Home | Business News | Browse by Publication | I | International Advances in Economic Research

Reporting effects of SFAS 143 on nuclear decommissioning costs.

Article Excerpt
Abstract

SFAS 143, Accounting for Asset Retirement Obligations, has the potential to cause significant economic consequences to firms impacted by its provisions. BK & L (Boatsman, J. R.; Khurana, I. K.; Loudder, M. L. "The Economic Implications of Proposed Changes in the Accounting for Nuclear Decommissioning Costs", Accounting Horizons, 14 (2), June 2000, pp. 211-233) suggests that companies would be required to record materially increased assets, liabilities, and expenses which may subsequently cause a significant impact to commonly used financial ratios. BK & L developed predictions of the pro forma effect on assets, liabilities, and expenses due to SFAS 143 adoption by nuclear power utilities. This study examines the actual financial statement effect on BK & L's sample firms due to the adoption of SFAS 143. Results indicate that concern voiced over the standard's requirement to capitalize asset retirement obligations and the related asset, and to record additional expenses by nuclear power companies may have been unfounded. (JEL M41)

**********

Nuclear electric power generators began to appear in the late 1950s and, by the 1960s, many had been introduced throughout the world. Utility companies saw this new form of electricity production as economical, environmentally clean, and safe. By 2004, 31 countries had nuclear power plants in commercial operation or under construction. A substantial number of these countries depend on nuclear power to supply between one quarter to one half of their electricity needs, and some depend on nuclear power to supply as much as three-fourths of their electricity. Over 16% of the world's electricity is provided by nuclear energy, which is more than the world used from all sources of electricity in 1960 [World Nuclear Association, 2005].

The use of nuclear electric power generators results in both environmental and economic consequences. The accidents at Three Mile Island in the United States and Chernobyl in the former Soviet Union resulted in increased regulation of the nuclear power generation industry throughout the world. One of the major concerns of this regulation is the clean restoration of the nuclear power generator site when a nuclear reactor is decommissioned. The environmental consequences faced by nuclear power companies are governed by the laws and regulations enacted by the countries in which they operate. These environmental consequences result in economic consequences arising from the restoration and other costs required by these laws and regulations.

Accounting for the economic consequences of operating nuclear electric power generators has been an issue of concern for over a decade. Most of the non-U.S. nuclear power companies are subject to the pronouncements of the International Accounting Standards Board (IASB). In 2004, the IASB's International Financial Reporting Interpretations Committee (IFRIC) issued an Interpretation of IAS No. 16 and IAS No. 37 "Changes in Existing Decommissioning, Restoration and Similar Liabilities". This pronouncement requires companies to recognize a provision for decommissioning costs that it expects to incur in the future, and includes an equivalent amount to be capitalized as additional cost of the power plant. The amount to be recognized is the best estimate of the expenditure required to settle the obligation at the balance sheet date. This amount is measured at its present value, which is measured using a current market-based discount rate.

U.S. nuclear energy companies are required to follow the pronouncements of the Financial Accounting Standards Board when accounting for the economic consequences of restoration and other costs. In 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143). At the time of SFAS 143's adoption, concern was voiced over the economic consequences to those firms impacted by its provisions [Ferguson, 1997; Alexander and Hiner, 2001; Chewning and McKie, 2002].

More specifically, Boatsman et al. [2000] (BK & L) suggested that the adoption of SFAS 143 would require nuclear electric power companies to record...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!