RSM Resources

What FIN 47 has to say to not-for-profits about asbestos removal

Asbestos removal has been an important part of building renovation for several years. Almost any renovation project, especially those in hospitals, on college and university campuses, and primary and secondary schools, has included an aspect of identifying and removing asbestos.

Now the Financial Accounting Standards Board, through Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), an interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations, is requiring entities to record a Conditional Asset Retirement Obligation (CARO) liability for the estimated costs of renovation and removal of environmental problems.

While FIN 47 — applicable for fiscal years ending after Dec. 15, 2005 — applies to all types of environmental issues, asbestos is the most common application to not-for-profit organizations. 

A calculating process

Calculating and recording a CARO liability is a multistep process — the first step being the determination whether a CARO exists. According to FIN 47, a CARO is a legal obligation to perform an asset retirement activity (e.g., sale, abandonment, recycling and renovation) even though the timing or method of retirement is uncertain. In other words, you are required to record a liability for the future asbestos clean-up since the removal and special handling requirements are mandated by federal and state regulations, even though the timing of the clean-up is not known. Therefore, the legal obligation and the associated liability are considered to be present when the asset was placed in service or when the regulations were effective, whichever is later.

If a CARO is present, the liability is required to be recognized if the fair value can be reasonably estimated. Since this requirement mostly relates to assets already in service, the liability can be reasonably estimated if an expected present value technique can be applied. Applying an expected fair value technique will require you to incorporate uncertainty about the timing and method of the settlement of the obligation. For example, if the capital renovation plans include restoring a building within a set time frame (e.g. the residential housing unit will be repaired within the next 10 years) or if the building will need to be remodeled or disposed in the future, the timing of the remediation can be reasonably estimated and the liability should be calculated and recorded.

Timing is everything, but not always exact

Yet, in some cases the timing of the remediation cannot be reasonably estimated. For instance, a building may be currently maintained by its organization’s maintenance program and there are no plans to renovate or dispose of the facility. In this scenario, a liability may not be reasonably estimated since the timing is uncertain. Under these circumstances, FIN 47 requires the organization to disclose that the obligation exists and has not been recorded, as well as the reasons for not estimating the liability. However, the liability still must be recorded in future years when the information to reasonably estimate the cost of remediation becomes available.

The calculation of a CARO is complex. Be sure to seek professional guidance on implementation and as well as how to determine the required calculations.