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Everyone is well aware, or should be, that the cost of retiring is escalating almost by the minute.  There are financial advisors and estate planners who solely focus on enabling us to have a shot at a decent retirement, relatively free of financial concern.  Employers in both the public and private sectors are recognizing mammoth liabilities for the pension resources they are holding in trust for their employees.  But, are employees all that are going to retire from a state or local government?  Is that the only long-term cost that a governmental entity is going to be liable for (above and beyond normal indebtedness)?  The answer is obviously no or I would not be writing this post.

In November 2016, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 83, Certain Asset Retirement Obligations that provides guidance on the valuation and reporting of legally enforceable liabilities that a governmental entity may have related to the future retirement of a significant capital asset. Up until this point, the only similar type of guidance that has been issued by the GASB is GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs.  That statement requires governmental entities to recognize as a liability the cost of closure and postclosure care of a landfill as they incur the liability.  Of course, they are incurring the liability as they use the landfill.  Likewise, GASB Statement No. 83 recognizes the fact that as certain significant tangible capital assets are being used, the entity is incurring the liability for the costs to retire the asset at some point in the future.

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Do I have to worry about all my capital assets?

Certainly not all capital assets, in fact most capital assets, do not require significant costs to retire.  As such, GASB Statement No. 83 is only applicable to those capital asset retirements that come with certain legal obligations that must be performed (again, similar to the legal and regulatory requirements associated with the closure and postclosure care of a landfill).  Certain examples cited by the GASB include, but would not necessarily be limited to:

  • Decommissioning of a nuclear reactor
  • Closure and removal of a sewage treatment facility
  • Removal and disposal of an x-ray machine
  • Removal and disposal of wind turbines

Obviously, these are significant and unique types of capital assets that cannot just simply be shuttered and ignored.

Thus, these so-called asset retirement obligations represent legally enforceable liabilities and include costs related to the following types of activities:

  • Retirement of the asset
  • Disposal of a replaceable part of the asset
  • Environmental impacts and required remediation associated with the retirement

However, the statement clearly excludes the following type of costs from the calculation of an asset retirement obligation:

 

When would I know I had to worry about this?

The timing of the recognition of the asset retirement obligation is based on a combination of external and internal obligating events.  The standard defines an external obligating event as one of the following:

  • Approval of federal, state, or local laws or regulations
  • Creation of a legally binding contract
  • Issuance of a court judgment

On the other hand, an internal obligating event would be one of these:

  • Contamination that is the result of normal operations (not as pollution remediation as defined by GASB Statement No. 49)
  • Placing a capital asset into operation
  • Permanent abandonment of the capital asset before it was placed into use

In all likelihood, the most common combination of external and internal events would be external regulations that dictate the terms/processes for certain asset retirements (e.g., sewage facilities) and the active use of the capital asset itself.

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How would I know the value of an asset retirement obligation?

Of course, the most common question is “how does one value an asset retirement obligation”?  The standard itself states that the asset retirement obligation “should be based on the best estimate of the current value of the outlays expected to be incurred”.  Current value is defined as “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”.  The liability should be offset by a deferred outflow of resources that will be amortized (i.e., expensed) over the life of the capital asset (assuming the liability was identified at the beginning of the asset’s useful life) or over the remaining useful life (assuming the liability was identified after it had been placed in service for a period of time).

On an annual basis, the asset retirement obligation should be adjusted as necessary to account for inflation or deflation.  Also, the obligation should be evaluated to determine whether or not any significant changes in assumptions, requirements, or technology have occurred that would necessitate an adjustment to the estimate itself.  If so, the deferred outflow of resources would be adjusted accordingly.

It should be noted that in some instances, a governmental entity may only hold a minority share of interest in a capital asset, with the majority interest being held by a nongovernmental entity.  As such, the asset retirement obligation calculation would be dictated by the applicable standards for the nongovernmental entity.  That amount should not be adjusted, but rather the minority share of it reported by the governmental entity.

 

Are there any required note disclosures?

No standard would be complete without additional note disclosures.  The following would be the types of disclosures that would be expected:

  • A general description of the asset retirement obligation and how the liability was incurred
  • Assumptions used in the calculation of the obligation
  • Estimated useful life that is being used for the amortization of the deferred outflow of resources
  • Information about how funding requirements such as bonding, insurance, etc. are being met
  • If the governmental entity is a minority interest holder, then the description of that arrangement and how the obligation is being measured would be required

If it is known that an asset retirement obligation exists but there is not a way to reasonably estimate it, then that fact should be disclosed included the reasons why the obligation cannot be valued at the time.

 

When do I have to think about this again?

There is light at the end of the tunnel.  In North Carolina, the earliest required year of implementation would be for the fiscal year ending June 30, 2019.  However, the GOOD NEWS is that the majority of general purpose governments will NOT have to worry about this standard ever affecting them.  There will be some, but the impact will not be widespread and most can simply discuss the existence of the standard at cocktail parties, but never have to put it into action.