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ASC 410-20 specifically excludes from its scope certain lease obligations, environmental remediation liabilities, costs to repurpose an asset for an alternative use, obligations arising solely from a plan to dispose of an asset, and certain other transactions and activities.

ASC 410-20-15-3

The guidance in this Subtopic does not apply to the following transactions and activities:
a. Obligations that arise solely from a plan to sell or otherwise dispose of a long- lived asset covered by Subtopic 360-10.
b. An environmental remediation liability that results from the improper operation of a long-lived asset (see Subtopic 410-30). Obligations resulting from improper operations do not represent costs that are an integral part of the tangible long- lived asset and therefore should not be accounted for as part of the cost basis of the asset. For example, a certain amount of spillage may be inherent in the normal operations of a fuel storage facility, but a catastrophic accident caused by noncompliance with an entity’s safety procedures is not. The obligation to clean up the spillage resulting from the normal operation of the fuel storage facility is within the scope of this Subtopic. The obligation to clean up after the catastrophic accident results from the improper use of the facility and is not within the scope of this Subtopic.
c. Activities necessary to prepare an asset for an alternative use as they are not associated with the retirement of the asset.
d. Historical waste held by private households. (The guidance in this paragraph does not pertain to an asset retirement obligation in the scope of this Subtopic.) For guidance on accounting for historical electronic equipment waste held by private households for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment adopted by the European Union, see Subtopic 720-40.
e. Obligations of a lessee in connection with an underlying asset, whether imposed by a lease or by a party other than the lessor, that meet the definition of either lease payments or variable lease payments in Subtopic 842-10. Those obligations shall be accounted for by the lessee in accordance with the requirements of Subtopic 842-10. However, if obligations of a lessee in connection with an underlying asset, whether imposed by a lease or by a party other than the lessor, meet the provisions in paragraph 410-20-15-2 but do not meet the definition of either lease payments or variable lease payments in Subtopic 842-10, those obligations shall be accounted for by the lessee in accordance with the requirements of this Subtopic.
f. An obligation for asbestos removal that results from the other-than-normal operation of an asset. Such an obligation may be subject to the provisions of Subtopic 410-30.
g. Costs associated with complying with funding or assurance provisions. Paragraph 410-20-35-9 otherwise addresses the measurement effects of funding and assurance provisions.
h. Obligations associated with maintenance, rather than retirement, of a long-lived asset.
i. The cost of a replacement part that is a component of a long-lived asset.

3.3.1 Obligations from asset disposal plans (ARO scope exclusions)

The asset retirement obligation guidance does not apply to obligations that arise solely from a plan to dispose of a long-lived asset. For example, if a reporting entity decides to dismantle and dispose of a manufacturing facility within two years rather than continuing to maintain it, there is no legal obligation for the disposal. As a result, the plan to incur the costs of dismantling the facility and removing the scrap materials is not an obligation within the scope of the ARO guidance.
In contrast, ASC 410-20 provides the following example of legal obligation that may result from the doctrine of promissory estoppel.

ASC 410-20-55-2

For example, assume an entity operates a manufacturing facility and has plans to retire it within five years. Members of the local press have begun to publicize the fact that when the entity ceases operations at the plant, it plans to abandon the site without demolishing the building and restoring the underlying land. Due to the significant negative publicity and demands by the public that the entity commit to dismantling the plant upon retirement, the entity's chief executive officer holds a press conference at city hall to announce that the entity will demolish the building and restore the underlying land when the entity ceases operations at the plant. Although no law, statute, ordinance, or written contract exists requiring the entity to perform any demolition or restoration activities, the promise made by the entity's chief executive officer may have created a legal obligation under the doctrine of promissory estoppel. In that circumstance, the entity's management (and legal counsel, if necessary) would have to evaluate the particular facts and circumstances to determine whether a legal obligation exists.

Question PPE 3-1
Should a reporting entity record an ARO if there is no legal obligation to remove the asset and no legal requirement to dispose of the asset in a specified manner upon retirement?
PwC response
No. ASC 410-20 is clear that an ARO is a legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of that asset. Further, ASC 410-20 indicates that a legal obligation must be the result of “an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel.”
When a reporting entity has no legal obligation to remove an asset and there is no legal requirement to dispose of the asset in a specified manner upon retirement, an ARO should not be recognized. For example, consider an electrical power plant that has been closed, ringfenced, and will be left abandoned. If there is no legal obligation to demolish the power plant or dispose of any component of the power plant in a specified manner (whether due to contract, law, or promissory estoppel), the reporting entity should not record an asset retirement obligation.
However, when a reporting entity has no legal obligation to remove an asset or to dispose of that asset in a special manner, the reporting entity should still consider whether there is a legal obligation (whether due to contract, law, or promissory estoppel) to monitor the asset upon disposal. In such instances, any legal obligations associated with monitoring the asset would be recognized following the guidance in ASC 410-20.

3.3.2 Environmental remediation liabilities (ARO scope exclusions)

The provisions of ASC 410-20 do not apply to obligations that result from improper operation of an asset, including environmental remediation liabilities, which are subject to ASC 410-30. ASC 410-20-15-3(b) provides guidance to help distinguish between asset retirement obligations and obligations that should be accounted for as environmental remediation liabilities.
The determination of whether an obligation should be accounted for in accordance with ASC 410-20 or under other guidance is a matter of judgment based on individual facts and circumstances. One factor that may be helpful in distinguishing AROs from environmental remediation liabilities or other contingencies is the timing of the required remediation efforts.
  • Immediate remediation required
Environmental damage extensive enough to require immediate remediation generally arises from improper operation of an asset (e.g., an oil spill or a pipeline leak). This type of environmental liability should be accounted for under ASC 410-30. See PPE 9 for more information on accounting for environmental costs under ASC 410-30.
  • Clean-up performed in connection with an asset’s retirement
The ability to delay remediation until asset retirement generally suggests that the damage arose from normal operations and was inherent in operating the asset. Environmental damage arising from normal operations is subject to ASC 410-20; therefore, the cost of such remediation is accounted for under the ARO guidance.

3.3.3 AROs relating to lease agreements (ARO scope exclusions)

The requirement to record an asset retirement obligation does not apply to obligations of a lessee in connection with an underlying asset that meet the definition of either lease payments or variable lease payments under ASC 842, whether imposed by a lease or by a party other than the lessor. In these circumstances, the legal obligation associated with the ARO is that of the lessor who owns the leased asset and who is legally responsible for the associated ARO activities. While a portion of the lessee’s lease payments may indirectly compensate the lessor for the AROs, the legal obligation at retirement would be that of the lessor, and not the lessee. For lessee obligations meeting the definition of either lease payments or variable lease payments under ASC 842, such amounts should be included in the determination of the lease liability and the right-of-use asset recognized at lease commencement, and would not be separately accounted for under ASC 410-20.
Alternatively, obligations imposed by a lease agreement that meet the definition of an ARO and do not meet the definition of either lease payments or variable lease payments under ASC 842 are within the scope of ASC 410-20 for the lessee. ASC 842-10-55-37 includes guidance on such obligations.

ASC 842-10-55-37

Obligations imposed by a lease agreement to return an underlying asset to its original condition if it has been modified by the lessee (for example, a requirement to remove a lessee-installed leasehold improvement) generally would not meet the definition of lease payments or variable lease payments and would be accounted for in accordance with Subtopic 410-20 on asset retirement and environmental obligations. In contrast, costs to dismantle and remove an underlying asset at the end of the lease term that are imposed by the lease agreement generally would be considered lease payments or variable lease payments.

The determination of whether an obligation associated with leased property falls within the definition of lease payments or variable lease payments often involves judgment and the conclusion will be based on the specific facts and circumstances. An important factor to consider in making this determination is whether the obligation existed at the inception of the lease or was created through the actions of the lessee following the inception of the lease. For example, a lease agreement might require the lessee to return the leased property to the lessor in its original condition beyond normal wear and tear, such as requiring the removal of leasehold improvements installed by the lessee, at the lessee’s cost. Any costs that the lessee expects to incur to bring the leased property to that specified condition may fall within the scope of ASC 410-20 and could result in the recognition of an ARO.
Conversely, if the lessee were to lease both the property and leasehold improvements (i.e., the leasehold improvements were already in place at inception of the lease), and the lease required the lessee to remove the existing leasehold improvements at lease termination, this obligation would generally be viewed as a lease payment under ASC 842. In this case, the cost is a specified payment in the lease agreement and does not result from the lessee’s actions after lease inception. As this obligation would meet the definition of a lease payment or a variable lease payment, it should be accounted for under ASC 842.
In certain circumstances, the leasehold improvements put into place by the lessee have a useful life shorter than the lease term. As a result, the lessee may expect to retire the old leasehold improvements and install new leasehold improvements during the lease term. If the lessee is required to remove the leasehold improvements at the end of the lease term, the lessee should account for an asset retirement obligation when the leasehold improvements are constructed, and the expected settlement date should be when the specific asset will be retired (i.e., at the end of the useful life of the leasehold improvement). When a new leasehold improvement is put into place, a new asset retirement obligation is incurred and would be measured with a new expected settlement date. Determining the settlement date requires an assessment of whether the lease will be renewed.
See Example PPE 3-1 and Question PPE 3-8 for a discussion regarding the measurement of an ARO when considering lease improvements and renewals.
EXAMPLE PPE 3-1
Determining whether leasehold improvements generate an ARO
Lessee Corp leases an office building that includes pre-existing leasehold improvements from a previous lessee, including interior walls and carpeting. Lessee Corp’s lease agreement states that the company is contractually obligated to remove the pre-existing improvements and any additional leasehold improvements at the end of the lease term.
Does the requirement to remove the pre-existing leasehold improvements create an ARO?
Analysis
No. The requirement to remove the pre-existing leasehold improvements does not create an ARO for Lessee Corp. While a legal obligation exists to remove the pre-existing leasehold improvements, the obligation was not created by the actions of Lessee Corp. Instead, the estimated cost of the required removal of the leasehold improvements that existed at lease inception should be included in lease payments when recognizing and measuring the lease liability and right-of-use asset under ASC 842.
Alternatively, if Lessee Corp constructs additional leasehold improvements, it should account for the removal cost obligations associated with these additional leasehold improvements as an ARO.
If costs are incurred that relate to both the removal of pre-existing and new improvements (e.g., if one contractor is hired to remove both pre-existing and new internal walls), Lessee Corp should allocate such costs between lease payments used when measuring and recording the lease liability and right-of-use asset under ASC 842 and the ARO.

3.3.4 Asbestos clean-up from improper use (ARO scope exclusions)

If asbestos cleanup must be performed before the asset retirement date due to improper use, then the costs would be accounted for in accordance with ASC 410-30. For example, if a forklift inadvertently causes exposure of asbestos in a wall of an owned building, the costs for clean-up would not be part of the normal use of the building, and thus would be accounted for in accordance with ASC 410-30. Conversely, asbestos to be removed in conjunction with the normal operation and retirement of an asset is an asset retirement obligation subject to the requirements of ASC 410-20.
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