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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 5 – Long-Term Liabilities
Certain Asset Retirement Obligations

GASB 83 established accounting and financial reporting standards for certain asset retirement obligations (AROs).

GASB 83 does not apply to:

  • Obligations that arise solely from a plan to sell or otherwise dispose of a tangible capital asset
  • Obligations associated with the preparation of a tangible capital asset for an alternative use
  • Obligations for pollution remediation such as asbestos removal, that result from the other-than-normal operation of a tangible capital asset — see GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations
  • Obligations associated with maintenance (rather than retirement) of a tangible capital asset
  • The cost of a replacement part that is a component of a tangible capital asset
  • Landfill closure and post-closure care obligations — including those not covered by GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs
  • Conditional obligations to perform asset retirement activities

Some common examples of AROs:

  • Sewage treatment plants
  • X-ray machines
  • Magnetic resonance imaging machines
  • Equipment associated with radioactive material or waste
  • Wind turbines
  • Nuclear research facilities, reactors or power plants

The following are State Property Accounting System (SPA) class codes that could contain AROs. Agencies with an asset recorded in SPA with one of these class codes are encouraged to research the asset to determine if a retirement obligation exists. This list is not exclusive.

Requirements

Agencies are responsible for ensuring proper accounting and reporting of AROs. When an agency knows (or suspects) a retirement obligation may exist with a tangible capital asset, the agency must take steps to determine what the legally enforceable liability is and prepare accounting entries to record the initial and subsequent measurement of the ARO.

Each agency must analyze its AROs at least annually and recognize them in its financial statements. Each agency is required to make the identification of retirement obligations a normal part of its procedures when acquiring tangible capital assets.

Agencies must also maintain an annual register of ongoing AROs and their related measurements. Each agency with an ARO is required to submit the Asset Retirement Obligation Template (Excel) regarding asset retirement activity with its AFR package in accordance with the AFR submission deadline.

Scope and Applicability

An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset (in other words, the tangible capital asset is permanently removed from service).

The retirement of a tangible capital asset encompasses its sale, abandonment, recycling or disposal in some other manner — however, it does not encompass the temporary idling of a tangible capital asset.

AROs result from the normal operations of tangible capital assets (whether acquired or constructed) and include legally enforceable liabilities associated with all of the following activities:

  • Retirement of a tangible capital asset
  • Disposal of a replaced part that is a component of a tangible capital asset
  • Environmental remediation associated with the retirement of a tangible capital asset that results from the normal operation of that capital asset

This disclosure also applies to legally enforceable liabilities of a lessor in connection with the retirement of its leased property if those liabilities meet the definition of an ARO.

Thresholds

AROs are subjected to the Capitalization thresholds.

Recognition

Agencies must recognize an ARO when the liability is incurred and reasonably estimable. Incurrence of a liability is manifested by the occurrence of both an external obligating event and an internal obligating event resulting from normal operations. An obligating event refers to an event whose occurrence determines the timing for recognition of an ARO.

An external obligating event is any one of the following:

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

An internal obligating event is any one of the following:

  1. For contamination-related AROs, the event is the occurrence of contamination. For purposes of this disclosure, contamination refers only to contamination that:
    1. Is a result of the normal operation of a tangible capital asset (such as nuclear contamination of a nuclear reactor vessel as a result of the normal operation of a nuclear power plant)
    2. Is not in the scope of GASB 49 (as amended)
  2. For non-contamination-related AROs:
    1. If the pattern of incurrence of the liability is based on the use of the tangible capital asset, the event places that capital asset into operation and consuming a portion of the usable capacity by the normal operations of that capital asset. For example, the internal obligating event to recognize a liability for the retirement of a coal strip mine is the excavation of the coal strip mine and using a portion of the capacity of the coal strip mine.
    2. If the pattern of incurrence of the liability is not based on the use of the tangible capital asset, the event places that capital asset into operation. For example, the internal obligating event to recognize a liability for the retirement of a wind turbine is placing the wind turbine into operation.
    3. If the tangible capital asset is permanently abandoned before it is placed into operation, the event is the permanent abandonment itself. For example, the internal obligating event to recognize a liability for the retirement of a tangible capital asset that is permanently abandoned during construction is the abandonment of the construction.
  3. For AROs related to acquired tangible capital assets, the event is the acquisition of the tangible capital asset. For example, the internal obligating event to recognize a liability for an acquired power plant with an existing ARO is the acquisition of the power plant.

The action of completing a plan to retire a tangible capital asset is not, by itself, an internal obligating event.

Recognition of a Deferred Outflow of Resources

When an ARO is recognized, the agency must also recognize a corresponding deferred outflow of resources.

If a tangible capital asset is permanently abandoned before it is placed into operation, the agency must immediately report an outflow of resources (for example, an expense) rather than a deferred outflow of resources when an ARO is recognized.

Initial Measurement

Initial Measurement of an ARO

  • The agency determines the types of activities to be included in the measurement of an ARO based on relevant legal requirements (in other words, the relevant laws, regulations, contracts or court judgments). The legal requirements resulting from laws and regulations, regardless of their effective dates, are based on:
    • Applicable federal, state or local laws
      –OR–
    • Regulations that have been approved as of the financial reporting date
  • The measurement of an ARO is based on the best estimate of the current value of outlays expected to be incurred. Current value is 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 best estimate is determined using all available evidence. This approach requires probability weighting of potential outcomes when sufficient evidence is available or can be obtained at reasonable cost. When probability weighting cannot be accomplished at reasonable cost, use the most likely amount in the range of potential outcomes. The determination of that amount must take into consideration all other available evidence that can be obtained at reasonable cost, including the potential for higher or lower outcomes.

Measure asset retirement obligations using probability weighting method. This method measures the liability as the sum of probability-weighted amounts in a range of possible estimated mean amounts – the estimated mean or average.

Illustration of Probability Weighting Method

The agency is retiring five underground fuel storage tanks. Based on experience with similar sites, engineers believe a reasonable estimate to retire the AROs are:

  • Best case: $150,000, 30 percent likely
  • Most likely: $320,000, 60 percent likely
  • Worst case: $450,000, 10 percent likely

Liability Calculation:

($150,000 x 0.3) + ($320,000 x 0.6) + ($450,000 x 0.1) = $282,000

Initial Measurement of a Deferred Outflow of Resources

Agencies must initially measure a deferred outflow of resources associated with an ARO at the amount of the corresponding liability upon initial measurement.

Subsequent Measurement and Recognition

Subsequent Measurement and Recognition of an ARO

  • Subsequent to initial measurement, the agency must (at least annually) adjust the current value of its ARO for the effects of general inflation or deflation.
  • The agency must also (at least annually) evaluate all relevant factors to determine whether the effect of one or more of those factors is expected to significantly increase or decrease the estimated outlays associated with the ARO. The agency must remeasure the ARO only when the results of the evaluation indicate there is a significant change in the estimated outlays. Factors that may lead to a significant change in the estimated outlays include, but are not limited to the following:
    • Price increases or decreases due to factors other than general inflation or deflation for specific components of the estimated outlays
    • Changes in technology
    • Changes in legal or regulatory requirements resulting from changes in laws, regulations, contracts or court judgments
    • Changes in the type of equipment, facilities or services that will be used to meet the obligations to retire the tangible capital asset
  • Changes in the estimated outlays are recognized as an increase or decrease in the carrying amount of the ARO in one of the following ways:
    • For a liability that increases or decreases before the time of retirement of the tangible capital asset, the agency must adjust the corresponding deferred outflow of resources
    • For a liability that increases or decreases at or after retirement of the tangible capital asset (at which time the corresponding deferred outflow of resources has been fully recognized as outflows of resources) the agency must recognize an outflow of resources or an inflow of resources in the reporting period in which the increase or decrease occurs

Subsequent Measurement and Recognition of a Deferred Outflow of Resources

Upon initial measurement of a deferred outflow of resources for an ARO, agencies must recognize a reduction of the deferred outflow of resources as an outflow of resources (for example, expense) in a systematic and rational manner over a period of time, in one of the following ways:

  • For a deferred outflow of resources initially reported at the beginning of a tangible capital asset’s estimated useful life, the reduction of the deferred outflow of resources is recognized as an outflow of resources (for example, expense) over the entire estimated useful life of the tangible capital asset.
  • For a deferred outflow of resources initially reported after a tangible capital asset has been placed into operation – but before the end of its estimated useful life – the reduction of the deferred outflow of resources is recognized as an outflow of resources (for example, expense) over the remaining estimated useful life of the tangible capital asset, starting from the point at which the deferred outflow of resources is initially recognized.

Accounting for the Obligation

A long-term liability must be established when an agency determines an ARO exists and information is available to make a reasonable and supportable estimation of expected outlays. Record the portion of this liability expected to be paid within one year to the current pollution remediation obligation liability general ledger account.

ARO general ledger accounts for both governmental and proprietary funds are:

Governmental Funds

  • GL 1533 BC CL Asset Retirement Obligation
  • GL 1713 BC NC Asset Retirement Obligation
  • GL 0573 BC Deferred Outflow Asset Retirement Obligation

Proprietary Funds

  • GL 1033 CL Asset Retirement Obligation
  • GL 1213 NC Asset Retirement Obligation
  • GL 0785 Deferred Outflow Asset Retirement Obligation

The COBJ for both governmental and proprietary funds is 7840 – Net Change in Asset Retirement Obligation.

The following is an example of a governmental funds entry.

Seq No Batch Type Doc Type Eff Date Fin Agy TC AY PCA COBJ Amount R Fund Input GL*
To Establish Long-Term Liability for an ARO
(1) 5 U 0832CY XXX 535 CY 99999 N/A $ XX.XX   XXXX 1713
(2) 5 U 0832CY XXX 534 CY 99999 N/A $ XX.XX   XXXX 0573
To Record Annual Amortization
(3) 5 U 0832CY XXX 502 CY 99999 7840 $ XX.XX   XXXX 9992
(4) 5 U 0832CY XXX 535 CY 99999 N/A $ XX.XX   XXXX 0573
To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Retired Within One Year
(5) 5 U 0832CY XXX 535 CY 99999 N/A $ XX.XX   XXXX 1533
(6) 5 U 0832CY XXX 534 CY 99999 N/A $ XX.XX   XXXX 1713
To Reduce Current Obligation for Actual Retirement Expenditures
(7) 5 U 0832CY XXX 535 CY 99999 N/A $ XX.XX   XXXX 0573
(8) 5 U 0832CY XXX 534 CY 99999 N/A $ XX.XX   XXXX 1533

Accounting effect of above entries:

Debit Credit
(1) To Establish Long-term Liability for ARO    
  9992 BC System Clearing $ XX.XX  
  1713 BC NC Asset Retirement Obligation   $ XX.XX
  0573 BC Deferred Outflow of Resources $ XX.XX  
  9992 BC System Clearing   $ XX.XX
(3) To Record Annual Amortization    
  5650 BC Expenditure Control $ XX.XX  
  9992 BC System Clearing   $ XX.XX
  9992 BC System Clearing $ XX.XX  
  0573 BC Deferred Outflow of Resources   $ XX.XX
(5) To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Retired Within One Year    
  9992 BC System Clearing $ XX.XX  
  1533 BC Current Asset Retirement Obligation   $ XX.XX
  1713 BC NC Asset Retirement Obligation $ XX.XX  
  9992 BC System Clearing   $ XX.XX
(7) To Reduce Current Obligation for Actual Retirement Expenditures    
  9992 BC System Clearing $ XX.XX  
  0573 BC Deferred Outflow of Resources   $ XX.XX
  1533 BC Current Asset Retirement Obligation $ XX.XX  
  9992 BC System Clearing   $ XX.XX

The following is an example of a business type funds entry.

Seq No Batch Type Doc Type Eff Date Fin Agy TC AY PCA COBJ Amount R Fund Input GL*
To Establish Long-Term Liability for an ARO
(1) 5 U 0832CY XXX 645 CY 99999 N/A $ XX.XX   XXXX 1213
(2) 5 U 0832CY XXX 644 CY 99999 N/A $ XX.XX   XXXX 0784
To Record Annual Amortization
(3) 5 U 0832CY XXX 632 CY 99999 7840 $ XX.XX   XXXX 9999
(4) 5 U 0832CY XXX 645 CY 99999 N/A $ XX.XX   XXXX 0785
To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Retired Within One Year
(5) 5 U 0832CY XXX 645 CY 99999 N/A $ XX.XX   XXXX 1033
(6) 5 U 0832CY XXX 644 CY 99999 N/A $ XX.XX   XXXX 1213
To Reduce Current Obligation for Actual Retirement Expenditures
(7) 5 U 0832CY XXX 645 CY 99999 N/A $ XX.XX   XXXX 0785
(8) 5 U 0832CY XXX 644 CY 99999 N/A $ XX.XX   XXXX 1033

Accounting effect of above entries:

Debit Credit
(1) To Establish Long-term Liability for ARO    
  9999 System Clearing $ XX.XX  
  1213 NC Asset Retirement Obligation   $ XX.XX
  0785 Deferred Outflow of Resources $ XX.XX  
  9999 System Clearing   $ XX.XX
(3) To Record Annual Amortization    
  5600 Expenditure Control $ XX.XX  
  9999 System Clearing   $ XX.XX
  9999 System Clearing $ XX.XX  
  0785 Deferred Outflow of Resources   $ XX.XX
(5) To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Retired Within One Year    
  9999 System Clearing $ XX.XX  
  1033 Current Asset Retirement Obligation   $ XX.XX
  1213 NC Asset Retirement Obligation $ XX.XX  
  9999 System Clearing   $ XX.XX
(7) To Reduce Current Obligation for Actual Retirement Expenditures    
  9999 System Clearing $ XX.XX  
  0785 Deferred Outflow of Resources   $ XX.XX
  1033 Current Asset Retirement Obligation $ XX.XX  
  9999 System Clearing   $ XX.XX

Use the Working Papers to assist with preparation of journal voucher entries for both governmental and business-type funds.

Statement of Cash Flow

The Agency Cash Flow Reporting (ACFR) web application has been updated to include AROs. A new general ledger account was added in the adjustments to the reconciliation of operating income or loss to net cash provided (used) by operating activities section. The new general ledger account is used for the increase or decrease in asset retirement obligations and related accounts (00096485).

Required Note Disclosures

For recognized AROs, agencies must disclose the following in the GASB 83 Asset Retirement Obligation Template and submit it via the ONDSS web application:

  • A general description of the AROs and associated tangible capital assets, as well as the source of the obligations (whether they are a result of federal, state or local laws –or– regulations, contracts or court judgments)
  • The methods and assumptions used to measure the liabilities
  • The estimated remaining useful life of the associated tangible capital assets
  • A description of how any legally-required funding and assurance provisions associated with AROs are being met (for example, surety bonds, insurance policies, letters of credit, guarantees by other entities or trusts used for funding and assurance
  • The amount of assets restricted for payment of the liabilities – if not separately displayed in the financial statements

If an ARO (or portions thereof) has been incurred by the agency — but is not yet recognized because it is not reasonably estimable — the agency must disclose that fact and the reasons therefor.

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