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

Fortnightly Magazine - September 15 1997


Utilities and others favored cost estimates that consider near-term technological advances. Accountants did not; industrials were split. Some suggested that FASB should not limit consideration only to near-term technological advances.

As I see it, the draft could undermine the typical position of the regulators that depreciation rates should reflect currently available technology. Every proposal I have seen to reflect future technology in electric and gas utility depreciation has produced decreased rates. I believe that the accountants have good reason to be concerned about whether estimates are accurate or can be audited if they reflect future advances in technology.

Discount Rate

Accountants and others favored the use of a risk-free discount rate. Regulators did not. Utilities and industrials were split. Those that disagreed favored a higher rate.

The task of setting an appropriate discount rate to estimate present value of liabilities enjoys the well-deserved reputation of being a difficult aspect of asset valuation. The degree of backloading in annuity calculations is a function of the magnitude of the discount rate, so those favoring a rate higher than the risk-free rate are proposing to increase the mismatch between asset usage and the recording of that usage for assets qualifying for liability treatment.

In its deliberations since the comments on the exposure draft, the board has reaffirmed its decision to require a risk-free rate.

External Trust Funds

Contrary to FASB's proposal, utilities and industrials favored the idea of applying trust funds as an offset against the obligation under liability treatment. Accountants did not, and others were split. Utilities stated that an offset for nuclear decommissioning funds appeared consistent with accounting treatment under SFAS 87 and 106.

While it appears logical to use cash flows from dedicated trust funds to offset closure or removal expenditures, the board apparently intends to disallow this claim.

Corresponding Capital Account

FASB's proposal requires businesses to recognize a capital account corresponding to the liability for the cost of closure or removal. Overall, those commenting tended to favor this approach. Accountants, others and some utilities favored capitalization as a cost of the asset. Regulators and most utilities favored capitalization as an intangible or deferred debit. Industrials were split. Several utilities and regulators stated that capitalization as a cost of the asset would increase property taxes.

Recorded liability amounts should carry a negative value, so that value increases should not occur as a result of liability treatment. However, increases may happen as a consequence of how ad valorem tax values are derived, suggesting faulty derivation methods.

Faulty derivation methods notwithstanding, the board should think hard about the validity of treating a liability in a way that could increase ad valorem tax values, as value increases are the reverse of economic reality.


Most respondents agreed the proposed disclosures under liability treatment were excessive (em especially the current and future costs and inflation rate. They showed concern that users of financial statements might not understand the multiple amounts (three or four) for the same obligation. Some suggested the disclosures would prove confusing and onerous (em dissuading voluntary disclosure of constructive obligations by requiring