FASB 143: Asset Retirement Obligations

The FASB has recently issued SFAS 143, Accounting for Asset Retirement Obligations. That Statement applies to all entities and covers legal obligations (arising from laws, statutes, contracts, etc.) that an entity must satisfy when disposing of tangible, long-lived assets. SFAS 143 doesn't apply to a lessee’s obligations that are considered minimum lease payments or contingent rentals.

In addition, obligations that arise solely from a plan to dispose of a long-lived asset in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, aren't covered by the provisions of SFAS 143. State-mandated waste removal or site restoration costs upon closing of a manufacturing plant are examples of asset retirement obligations (AROs).

Highlights of the guidance include the following:

• Liability Recognition. Basically, if an entity has an unavoidable responsibility to one or more entities that requires the transfer or use of assets due to an obligating event that has already occurred, the entity should record an ARO liability if it can reasonably estimate the fair value of the liability. The estimated cost should be capitalized as part of the related asset’s cost and then allocated to expense over the asset’s remaining useful life, using a systematic and rational method.)
  
  
• Initial ARO Measurement.Initially the ARO liability should be recorded at its fair value. If there aren't quoted market prices or prices for similar liabilities, an entity should estimate fair value by using a valuation technique, such as expected present value. If fair value can't be determined, the liability doesn't have to be recognized until a reasonable estimate of fair value can be made.
  
  
• Subsequent ARO Measurement. An entity isn't required to remeasure an ARO liability at fair value each period. Instead, changes to the initial measurement only need to reflect the passage of time and revisions of undiscounted cash flow estimates.
  
  
• Settlement of Liability. The entity will either settle the obligation at its recorded amount or incur a gain or loss.

SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Statement also provides transition guidance for ARO liabilities on the books at the time of the Statement’s adoption and includes disclosure requirements related to AROs.

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