The Public Sector Accounting Board has a new public sector accounting standard, PS 3280, Asset Retirement Obligations (ARO) that relates to all public sector entities following Public Sector Accounting Standards.

• An ARO is a legal obligation associated with the retirement of a tangible capital asset (removal of asbestos, removal of storage tank, wastewater or sewage treatment facilities, closure/post closure liabilities relating to landfill sites, etc.)
• Public sector entities are required to capture an Asset Retirement Obligation on all tangible capital assets, including leased assets, whether they are in productive use or not, as well as fully amortized and unrecognized tangible capital assets.
• This section takes effect for fiscal years beginning on or after April 1, 2022, which means that reporting year ending December 31, 2023, will be the first year impacted.

In preparing for the yearend audit, we will require significant information on your process to identify and record the ARO.

Please review the sections provided below to help you prepare for this process.

Table Of Contents

SECTION 1
Identification and recognition
Initial measurement

SECTION 2
Identify items that are within the scope
Determine if it meets the recognition criteria
Determine an appropriate estimate of the asset retirement obligation

SECTION 3
Additional resources
• Fact Sheet for Municipal Financial Officers
• Valuation Techniques
• Corporate Accounting Policy

SECTION 4
Questions
Contact us

SECTION 1

A review of the following questionnaire by your organization will help us better understand your processes so we are better able to determine the correct audit procedures.

If you have any questions about this section, please contact us.

Identification and recognition

• How did you determine your ARO? Please provide detail on the identification process that you went through.
• Did you consider the following:
  - assets in productive use and being amortized,
  - tangible capital assets fully amortized,
  - assets no longer in productive use, and
  - whether there were any assets that were never originally recognized
• How did you ensure nothing was missed or overlooked?
• Does your public sector entity have leased assets where there is a legal obligation to retire the asset(s)?
• Can you provide documentation of the following:
  - Working paper of all tangible capital assets considered and for each one, identify the relevant legal obligation applicable or the fact that it falls outside of the standard?
• Did you set a dollar amount as to whether an amount is considered significant or not?
• Who was involved and what are their qualifications?
• Did you hire an expert? Can you provide a copy of the report produced?
• If no expert was used, how did you determine that an expert was not required?

Initial measurement

• Which measurement technique (present value or cost escalation) did you use in setting up the ARO and why?
• If ARO measurement is based on the present value technique, please provide details on the parameters of the measurement (future value of cash flows, discount rate and timing of settlement).
• If ARO measurement is based on the cost escalation technique, please provide the measurement rate and inflationary factor considered in the calculation.
• If you calculate the estimates in-house, how did you determine the value of the ARO liability? Where did you obtain the rates in your calculations?
• If rate was based on past experience, do you have documents to support the rate that you can provide?
• Did you consider all costs including an allowance for unforeseen circumstances (contingency) and inflationary factor?
• What did you assume as an inflation factor?
• Was the ARO estimate reviewed by upper management for accuracy?

SECTION 2

The following is a sequential list of steps for your organization to review and consider when you are attempting to applying PS3280 (ARO).

If you have any questions about this section, please contact us.

1) Identify items that are within the scope of Section PS 3280 (ARO)

• Are there any known assets that require retirement or remediation?
• Does the entity control any landfills?
• Does the entity control any buildings or structures that contain asbestos?
• Are there any assets (including leased assets) with known contracts, agreements or legislation requiring clean up or retirement?
• Are there any assets not in productive use that require clean up or retirement?
• Has any new legislation come into effect that would require the retirement of any assets?
• Are there any other items not yet included on the list where asset retirement obligations may exist?

2) For each item in scope, determine if it meets the recognition criteria in paragraph PS 3280.09

• Have all laws, legislation, regulations and any potential promises under promissory estoppel, that the entity must comply with been identified?
• Is the entity legally responsible for retiring the asset?
• Have all past transactions or events that give rise to an asset retirement obligation been identified?
• Is there uncertainty that an asset retirement obligation exists?
  - What needs to be decided for this uncertainty to be realized?
  - Have legal counsel or other relevant experts been consulted?
• Are there any situations where the entity is unable to come up with a reasonable estimate of the amount of the liability? If so, what is the reason why this amount cannot be estimated?

3) For each item that meets the recognition criteria, determine an appropriate estimate of the asset retirement obligation

• Was the information used in estimating the liability available at the financial statement date?
• Are the costs included in the estimated liability directly attributable to the retirement of the asset?
• Have all directly attributable costs been considered (e.g. an asset purchased to facilitate the retirement activities that has no alternative use)?
• Was an appropriate measurement technique used to estimate the liability?
• Has the consistency of information across similar asset retirement obligations been evaluated?
• Has an appropriate expert been used? If not, is an expert needed?
• Have any expected recoveries been recorded separate from the liability?

SECTION 3

Additional resources

Fact Sheet for Municipal Financial Officers A brief overview of activities relating to ARO
VIEW PDF

Valuation Techniques Accounting policy guidance for valuation techniques related to ARO
VIEW PDF

Corporate Accounting Policy An overview of corporate accounting policy associated with ARO
VIEW PDF

If you have any questions about this section, please contact us.

SECTION 4

Questions?

If you have any questions about this article or Asset Retirement Obligation, please contact your Avail Client Advisor or one of our Municipality Audit Experts, or complete the contact form below.

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