FASB 143 – Ast Retirement Obligations Scope: Applies to legal obligations associated with the retirement of a tangible long-lived ast resulting from
Acquisition
Construction, or development
Normal operation
Legal obligation:
Bad on existing or enacted law, statute or ordinance
Bad on written or oral contract
Bad on legal construction under the doctrine of promissory estoppel
Promissory estoppel: a promi made without consideration may be enforced to prevent injustice if the
promisor should have reasonably expected the promie to rely on the promi and the promie did actually
rely on the promi to his or her detriment
Examples:
Landfill that must be capped and clod
Off-shore oil rig that must be dismantled and removed
Decontamination activities for nuclear power plant
Measurement at Fair Value
Fair value of ARO is the amount at which that liability could be ttled in a current transaction between willing parties
硅酸二钙In other words, NOT bad on a forced liquidation transaction price
Quoted market values are best if available
Prent value analysis may be the best technique available to determine fair value Note: the expected cash flow approach will probably be the only appropriate technique for most AROs.
[See Concept Statement No. 7, Para. 44 for description.]
管业务必须管安全Uncertainties in the amount and timing are incorporated into the fair value calculation
The entity’s credit standing is reflected in the discount rate ud
[credit-adjusted risk-free rate]
If a range is estimated for the timing or amount of the estimated cash flows, probabilities associated with possible outcomes are explicitly considered in an expected value
computation
Events that give ri to ARO may occur over multiple reporting periods
Examples: Liability for decommissioning a nuclear power plant is incurred as contamination occurs.
柔光箱Liability associated with PAST operation of an newly acquired operating landfill would be recognized
at acquisition. Additional obligations would be recognized each year as a result of operating the
landfill.
During each period, a new, parate layer of ARO is measured and recognized
Improper Operation or Catastrophic Accident
Environmental remediation liabilities that result from improper operation of a long-lived ast are not AROs.
Example: A certain amount of normal spillage might be anticipated as part of ARO. A major spill
caud by failure to comply with company’s safety procedures is not part of an ARO.
Presumably, a loss would be recognized for a catastrophe during the period it occurred although
FASB 143 does not discuss this point.
Initial Recognition
The period in which an ast retirement obligation (ARO) is recognized:
If a reasonable estimate can be made -- when it is incurred
If a reasonable estimate cannot be made initially – when it becomes possible to make a reasonable estimate of the fair value of the liability
To offt the liability, the entity will increa {debit} the carrying amount of the related long-lived ast by the same amount as the ARO liability recorded
Subquent Recognition and Measurement
Period-to-period changes in ARO are recognized differently:
1. related to the passage of time
2. related to revisions in assumption about timing or amount of cash flows
First step:
Measure and incorporate changes in liability due to passage of time to arrive at a new
carrying value
U an interest rate method applied to beginning balance using the original credit-
足不出门adjusted risk-free discount rate
The change is called an accretion expen and is classified as an operating expen on the income statement.
Note that it is computed like interest expen and is bad on the discount rate ud when the ARO
was established
Second step:
Measure changes resulting from revisions to assumptions
Upward revisions: u current credit-adjusted risk-free discount rate
Downward revisions: u original credit-adjusted risk-free discount rate
Downward revisions may also u a weighted-average credit-adjusted risk-free
discount rate
Recognize as an increa in the carrying value of the related long-lived ast {the debit} and an increa in the ARO {the credit}.
Note that this does not immediately affect the income statement. But the
amount of ARO ast depreciated in the current and future years will be
incread or decread accordingly
Transition
Effective for fiscal years beginning AFTER June 15, 2002
Companies will have to retroactively recognize ARO asts and liabilities.
The effect on current year will be included in operating income
The effect on prior years will be prented net of tax as a cumulative effect of a change in accounting principle
EXAMPLE 1 – Ast Retirement Obligation
A waste management company opens a landfill on January 1, 2003. It is legally required to properly cap and clo the landfill and restore the surface of the land for alternative u. The estimated uful life of the landfill is 12 years. The land was purchad in 2001 for $600,000. Upon closure, the land will be donated to the country for a park. The estimated value of the tax deduction related to the gift is $200,000. The cost incurred during 2002 to ready the property for u as a landfill was $800,000. The estimated capacity of the landfill is 120,000 tons of garbage. Level of usage is expected to be constant over the life of the landfill.
The company us the following assumptions to compute the fair value:
1.
2.
3. Expected cost of materials for closure = $85,000
4. Normal profit margin for contractors in this industry = 20%
5. Risk premium that a contractor would demand for bearing the uncertainty of a commitment
this far into the future = 7% of the estimated inflation-adjusted cash flows
6. The risk-free rate of interest on January 1, 2003 is 4%. The credit standing adjustment is 8%
for a total discount rate of 12%
7. Assumed inflation rate = 3%
Initial ARO Liability at January 1, 2003
Expected labor and material costs $ 460,000
Allocated overhead $ 375,000 * 80% 300,000
760,000
Markup on direct costs $760,000 * 20% 152,000
Expected cash outflow before inflation 912,000
Inflation factor 3% for 12 periods 1.425761
Inflation adjusted cashflow 1,300,294
Market risk premium 1,300,294 * 7% 91,021
Expected future cash outflow at closure of landfill =
Prent value
Computing depreciation or depletion expen:
Historical cost of land $ 600,000
Preparation costs $ 800,000
Residual value $ (200,000)
Ast retirement obligation capitalized
Depreciation ba
Estimated capacity in tons of garbage 120,000
Depletion or depreciation rate per ton $
Accretion expen is bad on the ARO capitalized. Multiply the beginning of the year balance in the ARO liability by the credit-adjusted risk-free rate (the same rate ud to discount the future cash flows).
The following schedule of expens assumes that there is no need to revi any of the assumptions that affect anticipated future cash flows.
12% $ 12.98
Year ARO - BOY ARO - EOY Accretion
Expen
Depreciation
Expen Total Expen
2003 357,116 399,970 42,854 129,760 172,614 2004 399,970 447,966 47,996 129,760 177,756 2005 447,966 501,722 53,756 129,760 183,516 2006 501,722 561,929 60,207 129,760 189,966 2007 561,929 629,360 67,431 129,760 197,191 2008 629,360 704,883 75,523 129,760 205,283 2009 704,883 789,469 84,586 129,760 214,346 2010 789,469 884,206 94,736 129,760 224,496 2011 884,206 990,310 106,105 129,760 235,864 2012 990,310 1,109,147 118,837 129,760 248,597 2013 1,109,147 1,242,245 133,098 129,760 262,857 2014 1,242,245 1,391,315 149,069 129,760 278,829
1,034,199 1,557,116 2,591,315
Example 2 – Same facts as Example 1 EXCEPT:
New regulations are announced in early 2008. The projected costs are conquently expected to increa by the following amounts. All other assumptions remain the same.
Labor increas by15% $ 56,250
Materials increa by50% $ 42,500
Credit-adjusted risk-free rate 10%
Since this is an UPWARD adjustment in the ARO, the increa is computed using the current credit-adjusted risk-free rate.
日本豆腐的家常做法Expected increa in labor and material costs
Allocated overhead on direct labor * 80%
Markup on direct costs * 20%
Expected cash outflow before inflation
Inflation factor 3% for 7 periods
Inflation adjusted cashflow
感激之礼Market risk premium
Expected future cash outflow at closure of landfill =
Prent value 10% for 7 periods
The accretion cost on this new ARO will u the discount rate from 2008 (not the original one from 2003). Conquently, it is probably easier to compute the additional accretion expen in a new t of columns.
For the depreciation expen, we first have to determine the carrying value of the landfill BEFORE the change in the assumptions – at the end of 2007. Then we re-compute the depreciation rate over the remaining uful life.
Historical cost 1,400,000
Initial ARO recognized 357,116
1,757,116
k2p路由器Less accumulated depreciation
Carrying value at end of 2007
Upward adjustment to ARO
Less salvage value (200,000)
Depreciation ba
Remaining capacity in tons of garbage选成语
Revid rate per ton
