FAS 143: Accounting for Asset Retirement Obligations addresses financial accounting and reporting is used for the retirement of tangible long-lived assets’ obligation and the related assets retirement costs. According to the statement, Auto World’s decision (on April 15, 2007) to close its 30 freestanding Pit stop centers is an asset retirement obligation in which the determination of the existence of a legal obligation is unambiguous. In this case where no statute, contract, law or ordinance exists, but the entity (Auto World) made a promise to a third party (customers and the public) about the closure of the stores, careful consideration of circumstances and facts should be conducted to determine whether the promise had imposed a legal obligation upon Auto World under the doctrine of Promissory estoppels. Therefore, even without any party taking a formal action, a legal obligation might still exist. The work of determining the actual existence of an obligation is left to the legal advisors and the preparers.
Unlike the current practice, this statement requires that as long as the fair value estimate of the asset retirement obligation can be computed, it should be recognized during the period that it occurred. Consequently, the costs associated with the asset retirement should be consolidated under the carrying amount of the asset. But according to recent practice, the cost accumulation measurement approach is used to recognize an amount for an asset retirement obligation; measured as fair value by this statement. Under this statement, the basis for accretion and discounting is the prevailing rate of interest during the time the asset was slated for recognition. On the contrary, lack of discounting of the retirement obligations implies that no accretion was reported under the current practice. Unlike the current practice, this statement adopted the date the liability was incurred as the appropriate for using the useful life of the asset in recognizing the retirement obligation. In order to determine the depreciation and amortization rates for valuing assets, calculations using the assets obligation dismantlement and restoration costs.
Further, the statement outlines certain disclosures that the entity will be required to provide. The disclosures include information about the asset retirement obligations. First, is the overall description of the asset retirement obligation and resulting long-lived assets. Secondly, the fair values of the specific assets considered as legally setting the asset retirement obligations. Thirdly, the consolidation of the initial and final total carrying value of the asset retirement obligations affecting the incurred liabilities, settled liabilities, accretion expense, and estimated cash flows revisions.
However, on the disclosures to appear in the notes of the financial statements covering the period over which the long-lived asset has or is classified for sale, include the circumstances and factual reasons that led to the retirement of the asset obligation. Alternatively, the carrying amounts of primary classes of liabilities and assets be consolidated in the disposal group, in case the facts of the retirement are not separately presented on the face of the financial statement. Similarly, paragraph 37 requires the disclosure in the income statement of resulting losses or gains or alternatively captioned at the gains or losses activities. Lastly, if applicable, the disclosure of the revenue amounts and pretax margins or losses for the discontinued operations.
On the contrary, FAS144 categorizes the retirement of asset obligation differently. The entity, Auto World, has Pit stop centers which are the lowest level at which the operations and cash slows can be distinguished, both operationally and for financial reporting reasons, from the rest of the entity. Hence the Pit stop centers are components of Auto World. Because the entity desires to serves the customers from one stop shop, the entity decided to exit its pit stop stores. Therefore, the pit stop stores are considered as held for sale at the date of closure. As a result of the closure transaction, the cash flows of the division will be eliminated from the normal operations of Auto World. Consequently, the entity will saver any involvement in the operations of the pit stop store; hence conditions necessary for discontinued operations as well as classification for sale will have bee met, in accordance to paragraph 42.
In other circumstances, in spite of discontinued operations classification in allowing the stakeholders to determine the impact of the disposal, reports of continuing cash flows may be recorded in the period following the discontinuation. The cash flows can either be direct or indirect, by precluding or not precluding the presentation of discontinued operations, consecutively.
Factually, direct cash flows are expected to be generated from continuation or migration of activities that are significant to the entity. It is only compulsory for the significance of the generation to be determined if the continued cash flows are being generated from the continued operation of the entity. However, if the continuing cash flows are not generated from migration or continuation of activities, evaluation of significance will not be necessary.