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Copy of Financial Decisions

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James Justice

on 6 November 2013

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Transcript of Copy of Financial Decisions

Deloitte Trueblood Case 10-4
"Lack of Information"

Financial
Decisions

Lack of Information (LOI) owns and operates 50 warehouses throughout the country
An internal audit has been conducted at all 50 warehouses through site visits and manager interviews
The following issues have been determined by LOI’s internal auditors
Recognize an ARO
Do Not Recognize an ARO
Support to Recognize an ARO for the 10 Warehouses in States With Asbestos Laws
ASC 410-20-25-15 – An unambiguous requirement that gives rise to an asset retirement obligation coupled with a low likelihood of required performance still requires recognition of a liability. Uncertainty about the conditional outcome of the obligation is incorporated into the measurement of the fair value of that liability, not the recognition decision. Uncertainty about performance of conditional obligations shall not prevent the determination of a reasonable estimate of fair value. A past history of non-enforcement of an unambiguous obligation does not defer recognition of a liability, but its measurement is affected by the uncertainty over the requirement to perform retirement activities.

Support to Recognize an ARO for the 10 Warehouses in States With Asbestos Laws (cont.)
Current law requires LOI to perform an asset retirement activity when these warehouses are dismantled or demolished
This creates an unambiguous requirement to perform the retirement activity, even if that activity can be indefinitely deferred
Deferral will not always be possible, due to the fact no tangible asset lives forever and LOI has determined that they will sell these factories over the next five years
With this fact in mind, LOI no longer has an indeterminate settlement date, therefore the obligation to perform the asset retirement activity is unconditional – ASC 410-20-25-13

Conclusion for the Two
We believe that an ARO should be recognized in accordance of the probabilities associated with the settlement dates and potential methods of settlement, i.e. 10%
If we determine that that liability is greater than the carrying value of the assets for the two warehouses, then a loss contingency should be disclosed as well
We believe that this is reasonably possible event, given the unknown of whether or not we will have to recognize the liability
For Each of These Scenarios
Support of LOI’s position for 10 Warehouses in States With Asbestos Laws
ASC 410-20-55-59
Assume an entity acquires a factory that contains asbestos. At the acquisition date, regulations are in place that require the entity to handle and dispose of this type of asbestos in a special manner if the factory undergoes major renovations or is demolished. Otherwise, the entity is not required to remove the asbestos from the factory. The entity has several options to retire the factory in the future including demolishing, selling, or abandoning it. At the acquisition date, it is not evident that the fair value of the obligation is embodied in the acquisition price of the factory because both the seller and the buyer of the factory believed the obligation had an indeterminate settlement date, an active market does not exist for the transfer of the obligation, and sufficient information does not exist to apply an expected present value technique. Ten years after the acquisition date, the entity obtains additional information based on changes in demand for the products manufactured at that factory. At that time, the entity has the information to estimate a range of potential settlement dates, the potential methods of settlement, and the probabilities associated with the potential settlement dates and potential methods of settlement. Therefore, at that time the entity is able to estimate the fair value of the liability for the special handling of the asbestos using an expected present value technique.

Support of LOI’s position for 10 Warehouses in States With Asbestos Laws (cont.)
May not be recognized because of LOI’s intent to sell the warehouses in 5 years
Therefore, LOI will effectively not have to settle the ARO until it is renovated or demolished
It becomes someone else’s problem

Support of LOI’s position for the Two Warehouses in States Without Asbestos Laws
ASC 410-25-10 – Instances may occur in which insufficient information to estimate the fair value of an asset retirement obligation is available. For example, if an asset has an indeterminate useful life, sufficient information to estimate a range of potential settlement dates for the obligation might not be available. In such cases, the liability would be initially recognized in the period in which sufficient information exists to estimate a range of potential settlement dates that is needed to employ a present value technique to estimate fair value.

Support of LOI’s position for the Two Warehouses in States Without Asbestos Laws (cont.)
The factories have an indeterminate useful life and as such we cannot reasonably estimate their fair value
LOI is not renovating or demolishing the factories, therefore there is no need to recognize an ARO

Presented By:
Aaron Justice & Tim Spaid
Accounting 6670
November 5, 2013
We are faced with a decision...
Conclusion for the Two
LOI should recognize an ARO for the two warehouses in states which do not have special handling requirements in place for removal of asbestos due to the following facts
There is an unambiguous requirement (contract) that requires removal of asbestos
Both parties are aware of the ARO and the liability should be evident that the fair value of the obligation is embodied in the acquisition price
We can estimate an associated cost to retire the asset and its liability

25 of the warehouses contain asbestos; 23 of these warehouses are in states that have laws requiring special handling and disposal of the asbestos when the building is demolished or renovated
LOI plans to sell 10 of the 23 warehouses in the states with asbestos laws within the next 5 years
There are no events scheduled that require special handling and disposal of asbestos
Issues for LOI
The remaining two of the 25 warehouses with asbestos reside in a state with no laws regarding the handling and disposal of asbestos
However, LOI has a binding contract to sell the warehouses in six months to a third party
The buyer can require LOI to remove the asbestos prior to the date of sale
LOI estimates a 90% probability that they will not have to remove the asbestos for the third party
Issues for LOI
LOI has owned and operated 13 of the 23 warehouses in states with asbestos laws for over 50 years
LOI has no plans in the foreseeable future to perform significant renovations or demolish these warehouses
LOI feels they do not have sufficient information to measure its asset retirement obligation (ARO) due to an indeterminate settle date
Issues for LOI
Applicable GAAP For This Case
ASC 410-20 – Asset Retirement and Environmental Obligations
ASC 450-20 – Loss Contingencies
Support of LOI’s position for the13 Warehouses in States Without Asbestos Laws (Cont.)
LOI believes that this illustrative example is the same as their situation
However, since there are no plans to sell the warehouses, the fair value of the obligation cannot be reasonably estimated at the financial statement date – ASC 410-20-55-58
Therefore an ARO, should not be recognized

Disclose an Obligation
Support to Recognize an ARO for the 10 Warehouses in States With Asbestos Laws (cont.)
An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made – ASC 410-20-25-4
LOI would have sufficient information to apply an expected present value technique due to the following circumstances
410-20-25-8b – the information is available to reasonably estimate
1. the settlement date or the range of potential settlement dates
2. the method of settlement or potential methods of settlement are known
3. the probabilities associated with the potential settlement dates are known

Support of LOI’s position for the 13 Warehouses in States Without Asbestos Laws
ASC 410-20-55-57 – Assume an entity acquires a factory that contains asbestos. After the acquisition date, regulations are put in place that require the entity to handle and dispose of this type of asbestos in a special manner if the factory undergoes major renovations or is demolished. Otherwise, the entity is not required to remove the asbestos from the factory. The entity has several options to retire the factory in the future including demolishing, selling, or abandoning it. The entity believes it does not have sufficient information to estimate the fair value of the asset retirement obligation because the settlement date or the range of potential settlement dates has not been specified by others and information is not available to apply an expected present value technique. For example, there are no plans or expectation of plans to undertake a major renovation that would require removal of the asbestos or demolition of the factory. The factory is expected to be maintained by repairs and maintenance activities that would not involve the removal of the asbestos. Also, the need for major renovations caused by technology changes, operational changes, or other factors has not been identified.

Support to Recognize an ARO for the Two Warehouses in States Without Asbestos Laws
ASC 410-20-25-13 – If a current law, regulation, or contract requires an entity to perform an asset retirement activity when an asset is dismantled or demolished, there is an unambiguous requirement to perform the retirement activity even if that activity can be indefinitely deferred. At some time deferral will no longer be possible, because no tangible asset will last forever (except land). Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement.


Support to Recognize an ARO for the Two Warehouses in States Without Asbestos Laws (cont.)
ASC 410-20-25-15 – states that a past history of non-enforcement of an unambiguous obligation does not defer recognition of a liability but its measurement is affected by the uncertainty over the requirement to perform retirement activities
Even if the third party has a history of waiving similar provisions, or there is an expectation of non-enforcement, the contract still imposes a legal obligation – ASC 410-20-55-5
Support to Recognize an ARO for the Two Warehouses in States Without Asbestos Laws (cont.)
There is a legally binding contract to sell the warehouses in 6 months.
Therefore, FASB 410-20-25-13 applies.
The third party would have to recognize the ARO at their acquisition
As reflected in ASC 410-20-25-6a, the seller and the buyer are both aware of the ARO and it would be evident that the fair value of the obligation is embodied in the acquisition price
Support to Disclose an obligation for 13 Warehouses in States With Asbestos Laws
ASC 410-20-55-60 – Although timing of the performance of the asset retirement activity is conditional on the factory undergoing major renovations or being demolished, existing regulations create a duty or responsibility for the entity to remove and dispose of asbestos in a special manner, and the obligating event occurs when the entity acquires the factory. In this Case, regulations are in place at the date of acquisition that require the entity to handle and dispose of the asbestos in a special manner. Therefore, the obligating event is the acquisition of the factory. If regulations were enacted after the date of acquisition, the obligating event would be the enactment of the regulations.

Conclusion for the 10
LOI should recognize an ARO for the 10 warehouse in states which require special asbestos handling due to the following:
There is an unambiguous requirement
There is a estimable date of retirement
An expected present value technique would be reasonably estimable

Support to Disclose an Obligation for 13 Warehouses in States With Asbestos Laws
Even though these factories have been held for 50 years, we would believe that either the regulations were in force at acquisition or during some point in time that the factories were held
As such, the obligating event has already transpired and given guidance from ASC 410-20-55-58 & 60, we would disclose a description of the obligation, the fact the liability has not been recognized because the fair value cannot be reasonably determined, and the reasons why fair value cannot be reasonably estimated

ASC 410-20-20
Definition of an ARO
An obligation associated with the retirement of a tangible long-lived asset
Definition of Retirement
The other-than-temporary removal of a long-lived asset from service. That term encompasses sale, abandonment, recycling, or disposal in some other manner. However, it does not encompass the temporary idling of a long-lived asset. After an entity retires an asset, that asset is no longer under the control of that entity, no longer in existence, or no longer capable of being used in the manner for which the asset was originally acquired, constructed, or developed.
Support to Recognize an ARO for the Two Warehouses in States Without Asbestos Laws (cont.)
We can determine a fair value of the liability due to the following facts:
Because the date that the asset will be retired is known
There is a determined price for the asset
We have a willing seller
We have a willing buyer
The FMV of the liability should be know and if not we have enough information to perform a expected present value technique

Conclusion for the 13
LOI should disclose an obligation for the 13 warehouses which are in states that have special requirements for removal of asbestos with the following facts in mind
Regardless of when the obligating event took place, it has already transpired
We can not determine the FMV or an expected present value technique due to an indeterminate settlement date
We have a lack of information
Questions?
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