Asset retirement obligations

Background

The Public Sector Accounting Board (PSAB) PS 3280 – Asset Retirement Obligations standard was established to guide public sector entities on how to account for and report legal obligations associated with the retirement of tangible capital assets. This standard is exercised in conjunction with existing standards PS 3150 Tangible Capital Assets. This standard will replace PS 3270 Solid Waste Landfill Closure and Post Closure Liability when PS 3280 comes into effect.

Scope

Asset Retirement obligations (AROs) are legal obligations that result from a past transaction or event. This can occur from acquisition, construction, development, or normal use of a tangible capital asset. It is this, and not the existence of the contract, agreement, legislation, or other legally enforceable right that is the obligating event. Delaying the settlement does not relieve the entity of the obligation. The obligating event occurs when the asset is acquired. If an asset that was not previously required to be retired must now be retired due to new legislation, an ARO would be created when the legislation is enacted. This obligation would not be reported as a prior period adjustment since new legislation is a current period event.

Obligations that arise solely from a plan to sell or otherwise dispose of a tangible capital asset are outside the scope of this section.

In certain circumstances, an entity may have doubts on whether there is an existence of an ARO. An assessment should be undertaken to determine whether obligations should be recognized or disclosed under PS 3260 Liability for Contaminated Sites, PS 3200 Liabilities, PS 3300 Contingent Liabilities, or PS 3390 Contractual Obligations.

See decision tree when assessing scope of liability:

Definitions

See reference PS3280.08-.10:

Asset Retirement Activities: These include all activities related to an asset retirement obligation. Examples include but are not limited to:

• decommissioning or dismantling a tangible capital asset that was acquired, constructed or developed;
• remediation of contamination of a tangible capital asset created by its normal use;
• post-retirement activities such as monitoring; and
• constructing other tangible capital assets to perform post-retirement activities.

Asset Retirement Cost: The estimated amount required to retire a tangible capital asset.

Asset Retirement Obligation: A legal obligation associated with the retirement of a tangible capital asset.

Present Value Technique: A method used to evaluate the present value of cashflow required to settle future obligations.

Legal obligation: A legal obligation establishes a clear duty or responsibility to another party that justifies recognition of a liability.