In November 2016, the Governmental Accounting Standards Board (GASB) issued Statement No. 83, Certain Asset Retirement Obligations, which addresses the accounting and financial reporting for certain asset retirement obligations (AROs). GASB believes this new standard will result in enhanced comparability of financial statements among governments and enhances the decision-useful information for readers.
Although an initial read of this GASB standard may have you thinking that it couldn’t apply to your government, this is one GASB standard you’ll want to think about a bit more. Depending upon the types of tangible capital assets your government owns, this statement could have significant accounting and reporting implications.
GASB 83 in brief
A governmental entity that has a legal obligation (laws and regulatory requirements, court judgments, contracts, etc.) to perform future asset retirement activities related to its tangible capital assets should recognize a liability, and a corresponding deferred outflow of resources, based on the guidance in this statement. A liability would be recognized by a government that will eventual retire, dispose of, or environmental remediate upon retirement, a capital asset and that retirement or disposal carries with it legally enforceable obligations. The accounting for AROs would generally only impact full accrual funds, unless the liability is due and payable, in which case it would be recorded in funds using the current financial resources measurement focus.
While prior GASB standards may have required the recognition of liabilities at the time certain assets were retired, this statement requires recognition of the liability when the asset is placed in service or as the asset is used, depending upon the incurrence of the retirement obligation.
Depending upon the types of tangible capital assets your government owns, this statement could have significant accounting and reporting implications.
Measurement of the liability and initial deferred outflow is based on the best estimate of the amount of the current value of outlays expected to be incurred. Annually, the government will amortize the deferred outflow into expense over the remaining life of the capital asset and evaluate whether the estimate of the liability continues to be appropriate. Additional footnote disclosures are also required!
Key details of GASB 83
- Effective date: Reporting periods beginning after June 15, 2018
- Early application: Allowed and encouraged
- Application method: Retroactively, by restating financial statements for all prior periods presented
In evaluating GASB 83, after fully understanding the applicability of this standard, governments should brainstorm with department heads and others within the organization as to what types of capital assets might be subject to a legal requirement for the government to incur costs upon retirement of the asset.
Where this statement applies, not only will it require the recording of a liability and a deferred outflow, it’ll also have an impact on expense of the organization as the deferred outflow is being amortized each year. It’s important to consider the impact of that additional expense on covenant calculations or other legal or reporting requirements.
Perhaps one of the more difficult aspects of this standard is coming up with the population of capital assets to which this standard might apply. The GASB has provided some potential examples within Statement 83, and we’ve added a few more you might want to consider:
- Sewage treatment plants
- Power plants/utilities
- Underground gas tanks
- Oil wells
- Wind turbines
- X-ray machines or magnetic resonance imaging (MRI) machines
- Research facilities
- Coal strip mines
- Nuclear research reactors
What other types of assets could this statement apply to? It’s a good question we all should continue to think about as the required implementation date of this statement approaches.
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