Asc 410 Week 6 Paper
Background
Big Company has asbestos in the insulation of its facility. In 2005, the company estimated its amount of asbestos, which resulted in a $4 million asset retirement obligation in its financial statements for the eventual remediation of the asbestos. This year, during maintenance work, more asbestos was discovered in parts of the facility not previously sampled. It is now believed that the remediation of the asbestos will be $8 million.
Issues
1. Is the asset retirement obligation necessary?
2. Should the additional $4 million in the asset retirement obligation be considered a change in accounting estimate or an error?
3. Will the $4 million change be recorded retrospectively or prospectively?
Analysis of Issue 1: Is the asset retirement …show more content…
obligation necessary?
A concern was raised as to whether the liability for asbestos disposal is necessary if Big Company does not plan on disturbing the asbestos by renovating any time in the near future.
Although the asbestos removal is uncertain for now, asset retirement obligations should still be recorded. ASC 410-20-25-15 states that even when the asset has a low likelihood of removal, it still requires the recognition of a liability. The uncertainty can affect the calculation of the liability, but not whether or not the liability should be recorded.
Analysis of Issue 2: Should the additional $4 million be considered a change in accounting estimate or an error?
A change accounting estimate, as defined in ASC 250-10-20, occurs when new information is available. However, an error results from mathematical mistakes, mistakes in applying generally accepted accounting principles, or the misuse of facts when the financial statements were prepared. In this case, the asbestos was sampled in 2005 and the $4 million amount was recorded. When new information was discovered this year, the estimate increased to $8 million. Because this change occurred from simply obtaining new information, this transaction should be recorded as a change in accounting estimate.
Analysis of Issue 3: Will the $4 million change be recorded retrospectively or
prospectively?
Recording a change in accounting estimate is addressed in ASC 250-10-45-17. The standard states that the change should be accounted for in the period of change and for future periods that the change affects. Therefore, the change should be recorded prospectively, and not by restating past financial statements.
Conclusion
Because Big Company will eventually dispose of the asbestos, an asset retirement obligation must be recorded even if the time of disposal is unknown. The additional $4 million worth of asbestos that was discovered this year should be recorded as a change in accounting estimate and reported prospectively.
Financial Statements and Disclosure Impacts
Since the additional asbestos disposal obligation will be recorded prospectively, it will not result in the restatement of past financial statements. ASC 250-10-50-4 states that a disclosure to the financial statements is required if the effect of the change is considered material.
Big Company has asbestos in the insulation of its facility. In 2005, the company estimated its amount of asbestos, which resulted in a $4 million asset retirement obligation in its financial statements for the eventual remediation of the asbestos. This year, during maintenance work, more asbestos was discovered in parts of the facility not previously sampled. It is now believed that the remediation of the asbestos will be $8 million.
Issues
1. Is the asset retirement obligation necessary?
2. Should the additional $4 million in the asset retirement obligation be considered a change in accounting estimate or an error?
3. Will the $4 million change be recorded retrospectively or prospectively?
Analysis of Issue 1: Is the asset retirement …show more content…
obligation necessary?
A concern was raised as to whether the liability for asbestos disposal is necessary if Big Company does not plan on disturbing the asbestos by renovating any time in the near future.
Although the asbestos removal is uncertain for now, asset retirement obligations should still be recorded. ASC 410-20-25-15 states that even when the asset has a low likelihood of removal, it still requires the recognition of a liability. The uncertainty can affect the calculation of the liability, but not whether or not the liability should be recorded.
Analysis of Issue 2: Should the additional $4 million be considered a change in accounting estimate or an error?
A change accounting estimate, as defined in ASC 250-10-20, occurs when new information is available. However, an error results from mathematical mistakes, mistakes in applying generally accepted accounting principles, or the misuse of facts when the financial statements were prepared. In this case, the asbestos was sampled in 2005 and the $4 million amount was recorded. When new information was discovered this year, the estimate increased to $8 million. Because this change occurred from simply obtaining new information, this transaction should be recorded as a change in accounting estimate.
Analysis of Issue 3: Will the $4 million change be recorded retrospectively or
prospectively?
Recording a change in accounting estimate is addressed in ASC 250-10-45-17. The standard states that the change should be accounted for in the period of change and for future periods that the change affects. Therefore, the change should be recorded prospectively, and not by restating past financial statements.
Conclusion
Because Big Company will eventually dispose of the asbestos, an asset retirement obligation must be recorded even if the time of disposal is unknown. The additional $4 million worth of asbestos that was discovered this year should be recorded as a change in accounting estimate and reported prospectively.
Financial Statements and Disclosure Impacts
Since the additional asbestos disposal obligation will be recorded prospectively, it will not result in the restatement of past financial statements. ASC 250-10-50-4 states that a disclosure to the financial statements is required if the effect of the change is considered material.