Asset Retirement

Question 1

What is an Asset Retirement Obligation?

Answer 1

requires firms to capitalize future asset retirement costs in the underlying asset account, and also in an ARO liability

The costs are incurred at the end of the asset’s life but are capitalized when they become estimable, often at the beginning of the asset’s useful life. The rationale for capitalizing such costs to the asset is that the retirement activities are integral to the operation of the asset.

Question 2

How do you measure an Asset Retirement Obligation (ARO)?

Answer 2

Fair Value

Question 3

How do you account for an ARO?

Answer 3

After the asset and ARO are increased by the initial fair value (present value) of future payments to retire the asset, (1) total depreciation or depletion expense over the asset’s life is thus automatically increased by the amount capitalized initially, and (2) the ARO is increased each year due to the passage of time causing the firm to also record “accretion expense

IT gradually increases over time

Question 4

When must an environmental liability be accrued?

Answer 4

when the liabilities are both probable and reasonably estimable