ARO Flashcards
The ARO
An asset retirement obligation (ARO) must be recognized at the time the asset is purchased to reflect legal obligation. The ARO would be recorded at the present value of the expected obligation by debiting the oil tanker depot asset and crediting asset retirement obligation liability. The accretion expense would be recorded so that at the end of the 10 years, the ARO liability is equal to the undiscounted total expected cost of $150,000
Accretion expense
is the increase in the ARO liability due to the passage of time. The credit adjusted interest rate is used to calculate the ARO, as follows:
Beginning ARO × Risk-adjusted rate = $100,000 × 10% = $10,000
. A decommissioning liability under IFRS
is the same as an asset retirement obligation (ARO) under U.S. GAAP. Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.
ARO
When an asset retirement obligation exists, the entity should record an asset retirement cost (ARC) which increases the carrying value of the long-lived asset as well as an asset retirement obligation (ARO), which is the liability recorded on the balance sheet related to the retirement. The amount recorded to both the asset and liability will be equal to the fair value of the asset retirement obligation (which is determined by discounting the future cash flows required). The ARC will be depreciated over the useful life of the related asset while the ARO will be “accreted” based on the relevant accretion rate.
troubled debt restructuring - asset transfer
When assets are transferred in a troubled debt restructuring, the asset (real estate) is adjusted to fair value and an ordinary gain or loss recorded. Then, the gain or loss on restructuring is recorded as the difference between the debt and fair value of asset transferred.
a loan is impaired and foreclosure is not probable
the creditor should measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the creditor may measure impairment based on (1) a loan’s observable market price, or (2) the fair value of the collateral if the loan is collateral dependent. If foreclosure of a loan is probable, impairment must be measured based on the fair value of the collateral.
discount resulting from the determination of a note payable’s PV
Although the discount is a separate account from the note payable account, the note payable is reported on the balance sheet at the net of the note payable face value less the unamortized discount
Noninterest bearing notes payable
are reported at the present value of future cash flows.
nonrecognized subsequent events.
Subsequent events that provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date . This type of subsequent event is not recognized in the financial statements; but, is disclosed in the notes to the financial statements.
