Project Updates

Interpretation of Statement 143

Project Summary

Last Updated: March 31, 2005 (Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

*Available Documents
*Summary of Interpretation 47


Reason for Issuing this Interpretation
How This Interpretation Will Improve Financial Reporting
How the Conclusions in This Interpretation Relate to the
Conceptual Framework
The Effective Date of This Interpretation
Board Meetings/Public Meeting Dates
FASAC Meetings
*Additional Information for Interested Constituents
*Contact Information

 

*Available Documents

The following documents are available regarding Conditional Asset Retirement Obligations.

*Summary of Interpretation 47

This Interpretation clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.

Reason for Issuing This Interpretation

Diverse accounting practices have developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. For example, some entities recognize the fair value of the obligation prior to the retirement of the asset with the uncertainty about the timing and (or) method of settlement incorporated into the liability’s fair value. Other entities recognize the fair value of the obligation only when it is probable the asset will be retired as of a specified date using a specified method or when the asset is actually retired. This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. Questions also arose about when sufficient information may not be available to make a reasonable estimate of the fair value of an asset retirement obligation. This Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.

How This Interpretation Will Improve Financial Reporting

Application of this Interpretation will result in (a) more consistent recognition of liabilities relating to asset retirement obligations, (b) more information about expected future cash outflows associated with those obligations, and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets.

How the Conclusions in This Interpretation Relate to the Conceptual Framework

FASB Concepts Statement No. 6, Elements of Financial Statements, states that “liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” The Board concluded that asset retirement obligations within the scope of Statement 143 that meet the definition of a liability in Concepts Statement 6 should be recognized as a liability at fair value if fair value can be reasonably estimated. The Board believes that when an existing law, regulation, or contract requires an entity to perform an asset retirement activity, an unambiguous requirement to perform the retirement activity exists, even if that activity can be deferred indefinitely. At some point, deferral is no longer possible, because no tangible asset will last forever (except land). Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. The use of an expected value technique to measure the fair value of the liability reflects any uncertainty about the amount and timing of future cash outflows. The clarification of when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation should improve the relevance, reliability, and comparability of the amounts recognized in the financial statements.

The Effective Date of This Interpretation

This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises).  Retrospective application for interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged.

Board Meeting/Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

Below is a list of the FASB Board/Public meetings. Minutes for meetings beginning with January 14, 2004, are available on the FASB website.

January 26, 2005 Board Meeting—Decision whether to reconsider the guidance in Statement 143 and whether to include additional guidance in the proposed Interpretation
August 25, 2004 Board Meeting—Redeliberations of the provisions of the Exposure Draft, based on the comments received from constituents.
April 7, 2004 Board Meeting—Application of Statement 143 to legal obligations to perform asset retirement activities when the retirement of the asset is conditional on a future event, effective date, transitions requirements, and comment period
January 14, 2004 Board Meeting—Agenda decision whether to add a project to the Board’s technical agenda

FASAC Meetings

March 23, 2004

*Additional Information for Interested Constituents

The Board issued an Exposure Draft for the proposed Interpretation on June 17, 2004 and the comment period for the Exposure Draft ended on August 1, 2004.

*Contact Information

If you have a technical inquiry regarding Interpretation 47, please use our technical inquiry system to submit your inquiry in writing.

Additional Details