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Far From Closure: No Consensus Yet on Accounting Proposal for Decommissioning

Fortnightly Magazine - September 15 1997

closure or removal expenditures. This situation does not stem directly from treating these obligations as liabilities; instead, it arises from the disparity between balance sheet treatment at discounted present value under liability treatment versus zero value under cash treatment.

The position of utilities and industrials appears well taken that current accounting practice creates a better match between costs and use of assets. It will be a shame if insistence on balance sheet treatment at different costs (present value for liability treatment; zero value for cash treatment) damages the validity of financial statements.

Additional Guidance

The board had asked whether others saw a need for additional guidance regarding obligations or assets. The response was an overwhelming yes. Accountants, in particular, expressed this need. Some additional comments were:

• Spent Fuel. Utilities requested clarification that temporary, spent-fuel storage costs qualified for liability treatment; %n3%n

• Indefinite Life. Utilities and industrials wanted to clarify that the standards would not apply to removal of components of asset groups for which life is indefinite, such as electric and gas transmission and distribution systems and quarries;

• Abandoned Plant; Losses. Utilities expressed need for guidance on application of SFAS 90; accountants for SFAS 121;

• Asset Impairment. Several letters requested clarification intended to keep liability treatment from triggering large-asset-impairment write-offs;

• Technological Advances. Some need guidance on handling future technological advances, and facilities for which the depreciable lives may be much different from the expected timing of satisfying the obligation, such as for facilities on leased sites; and

• Land Reclamation. Utilities and industrials pointed out that the most significant obligations for mine reclamation and landfills are not incurred early in life.

In general, the proposed standard likely applies to every asset. Removal or closure costs must receive either liability treatment or cash treatment. The board's deliberations in response to the comments reinforce this interpretation.

Many facilities exist for which the depreciable life is significantly different from when the obligation would be satisfied. Liability treatment for such facilities will complicate fixed-asset and depreciation accounting for all businesses.

Present Value Discounting

The industrials appeared to favor the use of current cost in the treatment of liabilities (em i.e., cost of removal predicted at today's prices. The group labeled "others" (see sidebar) favored FASB's proposal to discount costs to present value, using a risk-free rate. Utilities were split. Accountants showed some support for current cost treatment.

In my opinion, the call by industrials for the use of current costs instead of present-value discounting should not appear surprising, since petroleum producers utilize SFAS 19 in this manner for closure of oil and gas fields.

If industry is to convince the FASB to switch from present value discounting to current cost, it may choose from one of two methods to keep costs up to date: 1) Update current costs ratably over remaining life, or 2) adopt the inflation rate as a discount rate. The first method would backload costs even more than FASB's proposed discounting. The second method, however, would reduce the extent of backloading and eliminate the need to predict when the liability will be satisfied.