You have been given the following memorandum from management of DuPont Industries, Inc.
(“DuPont”). The memorandum documents the results of a study performed by the internal audit
team of DuPont. The internal audit team has identified the presence of asbestos in warehouses that
DuPont owns and operates. There are legal and regulatory requirements associated with the
handling and disposing of asbestos that is present in the warehouses which could result in DuPont
having to recognize an asset retirement obligation.
As reflected in the memorandum, management has determined that Dupont is not required to
recognize any asset retirement or other liabilities related to the presence of the asbestos in the
warehouses that it owns and operates. This conclusion is based upon managements assertion that
the potential or actual obligations associated with the handling and disposal of the asbestos are not
probable or that DuPont does not have sufficient information available to determine the value of
any resulting obligation.
For each of the situations where asbestos exist in the DuPont own and operated warehouses,
determine the appropriate accounting treatment for each situation and state whether or not
DuPont’s position that there is no need to recognize an obligation is correct or not, explaining
your reasoning in each situation.
1. Warehouses in states with laws and regulations requiring special handling and disposal of
a. 10 warehouses proposed to be sold in the next five (5) years
b. 13 warehouses proposed to be held for long-term use
2. Warehouses in states with no laws or regulations requiring special handling and disposal
of the asbestos.
a. 2 warehouses under contract to be sold to a third party. The contracts contain provisions
that require DuPont to dispose of the asbestos if requested by the third party purchaser.
To: Audit Engagement Team
From: Controller, DuPont Industries
Subject: ASC 410-20 – Asset Retirement Obligations Summary
Date: December 31, 2017
Identification and Analysis of Potential Asset Retirement Obligations
DuPont Industries, Inc. (“DuPont”) owns and operates 50 warehouses throughout the country. As part of
DuPont’s efforts to identify potential asset retirement obligations, DuPont’s internal audit group held
interviews with all 50 of the warehouse managers and performed site visits at each of the 50 locations. The
related findings of the interviews and site visits noted the following facts:
• 25 of the warehouses contain asbestos; all but 2 of the warehouses reside in states that have laws
in place that require the special handling and disposal of the asbestos when the building is
demolished or otherwise significantly renovated. There are no other events that will require the
removal and special handling and disposal of the asbestos, except as indicated in the third bullet
• 23 warehouses containing asbestos reside in states with special asbestos handling and removal laws.
– DuPont has plans to sell 10 of these warehouses within the next five years and does not have
plans to demolish or otherwise significantly renovate such warehouses prior to their disposal.
Because DuPont will never effectively have to settle the obligation to remove the asbestos from
the building(s), it does not have an asset retirement obligation that needs to be recognized.
– DuPont has owned and operated the other 13 warehouses for over 50 years with only minor
renovations and repairs being performed over those years. DuPont has no plans in the
foreseeable future to make significant renovations or to demolish the warehouses but will
continue to perform maintenance and repair activities as deemed necessary. DuPont does not
have sufficient information to measure its asset retirement obligation due to an indeterminate
settlement date based on the guidance in ASC 410-20-25-10.
• 2 of the 25 warehouses containing the asbestos reside in states that do not have laws in place
requiring the special handling and disposal of the asbestos when the building is demolished or
otherwise significantly renovated. However, DuPont does have a legally binding contract to sell
the warehouses in six months to a third party. The purchase/sales contract contains a standard
provision allowing the buyer to require DuPont to remove the asbestos prior to the date of the sale.
DuPont has previously sold warehouses to this same third party based on purchase/sales contracts
containing similar provisions related to the removal of asbestos. In each of those transactions, the
third party has never enforced the provision requiring DuPont to remove the asbestos from the
warehouses. Based on this prior experience with the third party, DuPont believes that there is a
90% probability that the third party will not enforce the provision in the current purchase/sales
contract requiring DuPont to remove the asbestos. Because it is not probable that DuPont will be
required to remove the asbestos, no asset retirement obligation needs to be recognized. At worst,
there is not sufficient information (based on ASC 410-20-25-10) to determine the fair value of the
asset retirement obligation as it is currently uncertain as to whether DuPont will be required to
remove the asbestos.