Conditional Asset Retirement Obligations (FIN 47)

Background

The Financial Accounting Standards Board published Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” on March 31, 2005. The interpretation clarifies the term conditional asset obligation used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” According to the interpretation, a conditional asset retirement obligation refers to a legal obligation to perform the asset retirement activity.

In general, FASB believes that when an obligation meets the definition of a liability, it should be recognized. To the extent long lived assets contain hazardous substances (as determined and defined by federal legislation, e.g. asbestos) - organizations have a legal obligation and consequently accounting liability related to those assets. The liability is termed "Conditional Asset Retirement Obligation" (CARO). FIN 47 defines CARO and clarifies the FASB's belief that SFAS 143 applies to CAROs.

The interpretation represents a relatively recent change in thought from FASB’s earlier statements—most notably FASB Statement No. 5, "Accounting for Contingencies," which required an entity to consider uncertainty in its determination of whether to recognize a liability.

The interpretation is effective no later than the end of fiscal years ending after December 15, 2005 -- typically fiscal 2006 for colleges and universities.

Resources

FARM Emerging Issues Update, Release 05-1
FIN 47 Estimation Calculation is an excel spreadsheet that allows you to change assumptions and calculate your conditional asset retirement obligation estimate.
Corporate Footnote Disclosures Since the effective date is for fiscal years ending after December 15, 2005, higher education can look to the corporate world for examples of footnote disclosures. Below are a few links to corporate financial statements; you may need to scroll a bit to get to the note regarding FIN 47, typically labeled Recent Accounting Pronouncements.
PricewaterhouseCoopers White Paper
NACUBO's Webcast Making Sense of Conditional Asset Retirement Obligations is available on-demand.