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…
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
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…
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