Purpose
With changes in laws and regulations relating to environmental remediation and protection, it has become very important for entities to recognize the losses or costs that they are likely to incur as a measure of environment remediation and assets restoration. Accounting for asset retirement obligations (AROs) and environmental obligations will vary depending on the laws and regulations governing such obligations. This publication provides an overview of the key accounting considerations and implementation matters relating to the accounting of asset retirement obligations and Environmental remediation liabilities as per the principles of ASC 410-20 and ASC 410-30 respectively. The technical views and accounting positions on the framework continue to improve depending on the results of further technical evaluations. We sincerely hope you find the enclosed publication informative. We will be happy to participate in any discussions to clarify our views, which are enclosed in the attached publication. We look forward to hearing from you.
Background
FASB has issued specific guidance on accounting for asset retirement obligations (AROs) and Environmental obligations in ASC 410.
ASC 410-20
“ARO” Legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of such assets.
ASC 410-30
“Environmental obligations” Environmental remediation liabilities resulting from the improper operation of a long-lived asset.
Asset retirement obligations
The FASB’s guidance on accounting for asset retirement obligations is included in subtopic ASC 410-20, which prescribes the principles for recognition, measurement, and disclosure of liability relating to asset retirement obligations. The recognition of ARO is dependent upon existence of an unconditional obligation related to the retirement of a tangible, long-lived asset used under normal operations by the entity. It represents an obligation to be settled by a party arising due to an existing or enacted law, statute, ordinance, or written or oral contractual terms or based on a promise and an expectation of performance (e.g., under the doctrine of promissory estoppel).
Environmental remediation liabilities
The FASB’s guidance on accounting for environmental remediation liabilities is included in sub-topic ASC 410-30. This topic prescribes the principles of the measuring an estimated environmental remediation liability, including which type of costs to include in the estimate, how to consider the effects of future developments, and how to allocate the liability between involved parties. The recognition and disclosure guidance is principally based on a framework defined by the guidance on loss contingencies in ASC 450-20. ASC 410-30 provides guidance for recognizing liability for obligations associated with environmental remediation liabilities, including a specific type of contingent liability that arises from state, federal, and local environmental regulations or, in some instances, international treaties related to contamination in groundwater, soil, sediment, and surface water.
Summary of Topic
01. Accounting for Asset Retirement Obligations
01. Scope of ASC 410-20
The guidance in ASC 410-20 applies to all entities (including not-for-profit entities and rate-regulated entities) that incur legal obligations for the retirement of tangible long-lived assets. This includes all AROs incurred any time during the life of an asset and not just those incurred during the acquisition and early operation stages.
The existence of legal obligation is a primary condition for the recognition of ARO. As per the guidance, “legal obligation” can be established by:
• A government action, such as a law, statute, or ordinance.
• An agreement between entities, such as a written or oral contract.
• A promise conveyed to a third party that imposes a reasonable performance expectation upon the promisor under the doctrine of promissory estoppel
02. Recognition and measurement principles of AROs
(Refer Balance Sheet in the PDF)
For initial recognition of ARO, entities need to evaluate the facts and circumstances underlying each individual ARO to determine the appropriate period for recognition. If a reasonable estimate of fair value cannot be made, recognition should occur when a reasonable estimate of fair value can be made
03. Conditional Asset Retirement Obligation
Conditional ARO refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the entity’s control. In the case of Conditional ARO even though uncertainty exists about the timing and/or method of settlement, but an obligation to perform the asset retirement activity is unconditional. Therefore, the liability for the fair value of a conditional asset retirement obligation should be recognized if, the fair value of the liability can be reasonably estimated. The uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists.
02. Accounting for Environmental Obligations
01. Scope of ASC 410-30
Although ASC 410-30 is written in the context of a reporting entity with operations in the United States, the guidance applies to all reporting entities applying US GAAP. Concerning environmental remediation obligations in addition to United States Federal laws, state laws, and regulations shall also be considered by a reporting entity, if applicable.
ASC 410-30-15-2 indicates that the recognition and measurement criteria for environmental obligations should be applied site-by-site. Therefore, the unit of account when recognizing and measuring environmental obligations should be at the individual site level
02. Initial Recognition Environmental Remediation Liabilities
Environmental remediation liabilities arise when a reporting entity is, or was previously, associated with a site at which remedial actions must take place.Such an association can be through number of activities including:
1. Ownership of the site – Past or Present
2. Operation of the site – Past or Present
3. Transportation/ Contribution of waste to the site
03. Initial Measurement of Environmental Remediation Liabilities
As per the principles of ASC 410-30, measurement of environmental remediation liabilities includes (a) incremental direct costs of the remediation effort, and (b) costs of compensation and benefits for employees to the extent of time expected to be spent directly on the remediation effort. Moreover, the remediation effort should be evaluated site-by-site when recognizing and measuring an environmental remediation liability. Following are some of the costs that are included in the measurement of an environmental remediation liability
04. Subsequent Measurement of Environmental Remediation Liabilities
The environmental remediation liability is recognized as per best possible estimate considering fact and circumstances existing on the date of initial recognition. Given the nature of environmental remediation liabilities, a reporting entity’s estimated liability will often evolve over time, as additional information relating to the liability becomes known. Circumstances that may result in changes to the recorded amount of an environmental remediation liability include the following:
– Additional phases of the remediation process that become estimable as progress is made.
– Changes in underlying cost estimates for completion of each phase of the cleanup (e.g., the cost of compensation and employee benefits).
– Changes in laws and regulations.
– Changes in technology used for applying the approved method.
Key Issues/ Considerations
01. Recognition of Conditional ARO
02. Recognition of Environmental remediation liability – Probability criterion
03. Recognition of Environmental remediation liability- Estimable criterion
Comparison with IFRS
01. Asset Retirement Obligations (refer table in the PDF)
02. Environmental obligations (refer table in the PDF)
