UTS 142.15 Certain Asset Retirement Obligations (AROs)

Sec. 1 Purpose

The purpose of this policy is to provide guidance for Governmental Accounting Standards Board (GASB) Statement No. 83 to The University of Texas System’s financial statements. If applicable, please contact the U. T. System Office of the Controller at controllersoffice@utsystem.edu for assistance in determining the appropriate accounting and reporting. GASB Statement No. 83 may be downloaded from the GASB’s website at www.gasb.org.

Sec. 2 Principles

The University of Texas System follows the requirements and guidelines provided in GASB pronouncements (statements, interpretations, technical bulletins and concept statements).

Sec. 3 Policy Statement

This policy establishes standards for accounting and financial reporting for assets for which a decommissioning plan would be required, for example nuclear reactors, irradiators, cyclotrons, gamma knifes and pods, proton therapy machines and broad scope radioactive material licenses.

Sec. 4 Scope and Applicability

For purposes of applying this Statement, an ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. 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.

This statement also applies to legally enforceable liabilities of lessors in connection with the retirement of their leased property if those liabilities meet the definition of an ARO. (Lessees would continue to follow lease guidance.)

This Statement does not apply to the following:

a) Obligations that arise solely from a plan to sell or otherwise dispose of a tangible capital asset

b) Obligations associated with the preparation of a tangible capital asset for an alternative use

c) Obligations for pollution remediation covered in GASB Statement 49, such as asbestos removal, that result from the other-than-normal operation of a tangible capital asset

d) Obligations associated with maintenance, rather than retirement, of a tangible capital asset

e) The cost of a replacement part that is a component of a tangible capital asset

f) Landfill closure and postclosure care obligations, including those not covered by Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs

g) Conditional obligations to perform asset retirement activities

Sec. 5 Recognition of an ARO

The University should recognize an ARO when the liability is incurred and reasonably estimable. A liability occurs when there is 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. Typically for the U. T. System, if a decommissioning plan would be required, you have an external and internal obligating event and should recognize an ARO.

An external obligating event is one of the following:

a) Approval of federal, state, or local laws or regulations

b) Creation of a legally binding contract

c) Issuance of a court judgment

An internal obligating event is one of the following:

a) For contamination-related AROs, the event is the occurrence of contamination. For purposes of this Statement, 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 because of the normal operation of a nuclear power plant) and (2) is not in the scope of GASB Statement 49.

b) For non-contamination-related AROs:

i. If the liability is based on the use of the tangible capital asset, the event is placing 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.

ii. If the liability is not based on the use of the tangible capital asset, the event is placing 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.

iii. 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.

c) 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 cyclotron with an existing ARO is the acquisition of the cyclotron.

Sec. 6 Recognition of a Deferred Outflow of Resources

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

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

Sec. 7 Initial Measurement of an ARO

The University should determine the types of activities to be included in the measurement of an ARO based on relevant legal requirements; that is, the relevant laws, regulations, contracts, or court judgments. The legal requirements resulting from laws and regulations should be based on applicable federal, state, or local laws or regulations that have been approved as of the financial reporting date, regardless of their effective dates. The U.T. System and University Offices of Risk Management should be consulted annually to determine if there are any new AROs that should be reported.

The measurement of an ARO should be based on the best estimate of the current value of outlays expected to be incurred during decommissioning. 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 should be 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, the most likely amount in the range of potential outcomes should be used. The determination of that amount should take into consideration all other available evidence that can be obtained at reasonable cost, including the potential for higher or lower outcomes.

For the U. T. System, the amounts used in the decommissioning plans is likely the best estimate available unless a formal decommissioning plan has not yet been developed, and if that is the case, current estimates from an informal plan are acceptable. Liabilities should be established even if there is not yet a formal decommissioning plan.

Sec. 8 Subsequent Measurement and Recognition of an ARO

Subsequent to initial measurement, the University should at least annually adjust the current value of its ARO for the effects of general inflation or deflation.

The University also should 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 University should 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:

a) Price increases or decreases due to factors other than general inflation or deflation for specific components of the estimated outlays

b) Changes in technology

c) Changes in legal or regulatory requirements resulting from changes in laws, regulations, contracts, or court judgments

d) Changes in the type of equipment, facilities, or services that will be used to meet the obligations to retire the tangible capital asset

For the U. T. System, the Texas Department of State Health Services has begun requiring that decommissioning plans be updated every three years.

Changes in the estimated outlays should be recognized as an increase or decrease in the carrying amount of the ARO in one of the following ways:

a) For a liability that increases or decreases before the time of retirement of the tangible capital asset, the University should adjust the corresponding deferred outflow of resources.

b)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 (as described in GASB 83 paragraph 23), the University should recognize an outflow of resources or an inflow of resources in the reporting period in which the increase or decrease occurs.

Sec. 9 Subsequent Measurement and Recognition of a Deferred Outflow of Resources

Upon initial measurement of a deferred outflow of resources for an ARO, the University should 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:

a) 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 should be recognized as an outflow of resources (for example, expense) over the entire estimated useful life of the tangible capital asset.

b) 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 should be 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.

For the U. T. System, the decommissioning plans are not broken down by asset. As a result, the largest assets to which the decommissioning plan relates should be identified. For decommissioning plans related to broad scope radioactive material licenses, an institution may need to identify the largest asset with the most reasonable estimated useful life to expense the deferred outflow. This is due to the fact that many times, decommissioning plans are largely calculations of staff hours required to decommission activities involving many smaller items, most of which were not capitalized.

Sec. 10 Example Entries using UT Share Peoplesoft (PS) and FCRS Accounts

The following accounts have been established in PeopleSoft for UT SHARE and FCRS for all institutions:

 PS FUND 

 LONG DESCRIPTION

 PS SHORT DESCR

 FCRS

 FCRS

 19140

 Deferred Outflows - ARO

 Defrd Out

 17904

 DFD_OUTFLOW_ARO

 24310

 Asset Retirement Obligation

 ARO

 24500

 Asset Retirement Obligation

 27750

 Asset Retirement Obligation

 ARO NC

 29300

 Asset Retirement Obligation

 66210

 Asset Retirement Expense

 ARO Exp

 48700

 ARO Expense

 

While the liability and deferred outflow will be associated with items in Investment in Plant, entries should be booked in the fund group which will ultimately satisfy the decommissioning payments.  We believe those fund groups will be E&G or Designated.  As a result, FCRS has been mapped to accommodate for liabilities, deferred outflows and expense in those fund groups.

Establishing an ARO and corresponding Deferred Outflow:

PS Account 19140/FM Account 17904 Def Outflow – ARO 10,000
PS Account 27750/FM Account 29300 Asset Retirement Obligation – NC    10,000

 

Reduction of deferred outflow annually for an asset with a 10-year remaining useful life:

PS Account 66210/FM Account 48700 ARO Expense $1,000
PS Account 19140/FM Account 17904 Def Outflow – ARO         $1,000

 

Payment of decommissioning amounts once the asset is retired and deferred outflows have been fully amortized:

PS Account 24310/FM Account 24500 Asset Retirement Obligation     1,000
PS Account 27750/FM Account 29300 Asset Retirement Obligation – NC          9,000
Cash $10,000

 

Sec. 11 Notes to Financial Statements

The University should disclose the following information about its AROs:

a) 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)

b) The methods and assumptions used to measure the liabilities

c) The estimated remaining useful life of the associated tangible capital assets

d) 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

e) 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 University but is not yet recognized because it is not reasonably estimable, the government should disclose that fact and the reasons.

Sec. 12 Effective Date and Transition

The provisions of this statement are effective for financial statements for periods beginning after June 15, 2018, or fiscal year 2019.

Changes adopted to conform to the provisions of this Statement should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. If restatement for prior periods is not practicable, the cumulative effect, if any, of applying this Statement should be reported as a restatement of beginning net position for the earliest period restated. In the first period that this Statement is applied, the notes to the financial statements should disclose the nature of the restatement and its effect. Also, the reason for not restating prior periods presented should be disclosed.