulatory requirements, and the type of equipment, facilities, or services that will be used to meet the obligations to retire the tangible capital asset.
- You will be required to disclose the following in your financial statements:
- General description of the ARO
- General description of the associated tangible capital asset
- Source of the obligations (i.e. law, regulation, or contract)
- Methods and assumptions used to measure the liabilities
- Estimated remaining useful life of the associated tangible capital asset
- How any legally required funding and assurance provisions associated with the ARO are being met (i.e. insurance policies, letters of credit, and guarantees by other entities)
- Amount of assets restricted for payment of liabilities, if not separately displayed in the financial statements.
- In instances where a government may have a minority share of ownership in a tangible asset and the remaining owners are nongovernmental entities, the ARO should be reported using the measurement produced by the non-governmental entity without any adjustments to conform to GASB 83’s liability measurement and recognition requirements.
Do you have questions regarding GASB 83? Please contact Brian McCall.
Please note this summary of GASB 83 is not meant to substitute for reading it in its entirety.