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, lead, etc.) - 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. However, if the obligations are not measurable with sufficient reliability, the institution's financial statements must disclose (a) a description of the obligation, (b) the fact that a liability has not been recognized because the fair value cannot be reasonably estimated, and (c) the reasons why fair value cannot be reasonably estimated.

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

• Accounting Tutorial
• FIN 47 Estimation Calculation is an excel spreadsheet that allows you to change assumptions and calculate your conditional asset retirement obligation estimate.
• PricewaterhouseCoopers White Paper
• NACUBO's Webcast Slides Making Sense of Conditional Asset Retirement Obligations  
• FARM Emerging Issues Update, Release 05-1