Asset Retirement Obligations (Aros)

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What is meant by "Asset Retirement Obligations" (AROs)?

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It is a legal obligation associated with the retirement of a tangible long lived asset that results from the acquisition, construction , or development &/or normal operation of a long-lived asset, except for certain lease obligations (minimum lease payment & contingent rentals).

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Note

Back 2

U.S. GAAP & IFRS require a B/S approach to recognizing AROs

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Note

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An ARO qualifies for recognition when it meets the definition of a liability in which it is:
1- Duty or responsibility
2- Little or no discretion to avoid
3- Obligating event

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Note

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Uncertainty about whether performance will be required does not defer the recognition of a retirement obligation; rather, that uncertainty is factored into the measurement of the FV of the liability through assignment of probabilities to cash flows.

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Note

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When an asset retirement obligation exists & qualifies for recognition, an entity records an asset & a liability on the B/S equal to the FV of the asset retirement obligation, if a reasonable estimate of FV can be made.

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Note

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FV is generally equal to the present value of the future obligation.

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Note

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If a reasonable estimate of FV cannot be made, the liability & related asset are recognized when a reasonable estimate of FV can be made.

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Note

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The ARO is the obligation (liability) associated with the retirement of a tangible long-lived asset.

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What is the "Asset Retirement Cost" (ARC)?

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It is the amount capitalized (asset) that increases the carrying amount of the long-lived asset when a liability for an ARO is recognized.

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What would be the JE to record the ARO?

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Note

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Under IFRS, an asset retirement obligation is called a Decommissioning liability.

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What is the difference between US GAAP & IFRS in the measurement of the ARO?

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Under IFRS, A decommissioning liability is initially measured at the best estimate of the expenditure required to settle the obligation, But under U.S. GAAP requires initial measurement at FV.

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Note

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In periods after the initial measurement, then the ARO liability is adjusted for accretion expense due to the passage of time, & the ARC asset is depreciated.

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What is the "Accretion Expense"?

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It is the INCREASE in the ARO liability due to the passage of time calculated using the appropriate accretion rate.

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Note

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At the end of the accretion period, the ARO liability reported on the B/S should be (approximately) equal to the ARO to be paid.

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What is the JE to record the Accretion expenses?

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Note

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The asset retirement obligation is recorded at a discounted amount. Accretion expense is the growth of the liability over time so that at the time the liability is satisfied, it is reported at its total non-discounted value.

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Note

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Depreciation expense DECREASES the ARC asset reported on B/S.

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Note

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At the end of the accretion period, the asset retirement cost (asset) should be FULLY depreciated.

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What would be the JE to record the depreciation expense of the ARC?

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Note

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Note

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Estimated cash flows are used to calculate the discounted ARO liability reported on the B/S. Under U.S. GAAP, these cash flow estimates may be revised over time.

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Note

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Note

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Under IFRS, a decommissioning obligation is remeasured each period for changes in the amount or timing of cash flows & changes in the discount rate, But under U.S. GAAP, the obligation is only adjusted for changes in the amount or timing of cash flows.

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Note

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If ARO is included in minimum lease payments, NO separate ARO accounting is required, But If ARO is imposed otherwise, then ARO accounting applies.

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Note

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In case of the lessor, If ARO is imposed, then ARO accounting applies.

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What is the JE to record the settlement of the ARO with revision adjustment at the end of the accretion period?

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