4.3 Scope of ASC 410-20
ASC 410-20
15-2 The guidance in this Subtopic applies to the following transactions and activities:
- Legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset, including any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived asset.
- An environmental remediation liability that results from the normal operation of a long-lived asset and that is associated with the retirement of that asset. The fact that partial settlement of an obligation is required or performed before full retirement of an asset does not remove that obligation from the scope of this Subtopic. If environmental contamination is incurred in the normal operation of a long-lived asset and is associated with the retirement of that asset, then this Subtopic will apply (and Subtopic 410-30 will not apply) if the entity is legally obligated to treat the contamination.
- A conditional obligation to perform a retirement activity. Uncertainty about the timing of settlement of the asset retirement obligation does not remove that obligation from the scope of this Subtopic but will affect the measurement of a liability for that obligation (see paragraph 410-20-25-10).
- Obligations of a lessor in connection with leased property that meet the provisions in (a). Paragraph 840-10-25-16 requires that lease classification tests performed in accordance with the requirements of Subtopic 840-10 incorporate the requirements of this Subtopic to the extent applicable.
- The costs associated with the retirement of a specified asset that qualifies as historical waste equipment as defined by EU Directive 2002/96/EC. (See paragraphs 410-20-55-23 through 55-30 and Example 4 [paragraph 410-20-55-63] for illustration of this guidance.) Paragraph 410-20-55-24 explains how the Directive distinguishes between new and historical waste and provides related implementation guidance.
Pending Content (Transition Guidance: ASC 842-10-65-1)
15-2 The guidance in this Subtopic applies to the
following transactions and activities:
-
Legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset, including any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived asset.
-
An environmental remediation liability that results from the normal operation of a long-lived asset and that is associated with the retirement of that asset. The fact that partial settlement of an obligation is required or performed before full retirement of an asset does not remove that obligation from the scope of this Subtopic. If environmental contamination is incurred in the normal operation of a long-lived asset and is associated with the retirement of that asset, then this Subtopic will apply (and Subtopic 410-30 will not apply) if the entity is legally obligated to treat the contamination.
-
A conditional obligation to perform a retirement activity. Uncertainty about the timing of settlement of the asset retirement obligation does not remove that obligation from the scope of this Subtopic but will affect the measurement of a liability for that obligation (see paragraph 410-20-25-10).
-
Obligations of a lessor in connection with an underlying asset that meet the provisions in (a).
-
The costs associated with the retirement of a specified asset that qualifies as historical waste equipment as defined by EU Directive 2002/96/EC. (See paragraphs 410-20-55-23 through 55-30 and Example 4 [paragraph 410-20-55-63] for illustration of this guidance.) Paragraph 410-20-55-24 explains how the Directive distinguishes between new and historical waste and provides related implementation guidance.
ASC 410-20 applies to legal obligations associated with the retirement of a
tangible long-lived asset. The determination of whether a legal obligation exists
should generally be clear and unambiguous. However, ASC 410-20 acknowledges in
defining the term “legal obligation” that such an obligation can be established by
an existing or enacted law, statute, ordinance, or written or oral contract, or in
accordance with the doctrine of promissory estoppel. If an entity makes a promise to
a third party, including the public at large, about its intentions to undertake
asset retirement activities, significant judgment may be required in the
determination of whether the entity has created a legal obligation under the legal
doctrine of promissory estoppel, which is defined as the “principle that a promise
made without consideration may nonetheless be enforced to prevent injustice if the
promisor should have reasonably expected the promisee to rely on the promise and if
the promisee did actually rely on the promise to his or her detriment.”1
The implementation guidance in ASC 410-20-55-2 provides the following example of a legal obligation
that may be established under the doctrine of promissory estoppel:
ASC 410-20
55-2 [A]ssume an entity operates a manufacturing facility and has plans to retire it within five years. Members
of the local press have begun to publicize the fact that when the entity ceases operations at the plant, it plans
to abandon the site without demolishing the building and restoring the underlying land. Due to the significant
negative publicity and demands by the public that the entity commit to dismantling the plant upon retirement,
the entity’s chief executive officer holds a press conference at city hall to announce that the entity will demolish
the building and restore the underlying land when the entity ceases operations at the plant. Although no law,
statute, ordinance, or written contract exists requiring the entity to perform any demolition or restoration
activities, the promise made by the entity’s chief executive officer may have created a legal obligation under the
doctrine of promissory estoppel. In that circumstance, the entity’s management (and legal counsel, if necessary)
would have to evaluate the particular facts and circumstances to determine whether a legal obligation exists.
A company’s past practice also may, but does not necessarily, create a legal
obligation. For example, a utility company may regularly remove and replace utility
poles as part of its normal operations, thereby potentially creating an expectation
that it will continue to do so. This expectation may create a legal obligation based
on the principle of promissory estoppel.2 For rate-regulated entities (such as public utilities), recovery through rates
of future removal costs alone does not create an ARO. However, rate-regulated
entities should review the applicable regulatory proceedings to determine whether a
promise to remove an asset was made for the regulator to approve the recovery of
costs in rates. If such an agreement was made and if the promisee relied on it to
his or her detriment, this may create an ARO through promissory estoppel.
Connecting the Dots
In determining whether an entity has a legal obligation under the notion of promissory
estoppel, entities must work closely with legal counsel to evaluate their own specific facts and
circumstances. When this determination is unclear, entities may wish to obtain a legal opinion to
support their conclusions.
Entities should evaluate the existence of legal obligations on the basis of current laws, regulations,
contractual obligations, and related interpretations and facts and circumstances and should not forecast
changes in laws or interpretations of such laws and regulations. The impacts of changes in laws or
regulations should be considered in the period in which such laws or regulations are enacted.
Connecting the Dots
The enactment date is the date on which all steps in the process for legislation to become law have been completed (e.g., in the United States, the date the president signs the legislation and it becomes law). For rules and regulations issued by federal regulatory agencies to implement enacted U.S. laws, the enactment date is generally the date on which final rules or regulations promulgated by the federal regulatory agency are published in the Federal Register, which may differ from the effective date of such rules or regulations. Entities may need to exercise considerable judgment and obtain the assistance of legal counsel in determining (1) the enactment date of laws and regulations implemented in jurisdictions outside the United States or (2) when regulations issued by governmental agencies to implement and interpret these laws are enacted.
The determination that a legal obligation exists is not affected by expectations
of nonenforcement, or uncertainty about enforcement, of existing laws, regulations,
or contractual provisions by governmental agencies or other third parties. However,
an entity would consider such expectations or uncertainty when measuring an ARO by
using an expected present value technique (see guidance on initial and subsequent
measurement of ARO liabilities in Sections 4.5 and 4.6). An entity may need to use significant judgment when determining
whether it has a legal obligation within the scope of ASC 410-20, and it may be
required to seek input from legal and other professional advisers in making this
determination.
Many component parts of larger systems have special disposal requirements, but there may not be a legal requirement to retire or remove the larger system to which the component parts belong. The costs associated with the legal obligation for disposal of a component part are within the scope of ASC 410-20 even though there is no legal obligation to remove the larger system. However, the cost of the replacement parts and their installation is not included in the measurement and recognition of the ARO. Further, if there is no legal obligation to remove the component part, removal costs would not be within the scope of ASC 410-20; only the disposal costs associated with the obligation to dispose of the contaminated component part, once retired and removed, are within the scope of ASC 410-20. ASC 410-20-55-10 includes the following example of component parts that wear out after a period and are subject to a special (legal) disposal requirement when removed:
ASC 410-20
55-10 [C]onsider an aluminum smelter that owns and operates several kilns lined with a special type of brick. The kilns have a long useful life, but the bricks wear out after approximately five years of use and are replaced on a periodic basis to maintain optimal efficiency of the kilns. Because the bricks become contaminated with hazardous chemicals while in the kiln, a state law requires that when the bricks are removed, they must be disposed of at a special hazardous waste site. The obligation to dispose of those bricks is within the scope of this Subtopic. The cost of the replacement bricks and their installation are not part of that obligation. . . .
4.3.1 Application of ASC 410-20 to Environmental Remediation Liabilities
The scope of ASC 410-20 is limited to those obligations that cannot be realistically avoided, assuming that the asset is operated in accordance with its intended use (i.e., resulting from the normal operation of a long-lived asset). Contamination arising out of “normal” operations generally is expected or predictable, gradual (or occurring over time), integral to operations, or unavoidable and does not require an immediate response. Contamination arising out of improper use of an asset or a catastrophic event is generally unexpected, requires immediate response or reporting, generally could have been controlled or mitigated, and is the result of a failure in equipment or noncompliance with company procedures. If an environmental remediation obligation is the result of the improper operation of an asset or the result of a catastrophic event, it would be subject to the provisions of ASC 410-30 or ASC 450, which address
the accounting for environmental obligations and contingencies, respectively.
See Chapter 1 for further discussion about the determination of whether an environmental remediation
liability is within the scope of ASC 410-20 or ASC 410-30.
4.3.2 Application of ASC 410-20 to Leases
The lease accounting guidance in ASU 2016-02 (codified in ASC 842),
which supersedes the guidance in ASC 840, is effective for public business
entities, as well as certain not-for-profit entities and employee benefit plans,
for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years.
In June 2020, the FASB issued ASU 2020-05, which defers the
effective dates of ASC 842 for public not-for-profit entities and private
entities. The deferrals apply only if those entities have not yet issued their
financial statements (or made their financial statements available for issuance)
as of June 3, 2020. For public not-for-profit entities that are eligible for a
deferral, ASC 842 is effective for fiscal years beginning after December 15,
2019, and interim periods therein. For private entities that qualify for a
deferral, ASC 842 is effective for fiscal years beginning after December 15,
2021, and interim periods within fiscal years beginning after December 15,
2022.
Most public companies have been accounting for leases under the
new standard. As of the issuance of this Roadmap, many non-PBEs have already
adopted ASC 842. However, some non-PBEs may still be working through the
implementation process since their financial statements for fiscal years ended
after December 15, 2022, may not have been issued.
4.3.2.1 Before the Adoption of ASC 842
ASC 410-20
15-2 The guidance in this Subtopic applies to the following transactions and activities:
a. Legal obligations associated with the retirement of a tangible long-lived asset that result from the
acquisition, construction, or development and (or) the normal operation of a long-lived asset, including
any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived
asset. . . .
d. Obligations of a lessor in connection with leased property that meet the provisions in (a). Paragraph
840-10-25-16 requires that lease classification tests performed in accordance with the requirements of
Subtopic 840-10 incorporate the requirements of this Subtopic to the extent applicable. . . .
15-3 The guidance in this Subtopic does not apply to the following transactions and activities: . . .
e. Obligations of a lessee in connection with leased property, whether imposed by a lease agreement or by
a party other than the lessor, that meet the definition of either minimum lease payments or contingent
rentals in paragraphs 840-10-25-4 through 25-7. Those obligations shall be accounted for by the
lessee in accordance with the requirements of Subtopic 840-10. However, if obligations of a lessee in
connection with leased property, whether imposed by a lease agreement or by a party other than the
lessor, meet the provisions in paragraph 410-20-15-2 but do not meet the definition of either minimum
lease payments or contingent rentals in paragraphs 840-10-25-4 through 25-7, those obligations shall
be accounted for by the lessee in accordance with the requirements of this Subtopic. . . .
ASC 410-20 applies to AROs of a lessor in connection with a leased property. ASC 410-20 also applies
to obligations of a lessee in connection with leased property, regardless of whether imposed by the
lease agreement or by a party other than the lessor, if those obligations do not meet the definition of
either minimum lease payments or contingent rentals under the guidance in ASC 840-10. If the lessee
obligations represent minimum or contingent rentals, they should be accounted for by the lessee in
accordance with ASC 840. As discussed in greater detail below, lessee obligations accounted for under
ASC 410-20 are initially measured at fair value, and uncertainties associated with the likelihood that the
lessor will enforce a lease provision are incorporated into the fair value measurement of the obligation.
Under ASC 840, minimum lease payments affect initial lease classification (operating vs. capital) and
subsequent accounting for leases by the lessee (the measurement of obligations under leases in
accordance with the guidance in ASC 840 is not based on fair value; therefore, any uncertainties
associated with the likelihood that the lessor will enforce a lease provision or require the payments are
not considered in the measurement of the lessee’s obligations under ASC 840).
At times, it may be challenging to distinguish between lessee obligations that meet the definition of
minimum lease payments or contingent rentals and those that do not. In a speech at the 2003 AICPA
National Conference on Current SEC Developments, the SEC staff acknowledged that diversity in practice
exists in accounting for obligations to retire a leased asset. The staff stated in the speech that it generally
has not objected to accounting for such obligations under either ASC 840 or ASC 410-20 as long as the
accounting policy is applied consistently. In addition, the staff indicated in the speech that it believes that
retirement obligations accounted for under ASC 840 should not be treated as contingent rentals since
the staff does not believe that such obligations meet the definition of contingent rentals.
Notwithstanding the views expressed in the SEC staff’s speech, and in the absence of an entity’s
consistently applied accounting policy election, we generally believe that the determination of whether
an obligation to retire (or bear the cost of retiring) a leased asset should be accounted for as a minimum
lease payment or as an ARO is a matter of judgment based on analysis of the relevant facts and
circumstances. ASC 840-10-25-5 defines minimum lease payments from the standpoint of the lessee
as “the payments that the lessee is obligated to make or can be required to make in connection with
the leased property.” Therefore, as a general rule, if the obligation is directly related to the leased asset
or to a component of the leased asset, the lessee should account for the obligation in accordance with
ASC 840. If the obligation either is related to assets (e.g., office equipment, machinery) placed in service
by the lessee at the leased premises or constitutes improvements made to the leased property by the
lessee during the lease term (i.e., leasehold improvements that are owned by the lessee), the lessee
should generally account for the obligation as an ARO in accordance with ASC 410-20.
4.3.2.2 After the Adoption of ASC 842
ASC 410-20
15-2 The guidance in this Subtopic applies to the following transactions and activities:
a. Legal obligations associated with the retirement of a tangible long-lived asset that result from
the acquisition, construction, or development and (or) the normal operation of a long-lived asset,
including any legal obligations that require disposal of a replaced part that is a component of a
tangible long-lived asset. . . .
d. Obligations of a lessor in connection with an underlying asset that meet the provisions in (a). . . .
15-3 The guidance in this Subtopic does not apply to the following transactions and activities: . . .
e. Obligations of a lessee in connection with an underlying asset, whether imposed by a lease or by
a party other than the lessor, that meet the definition of either lease payments or variable lease
payments in Subtopic 842-10. Those obligations shall be accounted for by the lessee in accordance
with the requirements of Subtopic 842-10. However, if obligations of a lessee in connection with
an underlying asset, whether imposed by a lease or by a party other than the lessor, meet the
provisions in paragraph 410-20-15-2 but do not meet the definition of either lease payments or
variable lease payments in Subtopic 842-10, those obligations shall be accounted for by the lessee
in accordance with the requirements of this Subtopic. . . .
ASC 842 does not significantly amend the scope of ASC 410-20 with respect to lessor and lessee AROs.
However, the following additional content is codified in ASC 842:
ASC 842-10
30-7 Paragraph 410-20-15-3(e) addresses the scope application of Subtopic 410-20 on asset retirement
obligations to obligations of a lessee in connection with a lease (see paragraph 842-10-55-37).
55-37 Obligations imposed by a lease agreement to return an underlying asset to its original condition
if it has been modified by the lessee (for example, a requirement to remove a lessee-installed leasehold
improvement) generally would not meet the definition of lease payments or variable lease payments
and would be accounted for in accordance with Subtopic 410-20 on asset retirement and environmental
obligations. In contrast, costs to dismantle and remove an underlying asset at the end of the lease term
that are imposed by the lease agreement generally would be considered lease payments or variable lease
payments.
To the extent that a lessee has agreed to remove modifications it has made to a
leased asset so that it can return the asset to the lessor in the asset’s
original condition (e.g., remove leasehold improvements), estimated future
payments for such work would not be considered a future lease payment. Such
an obligation would be accounted for under ASC 410-20. However, a lessee may
also be required to restore functionality, at the end of the lease term, to
a leased asset that benefits the lessor but not the lessee. The obligation
related to such restorations would be considered a future lease payment and
accounted for under ASC 842. For further discussion, see Sections 6.8 and
6.9.4 of
Deloitte’s Roadmap Leases.
Footnotes
1
See ASC 410-20-20, which cites the definition of promissory
estoppel that is used in Black’s Law Dictionary, seventh edition.
2
Wood utility poles used in certain industries are typically
treated with certain chemicals and, once removed, are subject to special
disposal requirements under existing legislation. In these circumstances,
the special disposal procedures under existing legislation create an ARO for
the disposal of the utility poles once removed, which should be accounted
for under the guidance in ASC 410-20 regardless of whether the removal or
replacement of the utility poles is considered an ARO under the doctrine of
promissory estoppel. See ASC 410-20-55-49 through 55-52.