AROs and Environmental Liabilities

Question 1

Define: Asset Retirement Obligation (ARO)

Answer 1

ARO requires capitalization of future asset retirement costs in the asset account and as a liability

Question 2

For an ARO, how is it measured on the balance sheet?

Answer 2

The amount capitalized is the present value of the future costs to dismantle, clean up, or retire an asset

Question 3

How is an ARO measured subsequent to recognition?

Answer 3

The asset’s base is depreciated over its useful life

The ARO is increased each year due to the passage of time- this is referred to as accretion expense

Question 4

Define an environmental liability?

Answer 4

Arises from violation of an environmental law or regulation.

Question 5

When do you record a contingent liability?

Answer 5

When the cost is probable and can be estimated

Question 6

T/F: The retirement obligation of the asset is combined with the total value of the asset acquired?

Answer 6

True, you combine the value two values. The cost to get it ready plus the cost to retire or dispose.

Depletion expense will be for the full amount (cost to construct plus cost of disposal)

Accretion expense will only be for the PV

Question 7

T/F: The retirement obligation of the asset is combined with the total value of the asset acquired?

Answer 7

True, you combine the value two values. The cost to get it ready plus the cost to retire or dispose.

Depletion expense will be for the full amount (cost to construct plus cost of disposal)

Accretion expense will only be for the PV of the cost to dispose * PV percentage