Accounting & Tax

FASB Stokes the Fair Value Flame

Hot off the press: Statement No. 143, Accounting for Asset Retirement Obligations.
Craig SchneiderAugust 21, 2001

Just when senior financial execs are getting comfortable with new rules for treating goodwill and other intangibles, the Financial Accounting Standards Board issues another rule, Statement No. 143, Accounting for Asset Retirement Obligations.

The standard, released Thursday, requires that companies record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Take, for instance, an offshore drilling platform that needs to be removed at the end of its useful life. When the liability is initially recorded, the company capitalizes a cost by increasing the carrying amount of the related long-lived asset.

Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

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Interestingly, under Statement No. 143, companies use the hotly contested method for determining fair value detailed in FASB’s Concepts Statement 7, Using Cash Flow Information and Present Value in Accounting Measurements.

Briefly, Concepts Statement 7 requires companies to aim for the average of a range, using various probabilities of timelines and cash flow, rather than using a single, most-likely, maximum, or minimum amount when determining cash flow. For more about this, read “Understanding the Issues.”

The standard is effective for fiscal years beginning after June 15, 2002. The publication of Statement No. 143 may be obtained by placing an order at the FASB website, or by contacting the FASB’s Order Department at (800) 748-0659.

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