4.8 Disclosure
ASC 410-20
50-1 An entity shall disclose all of the following information about its asset retirement obligations:
- A general description of the asset retirement obligations and the associated long-lived assets
- The fair value of assets that are legally restricted for purposes of settling asset retirement obligations
- A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations showing separately the changes attributable to the following components, whenever there is a significant change in any of these components during the reporting period:
- Liabilities incurred in the current period
- Liabilities settled in the current period
- Accretion expense
- Revisions in estimated cash flows.
50-2 If the fair value of an asset retirement obligation cannot be reasonably estimated, that fact and the reasons therefor shall be disclosed.
ASC 410-20-50-1 and 50-2 provide disclosure requirements applicable to AROs. They require disclosure of (1) a general description of an entity’s AROs and the associated long-lived assets and (2) the fair value of any assets legally restricted for purposes of settling AROs. In addition, they require tabular reconciliation of the beginning and ending aggregate carrying amount of AROs, showing separately changes attributable to new liabilities incurred, liabilities settled, accretion expense, and revisions in estimated cash flows, whenever there is a significant change in any of these components during a reporting period. When an entity cannot reasonably estimate the fair value of an ARO, the entity is required to disclose that fact and the reasons why a reasonable estimate of the ARO’s fair value cannot be made.
Note that ASC 820-10 disclosures apply only to assets and liabilities measured at fair value in periods after initial recognition. The disclosures required by ASC 820-10 do not apply to AROs because the subsequent measurements are not at fair value.
4.8.1 Special Considerations for Oil and Gas Producing Activities
ASC 932 does not address the treatment of AROs or the related ARCs. In February
2004, the SEC’s Division of Corporation Finance
sent a letter (the “February 2004
letter”) to registrants primarily engaged in the
production of oil and gas requesting that all
registrants with subsidiaries or operations
engaged in the production of oil and gas consider
the letter in the preparation of their filings
with the SEC. The scope of the February 2004
letter is limited to disclosure requirements for
oil and gas producers.
4.8.1.1 Disclosure of Capitalized Costs Related to Oil and Gas Producing Activities
As stated in the February 2004 letter, the SEC staff believes that (1) “the reported carrying value of oil and gas properties should include the related asset retirement costs and accumulated depreciation” and (2) “depletion and amortization should include the accumulated allocation of the asset retirement costs since the beginning of the respective property’s productive life.”
Paragraph B46 of the Background Information and Basis for Conclusions of FASB
Statement 143 discusses the Board’s conclusion
about the capitalization of ARCs, stating that “a
requirement for capitalization of an asset
retirement cost along with a requirement for the
systematic and rational allocation of it to
expense achieves the objectives of (a) obtaining a
measure of cost that more closely reflects the
entity’s total investment in the asset and (b)
permitting the allocation of that cost, or
portions thereof, to expense in the periods in
which the related asset is expected to provide
benefits.” As noted in the February 2004 letter,
“[e]xcluding net capitalized asset retirement
costs from the capitalized costs disclosure would
essentially result in a presentation of
capitalized costs that is not reflective of the
entity’s total investment in the asset, which is
contrary to one of the objectives of [FASB
Statement 143 (currently codified in ASC
410-20)].”
4.8.1.2 Disclosure of Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities
The SEC staff believes that an entity should include ARCs in its “costs
incurred” disclosure in the year in which the
liability is incurred, not on a cash basis. In
addition, ASC 410-20 requires an entity to
recognize the ARCs and liability in the period in
which it incurs the legal obligation — through
either (1) the acquisition or development of an
asset or (2) normal operation of the asset.
Further, as stated in the February 2004 letter,
the “cost of an asset retirement obligation is not
incurred when the asset is retired and the
obligation is settled. Accordingly, an entity
should disclose the costs associated with an asset
retirement obligation in the period in which that
obligation is incurred. That is, the Costs
Incurred disclosures in a given period should
include asset retirement costs capitalized during
the year and any gains or losses recognized upon
settlement of asset retirement obligations during
the period.”
ASC 932-235-50-18 requires an entity to disclose costs incurred during the year regardless of whether
those costs are capitalized or charged to expense.
4.8.1.3 Disclosure of the Results of Operations for Oil and Gas Producing Activities
The February 2004 letter expresses the SEC staff’s belief that the “accretion of the liability for an asset
retirement obligation should be included in the Results of Operations disclosure either as a separate
line item, if material, or included in the same line item as it is presented on the statement of operations.”
ASC 410-20-35-5 and ASC 410-20-45-1 together indicate that the accretion expense resulting from recognition of the changes in the liability for an ARO due to the passage of time should be classified as an operating item in the statement of income. Therefore, as stated in the February 2004 letter, “the accretion expense related to oil and gas properties’ asset retirement obligations should be included in the [FASB Statement 69] Results of Operations disclosure,” which is currently codified in ASC 932-235-50-23.
4.8.1.4 Disclosure of a Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserve Quantities
The FASB staff and SEC staff believe that an entity should include the cash flows related to the settlement of an ARO in its “standardized measure” disclosure.
Under ASC 932-235-50-30, an entity is required to disclose as of the end of the year a standardized measure of discounted future net cash flows related to its interests in both (1) “[p]roved oil and gas reserves” and (2) “[o]il and gas subject to purchase under long-term supply, purchase, or similar agreements and contracts.” The February 2004 letter expresses the SEC staff’s belief that “the requirement to disclose ‘net cash flows’ relating to an entity’s interest in oil and gas reserves requires an entity to include the cash outflows associated with the settlement of an asset retirement obligation. Exclusion of the cash flows associated with a retirement obligation would be a departure from the required disclosure. However, an entity is not prohibited from disclosing the fact that cash flows associated with asset retirement obligations are included in its Standardized Measure disclosure as a point of emphasis.”