Asset Retirement Obligations – Understanding What is in Scope
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dding to an increased focus on municipal assets, the Public Sector Accounting Standard (PSAS) 3280 will require organizations to identify Asset Retirement Obligations (AROs). In its simplest form, AROs look to determine the overall liability an organization will need to recognize based on the future retirement of certain assets. Herein lies the challenge; determining what asset groups and types of obligations make up the liability and how to determine when the asset will be permanently removed from service. As daunting as this work may seem, there is time to take a purposeful approach and develop a plan to meet the April 2022 implementation date. GFOABC, in partnership with KPMG, has developed a series of sessions intended to support municipalities and regional districts in understanding and creating a plan to meet these new requirements. The start of your work to meet the PSAS 3280 requirements is to have a conversation with your auditor. You should expect that they have a number of questions related to the accounting of AROs; including how you have identified these obligations, what is the source of the information and what assumptions you have applied in order to determine the obligation. This proactive approach is intended to support the development of the program, and allows financial professionals to build a solution that will meet the long-term objectives of the organization. Once the understanding of what will be required in future audits is clear, then as with all good plans, the organization begins determining what is in scope and what is not. The activity of scoping looks to identify what tangible capital assets are in scope and what other obligations may need to be considered. The scope for each municipality and regional district is going to be both similar and different given the various levels of services each organization delivers with their assets. 6 | GFOABC.CA
Many organizations will discover there is a higher degree of risk with some assets created before the 1990s. Items that should be considered in scope are: asbestos and other various types of hazardous materials, both storage and septic underground tanks, and post closure landfill costs may need to be adjusted. These are likely the most obvious assets to consider, but other obligations fall into these requirements as well. For example, leases or use of land with restoration clauses, and sewage and wastewater facilities will need to be considered as well. To support the gathering of this information the finance teams will need to work with their operations and safety teams. There have likely been a number of assessments and inventories already compiled that will help to identify these risks. Many of the assets in scope will be in use for a considerable period of time, so determining when that asset will be permanently retired is going to rely on discussions with the operations team and using professional judgement. The next layer of complexity is how to value the obligation. This valuation is specific to the asset retirement obligation, not the costs for replacing
