"This legislation represents a piecemeal approach to a problem which requires deliberate and thoughtful consideration .... [It] could lead to 'cream-skimming,' which would result in increased...
Evolution or Revolution? Dismantling the FASB Standard on Decommissioning Costs
If approved as proposed, the new accounting standard
for closure or removal of long-lived assets
will bring costs out into the open.
But is it rational?
On February 7, 1996, the Financial Accounting Standards Board (FASB) issued for comment an "Exposure Draft" of a new proposed statement of financial accounting standards pertaining to nuclear plant decommissioning and other similar legal obligations, both for regulated utilities and unregulated firms. The proposed new standard, Proposed Statement of Financial Accounting Standards, Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets, would apply to fiscal years beginning after December 15, 1996. The comment period ends May 31, 1996.
If approved as drafted, the new accounting standard will pose important questions for utilities, both in its interpretation and its likely effects on accounting and depreciation practices.
s Depreciation Practice. Current treatment, as a component of depreciation, would no longer apply exclusively. The new
standard would affect the "group concept" of depreciation commonly practiced by utilities.
s Accounting Methods. Future accounting treatment would depend on whether the cost qualifies under the new standard either as a "liability" or a cash "expense."
s Backloading. Either way (liability or cash expense), the new standard will create a significant backloading of costs for covered obligations.
s Disclosure. The new standard will likely attract attention both from regulators and investors, as it will require utilities to identify and disclose certain future obligations.
The FASB launched the project on the heels of suggestions both by the Securities and Exchange Commission (SEC) and the Edison Electric Institute (EEI). More than two years ago, the SEC suggested that decontamination of nuclear facilities represents an environmental obligation that should be recorded as a liability. With that position somewhat at odds with the typical utility practice of providing for nuclear plant decommissioning through depreciation and trust funds, the EEI in February 1994 asked the FASB to consider a project to address accounting practice for costs related to the obligation to decontaminate nuclear facilities and other similar obligations. In April 1994, the Financial Accounting Standards Advisory Council discussed whether the FASB should address nuclear decommissioning costs in particular and removal costs in general, or whether it should take on a much broader project to examine the whole gamut of environmental remediation.
Eventually, the FASB chose a middle ground, addressing a broad range of closure and removal obligations, not just those for nuclear facility decontamination. By its terms, the exposure draft would cover obligations for a range of activities that include closure of landfills or hazardous waste storage facilities, or dismantlement and removal of offshore oil and gas production facilities.1 In general, it would cover obligations that satisfy all of the following three characteristics:
s Normal Operation. Incurred in the acquisition, construction, development, or early operation of a long-lived asset.
s Mature at Closure. Related to the closure or removal of a long-lived asset; cannot be satisfied until cessation of operation or use.
s Unavoidable. Cannot realistically be avoided if the asset is operated for its intended use.2
Thus, the proposed standard would not cover obligations