FAR - Specific Transactions, Events, & Disclosures - Asset Retirement & Environmental Obligations

Question 1

Asset Retirement Obligation (ARO)

Answer 1

requires capitalization of future asset retirement costs in underlying asset acct and as a liab

amount capitalized is probability weighted PV of future costs to retire the asset (initial FV)

Question 2

ARO costs

Answer 2

Future costs that are integral to operations:

1) dismantling an asset
2) removal
3) site reclamation
4) nuclear decommissioning
5) closing a mine

Question 3

ARO - concepts

Answer 3

reason to capitalize costs to asset is that the retirement obligation is integral to the operation of the asset

obligation established @ beginning of assets life must be a legal obligation, one that the firm is required to settle as a result of law/contract

Question 4

ARO - subsequent recognition/measurement

Answer 4

asset’s base depreciated over useful life

ARO increased each yr due to passage of time - accretion expense

ARO gradually increases over time to final amount expected to be paid

Question 5

accretion expense

Answer 5

ARO balance X interest rate used @ initial measurement

(increases ARO over time until hits future value)

(operating expense)

Question 6

Environmental Obligation

Answer 6

arises from violation of environmental law/regulation (clean air act)

obligation accrued when probable/estimated

Company may be named potentially responsible party (PRP)

Question 7

ARO Conclusion

Answer 7

ARO capitalized as part of asset cost @ initiation and is a liab

Over time asset is depreciated

Over time, liab increases until equals value to be paid to retire asset

EO is accrued when probable/estimable

Question 8

J/E to record ARO

Answer 8

recorded as a debit to the natural resources account (depletion base) and a credit to a liability.

Question 9

when is ARO recorded?

Answer 9

recorded when a firm has a probable and estimable future cost to reclaim the property exploited at the end of the project life