Asset Retirement Obligation, Changes in Estimate versus Errors, Writing an Issues Memo Facts: Mega-

Corp's corporate headquarters, built in 1970, has asbestos in its insulation. The Company's financial statements

reflect a $5 million asset retirement obligation (ARO) for the eventual remediation of the asbestos. This ARO was

initially estimated and recorded in 2005 when the company adopted FIN 47, Accounting for Conditional Asset

Retirement Obligations. (Note: Amounts recorded for AROs are generally estimated, because it is not always pos-

sible to know how much remediating asbestosor other like issueswill ultimately cost.) MegaCorp is a public

company with a calendar year-end

While performing routine maintenance work on the facility, additional sampling identified the presence of

asbestos in more places than the Company had documented during its initial estimate. The Company now believes

the total cost to remediate the asbestos will be $9 million. The initial estimate ($5 million) was based on sampling

around the plant for areas containing asbestos. The newly-discovered areas with asbestos were in a part of the

facility that was not sampled.

Required: Assume that you are in the controller's group of MegaCorp and have been asked to prepair an account-

ing issues memorandum documenting your consideration of the following issues.

1. The Company's controller is questioning whether this liability for asbestos disposal is even necessary at all.

He argues that asbestos must only be remediated if it is disturbed (such as through renovations), and points

out that the company does not have any immediate plans to renovate the building. Respond to his question

using authoritative guidanceis a liability even necessary, if the company's plans for disposal or renovation

of this building are uncertain?

2. Determine whether the additional liability for the newly discovered asbestos is considered a change in

accounting estimate or an error. Note that this is not a change in accounting principle. Support your answer

using authoritative guidance.

3. Describe how the company should record this $4 million change (prospectively, or through a retrospective

adjustment)? What accounts should be debited/credited? You can disregard use of present value for this

example