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3.2 Scope of the ARO guidance
Publication date: 30 Jun 2022
us PP&E and other assets guide
ASC 410-20 details the types of transactions subject to the asset retirement obligation guidance.
The guidance in this Subtopic applies to the following transactions and activities:
a. Legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset, including any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived asset.
b. An environmental remediation liability that results from the normal operation of a long-lived asset and that is associated with the retirement of that asset. The fact that partial settlement of an obligation is required or performed before full retirement of an asset does not remove that obligation from the scope of this Subtopic. If environmental contamination is incurred in the normal operation of a long-lived asset and is associated with the retirement of that asset, then this Subtopic will apply (and Subtopic 410-30 will not apply) if the entity is legally obligated to treat the contamination.
c. A conditional obligation to perform a retirement activity. Uncertainty about the timing of settlement of the asset retirement obligation does not remove that obligation from the scope of this Subtopic but will affect the measurement of a liability for that obligation (see paragraph 410-20-25-10).
d. Obligations of a lessor in connection with an underlying asset that meet the provisions in (a).
e. The costs associated with the retirement of a specified asset that qualifies as historical waste equipment as defined by EU Directive 2002/96/EC. (See paragraphs 410-20-55-23 through 55-30 and Example 4 [paragraph 410-20-55-63] for illustration of this guidance.) Paragraph 410-20-55-24 explains how the Directive distinguishes between new and historical waste and provides related implementation guidance.
An ARO is a legal obligation. It can be established by agreement between two or more parties, imposed by a governmental authority, or arise due to promissory estoppel (i.e., through third-party reliance on a promise, even in the absence of consideration in exchange for that promise, see PPE 3.3.1). Considerable judgment and the assistance from legal counsel may be required to determine whether an ARO should be recorded due to promissory estoppel.
An example of an obligation established by an agreement would be when a municipality grants a reporting entity access to land on which the entity will be allowed to build and operate a facility, under the condition that after the entity ceases to use the facility, it must convert the land to a public park.
AROs can also be recognized in a business combination or asset acquisition. See BCG 2.5.7.2 for guidance on AROs recognized in a business combination.
The following activities often result in the need to recognize an ARO due to the associated legal obligation:
- Decommissioning nuclear facilities
- Dismantling, restoring, and reclaiming oil and gas properties
- Reclamation, closure, and post-closure obligations associated with mining activities
- Removal of asbestos around pipes or in a building wall at the time the related asset is retired
- Removal of transmission assets (including transformers and wires)
- Clean up of contamination from landfills, plugged and abandoned injection wells, water wells, and wastewater treatment facilities
- Removal of leasehold improvements installed by lessees
The above list is not all-inclusive, and reporting entities should assess all agreements related to tangible long-lived assets for provisions that may indicate the existence of an ARO.
For an obligation to fall within the scope of ASC 410-20, the obligation must be legally unavoidable, it must be associated with the retirement of a tangible long-lived asset, and it must result from the acquisition, construction, or development and/or normal operation of that asset. Since the liability is associated with the acquisition, construction, or development and/or normal operation of the asset, it is not relevant whether the entity intends to dispose of or transfer the asset prior to actual payment of the remediation costs. If the asset is disposed of, the asset retirement obligation would be transferred along with the related asset and the buyer’s assumption of the liability would be considered in the asset’s sales price.
AROs also must arise from the normal operation of the asset, and not from improper use or accidents, to be within the scope of ASC 410-20. For example, a certain amount of spillage may be inherent in the normal operation of a fuel storage facility and obligations arising from such normal operation would be within the scope of ASC 410-20. However, a catastrophic accident caused by noncompliance with an entity's safety procedures is not within the scope of the ARO guidance. See PPE 3.3.2 for additional details on the scope exclusion for environmental remediation liabilities.
Only legal obligations associated with the other-than-temporary retirement of tangible long-lived assets are in the scope of the ARO guidance. Therefore, the costs to voluntarily remove or retire an asset are not an ARO. For example, if an entity plans to remove a machine at the end of its useful life and replace it with a new model, and there is no legal obligation to remove the asset, the removal costs do not constitute an ARO because there is no legal obligation to remove the old model.
ASC 410-20 defines retirement as the other-than-temporary removal of a long-lived asset from service, including through sale, abandonment, recycling, or disposal in some other manner. Removing an asset from an existing location in connection with a legal obligation with the intent to re-deploy the asset to another location would not be within the scope of ASC 410-20 because it is a temporary removal from service. For example, if a reporting entity is obligated to transfer a plant and the associated fixed assets prior to the end of the useful lives, those transfer costs would not be within the scope of ASC 410-20 because those costs are not associated with the retirement of the plant and the fixed assets.
In many circumstances when an entity-owned asset operates in a leased plant, the asset life may differ from the term of the lease. There may be uncertainty as to whether the asset will be re-deployed to another owned or leased site, retired before the end of its useful life (e.g., because it is cost prohibitive to move) or maintained in its current state (i.e., the lease will be renewed). This uncertainty must be evaluated to determine whether there is a conditional ARO. See PPE 3.4.3.2 for further information on evaluating conditional AROs.
3.2.1 AROs related to component parts (scope of the ARO guidance)
As discussed in PPE 3.3, ASC 410-20 does not apply to ongoing maintenance activities to maintain the operation of a long-lived asset. However, in addition to applying to the retirement of an entire long-lived asset, ASC 410-20-55-9 indicates that a reporting entity may have retirement obligations for component parts of a larger system that are legally required to be retired and remediated in advance of the larger system. If the recognition criteria are met, the reporting entity should record an asset retirement obligation associated with interim component retirements. Examples of these types of obligations include:
- Aluminum smelter
ASC 410-20-55-10 provides an example of an aluminum smelter that is lined with a special type of brick. The bricks have a shorter life than the kiln and must be replaced periodically to maintain optimum efficiency of the kilns. When the bricks are removed, the bricks must be disposed of at a special hazardous waste site under state law due to contamination that occurs during their use. If the legal obligation to dispose of the bricks at the end of their useful life presently exists, then the ARO related to those bricks should be recognized when they are contaminated (because the contamination is the obligating event, which occurs when the kiln is first used) and an estimate of the fair value of the liability for the required disposal procedures should be made. The cost of the replacement bricks and their installation are not part of the ARO.
- Natural gas pipelines
A pipeline or natural gas distribution system owner has a legal obligation to remove the pipelines at the end of their useful life when it is abandoned. The owner may conclude that it will not abandon a pipeline system (which has an ARO associated with the retirement of the system) but would replace segments of the pipe on a rotating basis when the segments have reached the end of their useful life. Although the overall pipeline is not abandoned, the owner would still be required, due to a legal obligation, to remove and dispose the segments of the pipeline.
It does not matter that an ARO will be settled prior to the ultimate retirement of the long-lived asset. For example, consider the obligation to cover a landfill with topsoil and plant vegetation, known as capping. Often, capping activities are performed as sections of the landfill become full and are effectively retired. The fact that some of the capping activities are performed while the landfill is still accepting waste does not remove the obligation to perform those intermediate capping activities from the scope of ASC 410-20.
The level of detail maintained in a reporting entity’s records has no impact on the requirement to record AROs for component units. For example, a reporting entity may record an asset as an oil field, even though it is comprised of several oil wells. The disposal obligation should be recorded even if the individual assets are not identified in the accounting records. Aggregation techniques may be used to derive a collective ARO.
3.2.2 Conditional AROs (scope of the ARO guidance)
Conditional asset retirement obligations require recognition when there is a legal obligation to perform an asset retirement activity, but the timing and/or method of settlement may be conditioned on a future event. In other words, a legal obligation exists but the timing and/or method of extinguishing the obligation is dependent upon a future event that may or may not be within the control of the entity.
Definition from ASC 410-20-20
Conditional Asset Retirement Obligation: 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.
ASC 410-20-25-7 states that the legal obligation to perform an asset retirement activity is unconditional even when uncertainty exists about the timing or method of settlement. For example, the settlement date and method of settlement for an obligation may have been specified by others through law, regulation, or contract that gives rise to the legal obligation but provides various methods of settlement, each of which would be acceptable. Therefore, even if the timing or method of settlement is uncertain and may be conditional on a future event, an unconditional obligation exists and should be accounted for in accordance with ASC 410-20. See PPE 3.4.3.2 for guidance on the recognition and measurement of conditional AROs.
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