Airing Out ”Mothballed” Facilities

A proposed accounting standard might have companies looking twice at factories and other buildings that have been temporarily shuttered.

In August, the Financial Accounting Standards Board proposed a new interpretation of FAS No. 143, Accounting for Asset Retirement Obligations (AROs). Scheduled to be finalized by the end of this year, the proposal would effectively require many companies to book their AROs more quickly than in the past.

The proposal has garnered few corporate fans; most critics have argued that the scope of the new interpretation is too broad to be practical. As of early October, FASB had received 20 letters from corporate accountants as well as a handful from CPA societies and trade groups, all of which maintain that the proposal needs work.

Seemingly unnoticed by the critics, however, is a loophole regarding idled, or “mothballed,” facilities that would itself be shut down, permanently. Mothballing — temporarily shuttering a factory or building until business conditions warrant reopening it — is a common practice, used mostly in the industrial sector. Just this month, technology company Corning Inc. and energy company Texas Genco Holdings put facilities into mothballs, noted the shutdowns in their financial statements, and described the business conditions that would warrant a restart. Neither company was required to book an ARO.

Indeed, the current interpretation of FAS 143 does not specify whether such obligations should be booked immediately or upon retirement. By allowing companies to delay recognizing the ARO, FAS 143 has also enabled them to delay triggering environmental cleanup laws, defer cleanup costs, and keep liabilities off their balance sheets. (See “We’re Booking as Best as We Can,” at the end of this article.)

There’s no evidence that either Corning or Texas Genco Holdings intends to avoid any legally mandated environmental cleanups that might eventually be required. However, if the proposed interpretation of FAS 143 is approved in its current form, many companies will be forced to rethink their asset management strategy to comply with generally accepted accounting principles as well as the rigorous fair-disclosure regulations mandated by the Sarbanes-Oxley Act.

Don’t Ask, Don’t Tell

The loophole has been considered an open secret at the Environmental Protection Agency and among environmental lawyers, consultants, and socially responsible investors (SRIs). The corporate managers who actually use it, on the other hand, don’t discuss their strategies, according to several industry sources who asked not to be identified.

By following the “don’t ask, don’t tell” policy implicit in the current FAS 143 and not including reports on mothballed facilities in their financial statements, those managers can make it much more difficult for the EPA, the Securities and Exchange Commission, and other agencies to track violations. If those managers were to discuss the loophole openly, they might trigger environmental cleanup laws sooner rather than later.

Because information about this type of mothballing is so difficult to gather, SRIs and other advocates for the proposal say they won’t be able to accurately measure its effects — or even determine how many businesses have taken advantage of the existing rule’s ambiguity. Collectively, however, they hope the new interpretation will cajole more companies to come clean about their environmental burdens.


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