RSM Resources

In March 2005, the Financial Accounting Standards Board published FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, to provide guidance for more consistent recognition of liabilities relating to conditional asset retirement obligations and more information about future cash outflows relating to these obligations.

FASB Statement No. 143 (FIN 47), Accounting for Asset Retirement Obligations, requires entities to record an obligation, when incurred, for the cost of retiring assets through renovation, demolishment or sale. For example, if an organization is legally obligated to restore a building site back to a certain condition, it’s required to accrue that obligation once the contract or law establishes the obligation, as opposed to at the end of the asset’s useful life. In addition, these liabilities need to be recorded even if the entity plans to sell the facility versus actually performing the remediation.

Entities may mistakenly believe FIN 47 applies only to “dirty” industries (e.g., mining or nuclear power production) because they need to accrue clean up costs (such as land reclamation or nuclear decommissioning). Actually, asset retirement obligations exist in substantially all industries. Throughout the U.S., FIN 47 implementation has resulted in universities, hospitals, nursing homes and medical clinics, among others, recognizing asset retirement obligations when none had previously been recognized. For instance:

• University A knows some of its facilities contain asbestos and that they’re located in a state that requires asbestos abatement – if the facilities undergo major renovations or are demolished. The university’s 10-year strategic plan calls for major renovation of two buildings within the next five years. Therefore, it has the information needed to estimate a range of potential dates for asbestos removal, possible methods of removal and related costs and probabilities associated with those dates and methods. Consequently, the university is able to approximate the fair value of the liability for the special handling of the asbestos using an expected present value technique. The university would recognize the cumulative effect of initially applying FIN 47 as a change in accounting principle reflected as of the beginning of the first period presented.
  
  
• Hospital B realizes some of its facilities contain asbestos and they’re located in the same state that requires asbestos abatement – if the facilities undergo major renovations or are demolished. However, the hospital has no plans to renovate or demolish any of the facilities that would trigger a future outflow of cash for asbestos remediation. It’s also unaware of any need for major renovations caused by technology changes, operational changes or other factors. Additionally, the hospital is unsure whether it will ever renovate or sell the facilities “as is” once the facilities are near or at the end of their useful life. It has concluded it doesn’t have the information needed to estimate the range of time over which the entity may need to remove the asbestos and cannot reasonably assess the fair value of the liability. The hospital isn’t required to estimate or record the abatement liability, but the circumstances must be disclosed in the financial statements. Although, in the future when this information becomes available, such as when it makes plans to renovate or demolish the facility, it will need to record the fair value of the abatement liability using an expected present value technique.
  

Interpretation 47 was effective no later than the end of fiscal years ending after Dec. 15, 2005. If FIN 47 wasn’t properly implemented in the financial statements of a period for which it was effective, such an error must be reported as a prior-period adjustment.

For the full text of the interpretation, visit www.fasb.org/pdf/fin%2047.pdf.