2000 CFRI CONFERENCE

1. 2000 CFRI CONFERENCE Asset Impairment & Disposal Issues/Accounting for Obligations Associated with the Retirement of Long-lived Assets PANELIST: Julie Erhardt Partner, National Accounting Office, Arthur Andersen, LLP Richard Stock Director of Accounting Policy, Exxon Mobil Corporation Ed Trott Member of the Board, Financial Accounting Standards Board MODERATOR: James E. Terrell Vice President & Controller, Georgia-Pacific Corporation

2. KEY CURRENT LITERATURE REGARDING LONG-LIVED ASSET IMPAIRMENTS AND DISPOSALS: • Statement 121 • EITF 94-3 • SAB 100 • APB 30 / EITF 95-18 Discontinued Operations • APB 29- Spin-offs and Certain Exchanges • EITFs 87-11, 90-6, and 95-21 - Assets Purchased that are to be Disposed of

3. THE ED ON LONG-LIVED ASSET IMPAIRMENTS AND DISPOSALS: • Replaces Statement 121 • Nullifies Most of EITF 94-3 • Replaces APB 30 / EITF 95-18 Discontinued Operations • Provides Guidance for Applying APB 29 • Nullifies EITFs 87-11, 90-6, and 95-21 • Will Impact Consolidation Policy Regarding “Temporary Control” • Does Not Affect EITF 95-3 - - Purchasing Accounting • Effective for Fiscal Years Beginning after December 15, 2001

4. COMPARISONS WITH STATEMENT 121: • What is the Same… • Two Step Process for Assets to be Held and Used • Recoverability (Does Undiscounted Cash Flow Recover the Carrying Amount?) • Fair Value (Is the Current Fair Value Below Carrying Amounts?) • Grouping Assets at the Lowest Level for Identifiable / Independent Cash Flows

5. COMPARISONS WITH STATEMENT 121 (continued): • What is the Same... • Use of Events to Trigger Testing • Write-down to Fair Value if Held and Used Assets are Impaired • Lower of Carrying Amount or Fair Value for Assets Held for Sale • No Depreciation for Assets for Held Sale

6. COMPARISONS WITH STATEMENT 121 (continued): • What has Changed... • Use of “Expected” Cash Flow Approach -- Probability-weighted - - for Recoverability Testing and Fair Value • More Guidance on Cash Flow Estimates (Repairs, Maintenance, and Replacements, Interest to be Capitalized, Life of Primary Asset) • More Guidance on when an Asset is Held for Sale (Available for Immediate Sale on Normal Delivery Terms, Probable of Being Sold within a Year, Etc.)

7. COMPARISONS WITH STATEMENT 121 (continued): • What has Changed… • Guidance Provided for Events after Balance Sheet Date • Guidance Provided for Changes to a Plan of Sale • Separate Guidance for Disposals Other Than by Sale • Abandonments (Don’t Stop Depreciation While in Use) • Spin-offs (See APB 29 Guidance) • Exchanges of Similar Productive Assets (See APB 29 Guidance)

8. ISSUES: PREPARER PERSPECTIVE • Fair Value of Initial Measurement • Applies to Measurement of Both ARO and Impairment • Market-oriented • Required by CON 7 • Differs from FAS 5 • Inconsistent with Business Plans • Requires the Elimination of Contractual Relationships- Example 2 Impairment ED

9. ISSUES: PREPARER PERSPECTIVE • Expected Cash Flows • Differs from Best Estimate Concept of FAS 5 • Requires Risk-free Rate (Credit Adjusted for ARO) Applied to Probability Weighted Cash Flows • Differs from Traditional Approach in FAS 121 • Inconsistent with Business Plans

10. ISSUES: PREPARER PERSPECTIVE • Other Issues (Impairment ED) • Impairment of Assets at the Entity Level • Consideration of Cash Flows and Capital Expenditures of Future Development

11. ISSUES: AUDITOR’S PERSPECTIVE • Projected Cash Flows • Completeness of the Cash Flow Scenarios • Accuracy of the Assumed Cash Flows based only on the asset’s existing service potential • Validity of the Probabilities of each Cash Flow Scenario • What constitutes “Available Evidence” related to each of the above items

12. ISSUES: AUDITOR’S PERSPECTIVE • Assets Held for Sale: • Probability of a Sale Within One Year • Validity of “Unlikely Events” Driving a Later Decision Not to Sell an Asset • Appropriateness of an Impairment Charge (Asset Held for Sale) Versus Depreciating the Asset Over a Shortened Remaining Life (Asset to be Abandoned) • Verifiability of a Decision to Sell an Asset Being Made at, Not After, the Balance Sheet Date

13. COMPARISONS WITH EITF 94-3: • What is the Same… • Requirements for a One-time Termination Plan • Most Disclosure Requirements • Covers Only One-time Benefit Arrangements -- Not On-going Plans that are Covered by Statement 112

14. COMPARISONS WITH EITF 94-3 (continued): • What is Changed… • Employee Termination Benefits Recognized like a Stay-bonus Rather than as a Payment for Past Services (If Future Service Required) • Operating Lease Cost Spread over Revised Utilization Period Rather than All Pushed Back • Delay in Recognition of Other Liabilities (Other than Terminations of Existing Contractual Obligations Other than Operating Leases)

15. ISSUES: PREPARER PERSPECTIVE • Termination Benefits (ImpairmentED) • Does Not Recognize Service • Differs from FAS 5 and EITF 94-3 that a Liability Arises when the Entity Commits to the Employees • Differs from the Treatment of Nominal Service Periods Under FAS 106 • Differs from Lease Termination Penalties

16. ISSUES: PREPARER PERSPECTIVE • Termination Benefits (ImpairmentED) • Does Not Recognize Service • Differs from FAS 5 and EITF 94-3 that a Liability Arises when the Entity Commits to the Employees • Differs from the Treatment of Nominal Service Periods Under FAS 106 • Differs from Lease Termination Penalties

17. ISSUES: AUDITOR’S PERSPECTIVE • Termination Benefits • Verifiability of a Termination Payment Stemming From: • A Pre-existing FAS 112 Plan (Accrue when Payment is Probable), • Or • A One-time Arrangement (Accrue Over the Employee’s Remaining Service Period)

18. MAJOR CHANGES TO APB 30 / EITF 95-18 DISCONTINUED OPERATIONS (DO): • What is the Same… • The Display of DO on a Net of Tax Basis Below Continuing Operations

19. MAJOR CHANGES TO APB 30 / EITF 95-18 DISCONTINUED OPERATIONS (DO)--(continued): • What is Changed… • Criteria for what can be Displayed as a DO (Operations of a Significant Component of an Entity: (a) that Either has been Disposed of by Sale or Otherwise or is Classified as Held for Sale and; (b) Where Activities, Operations and Assets have been or will be Eliminated in the Disposal Transaction) will Allow for More DO Presentations • Prohibition of Accruing for Future Losses at Measurement Date

20. MAJOR CHANGES TO APB 30 / EITF 95-18 DISCONTINUED OPERATIONS (DO)--(continued): • What is Changed… • Assets and Related Liabilities Held for Sale shown Broad Rather than Net • No Pushback of Decision to DO if After Balance Sheet Date

21. ISSUES: AUDITOR’S PERSPECTIVE • Discontinued Operations • Validity of and Consistency of Conclusions that Discontinued Operations are “Significant”; a Judgmental Criterion • Verifiability of a Decision to Discontinue an Operation Being Made At, Not After, the Balance Sheet Date

22. WHAT GUIDANCE IS GIVEN FOR APB 29: • At the Spin-off Date, the Spinee Operations is to be Written Down (Through the P&L) to its Lower of Carrying Amount or Fair Value • At the Exchange Date of a Similar Productive Asset, the Transferred Asset is Written Down (Through the P&L) to its Lower Carrying Amount or Fair Value

23. ISSUES: PREPARER PERSPECTIVE • Other Issues (Impairment ED) • Exchanges of Similar Productive Assets and Spin-offs • Subject to Measurement at Fair Value Without Recognition Test • Held for Sale Criteria • Definition of Normal Delivery Terms (Para 30b) • Assets to be Sold as a Group (Para 30e)

24. WHAT GUIDANCE IS GIVEN IN PLACE OF EITFS 87-11, 90-6, AND 95-21: • Assets and Related Liabilities Displayed Broad Rather than Net • Results of Operations Recognized as they Occur Rather than Being Absorbed in the Purchase Price Allocation

25. WHAT IS THE IMPACT ON CONSOLIDATION POLICY - “TEMPORARY CONTROL”: • The Exemption to Consolidation for Entities Where Control is Temporary will be Deleted • Assets and Related Liabilities will be Treated Like Other Net Asset Groups Held for Sale

26. TREATMENT OF GOODWILL: • ED Approach is Like that in Statement 121 • Input Received on Business Combinations ED will Affect this Area

27. KEY CURRENT LITERATURE REGARDING ASSET RETIREMENT OBLIGATIONS: • Statement 19 - Oil and Gas Operations • SOP 96-1 - Environmental Remediation Liabilities

28. THE ED ON LONG-LIVED ASSET RETIREMENT OBLIGATIONS: • Replaces Guidance in Statement 19 • Impacts all Companies that have a Retirement Obligation for Long-lived Assets (This is Not Just for Utilities, Landfill, Mining or Oil and Gas) • Will Increase Leverage by Requiring a Retirement obligation be Recognized as a Liability Rather than as Part of Depreciation

29. THE ED ON LONG-LIVED ASSET RETIREMENT OBLIGATIONS (continued): • Will Require that a Liability be Recognized for a Retirement Obligation Sooner than Current Practice • Will have the Initial Liability Recognition be Based on Fair Value Rather than Accumulated Costs (Examples in the ED Show the Impact of this Measurement) • Effective for Fiscal years Beginning after June 15, 2001

30. KEY PROVISIONS IN THE ED: • Retirement Obligations are those that are Unavoidable as a Results of the Acquisition or Normal Operations of a Long-lived Asset • The Initial Amount Recorded as a Liability is Added to the Long-lived Asset’s Cost Basis • Accretion of the Time Value of Money (Discount) is a Period Expense and Not Subject to Capitalization Under Statement 34

31. KEY PROVISIONS IN THE ED (Continued): • Fair Value of the Liability is Expected to be Determined by an Expected Present Value Technique (Concept Statement 7, Probability-weighted; Includes Inflation, Overhead, Profit Margin, Market Risk Premiums, Etc., Discounted Using A Credit-adjusted Risk-free Rate) • Changes in Estimates Adjust the Liability and Capitalized Cost

32. ISSUES: PREPARER PERSPECTIVE • Constructive Obligations (ARO ED) • AROs for Constructive Obligations-F/N 27 • Do All Assets have Retirement Obligations that are Not Conditional? • Or • When Retirement Obligations Exist are They Not Conditional? • AROs for Interim Property Retirements (Para. 53)

33. ISSUES: PREPARER PERSPECTIVE • Oil & Gas Industry (ARO) • Matching of Revenues Generated by Production with Accrual of ARO • Transition • Will have the Effect of Reversing Previous Accruals and Re-accruing in the Future • Costly to Implement. Need to Research Historical Data to Determine Accumulated Depreciation • Grouping of Assets

34. ISSUES: AUDITOR’S PERSPECTIVE • Scope • Obligations for Interim Property Retirements (Within the ED’s Scope), • Vs. • Obligations for Ongoing Operation of the Asset (Outside the ED’s Scope) • Example: • Replace a Section of a Gas Pipeline

35. ISSUES: AUDITOR’S PERSPECTIVE • Recognition • Applying the “Probable Future Sacrifice … that an Entity has Little or No Discretion to Avoid” Criterion • Examples: • Asset Removal Laws are Not Enforced and No Removals have ever taken Place • Asset Removal is Merely General Practice (No Laws); Non-removal Yields Adverse Publicity

36. ISSUES: AUDITOR’S PERSPECTIVE • Measurement • “Expected Cash Flow” Model - Same Issues as with the Impairment ED • Meshing the ED’s Anticipatory “Fair Value” Measurement Guidance With Its “Present Responsibility” Recognition Guidance • Example - Pending Law Changes • Example - “Cut and Cover” Strip Mine