Hot topics in FAS 109.

• Author: Raines, Donna
• Position: Statement of Financial Accounting Standards No. 109

As the 2008 financial statement year-end tax provision planning process begins, it is a good time to review some areas of Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes, that could require more analysis in preparing year-end tax provisions for companies.

Asset Retirement Obligations

The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 143 (FAS 143), Accounting for Asset Retirement Obligations, requires an entity to recognize the fair value of a liability for legal obligations associated with the retirement of a tangible long-lived asset in the period in which it is incurred if a reasonable estimate of fair value can be made. FAS 143 is applicable to all entities. Upon initial recognition of an asset retirement obligation (ARO), an entity capitalizes the ARO cost by increasing the carrying amount of the related long-lived tangible asset by the same amount as the liability. An entity subsequently allocates the ARO cost to expense in the income statement using a systematic and rational method over the useful life.

Generally, these liabilities are not deductible for income tax purposes when accrued for financial statement reporting, and this therefore creates a book/tax basis difference both in the long-lived tangible asset and in the ARO liability. Accordingly, an entity should recognize a deferred tax asset for the difference between the financial statement carrying value of the ARO liability and the tax basis, which is generally zero. The offset of the ARO liability for financial statement purposes is an increase in the asset carrying value of the respective asset. This additional asset value will result in a separate temporary book/tax basis difference for which an entity should recognize a deferred tax liability.

The deferred tax liability associated with the increase in the asset's financial statement carrying value will reverse as the asset is depreciated for financial statement purposes. Since most of these ARO liabilities are long term, an entity may not be able to estimate when the ARO deferred tax asset will be settled and deductible for tax purposes, resulting in the reversal of the deferred tax asset. Therefore, the entity should consider the need for a valuation allowance for the ARO deferred tax asset. In addition, FAS 143 requires an entity to recognize period-to-period changes in the ARO liability, which will require analysis of the ARO...