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Far From Closure: No Consensus Yet on Accounting Proposal for Decommissioning
In aiming to make financial statements more meaningful, will FASB instead make them indecipherable?
By mid-summer, a total of 123 companies had cranked out some 574 pages of comments, detailing exactly what they thought of the accounting rules proposed by the Financial Accounting Standards Board to cover the closure or removal of certain long-lived assets. %n1%n The FASB's"Exposure Draft," issued early last year, had requested comments on eight issues. The respondents answered as requested, but also raised a host of new questions.
The proposed financial accounting standards pertain to nuclear plant decommissioning and other similar legal obligations. If adopted, the standards would alter the accounting and depreciation practices of all utilities.
The FASB had launched the project on the heels of suggestions both by the Securities and Exchange Commission and the Edison Electric Institute. The SEC had posed that decontamination of nuclear facilities denotes 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 had asked the FASB to address accounting practice costs incurred to decontaminate nuclear facilities and for other similar obligations. FASB responded with its exposure draft. By its terms, the proposal would cover not just nuclear decommissioning, but a broad range of activities, including closure of landfills or hazardous waste storage facilities, plus dismantlement and removal of offshore and gas production facilities. In general, it would cover all unavoidable obligations (both legal and constructive) incurred in the normal operation of a long-lived asset and that are incurred early in the life of an asset and mature at closure or removal.
Among other points, the FASB exposure draft would require utilities and other businesses to record estimated future costs for certain covered obligations (costs incurred early in the asset life) as liabilities on their balance sheets, discounted to present value. This liability treatment would sever much of the link between cost recognition and asset use, leading to a backloading of costs and greater financial disclosure for utilities than is now customary. Other obligations not qualifying for liability treatment would be depreciated up to the amount of salvage proceeds and the remainder expensed (cash treatment). Thus, the FASB proposal promised to impose significant changes in accounting practice for electric and gas utilities, whose assets tend to produce removal costs much higher than salvage value. %n2%n
Overall, the comments seemed negative. Most agreed, however, that the financial obligations addressed in the standards should qualify as "liabilities" and that additional guidance would prove useful. Considerable disagreement arose concerning the appropriate treatment of such obligations for financial reporting.
Of course, the board had said it intended to make financial statements more meaningful. But the mismatch with asset usage or revenue generation that would stem from the exposure draft would prevent this from happening. The letters prove that many believe the exposure draft will produce indecipherable, and perhaps misleading, financial statements. Many responses said the draft would not reflect accurate estimates of the amount and timing of future