Asset Retirement Obligations under US GAAP

The accounting guidance in ASC 410-20 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. A legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract, or that is based on a promise and an expectation of performance (e.g., under the doctrine of promissory estoppel).
An asset retirement obligation (ARO) initially should be measured at fair value and should be recognized
at the time the obligation is incurred (provided that a reasonable estimate of fair value can be made). For
example, certain obligations, such as nuclear decommissioning costs, generally are incurred as the asset
is operated. Other obligations, like the obligation to remove an offshore drilling platform, may be incurred as the asset is being constructed.
Upon initial recognition of a liability for retirement obligations, an entity should capitalize that cost as part of the cost basis of the related long-lived asset and depreciate the asset over its useful life. Changes in the obligation due to revised estimates of the amount or timing of cash flows required to settle the future liability should be recognized by increasing or decreasing the carrying amount of the ARO liability and the related long-lived asset.

Changes due solely to the passage of time (i.e., accretion of the discounted liability) should be recognized as an increase in the carrying amount of the liability and as an expense classified as an operating item in the income statement and referred to as accretion expense (or any other descriptor that conveys the nature of the expense).
ASC 820 serves as the primary guidance regarding fair value measurements in GAAP. Although the
FASB acknowledges that many asset retirement obligations cannot be settled in current transactions
with third parties and that some entities will perform the retirement activities themselves, the ARO must
be measured at fair value. If the obligation is settled using the entity’s own resources, the entity may
recognize a gain or loss (the difference between the liability measured at fair value and the actual costs
incurred) upon completion of the retirement activities.

Download EY Publication from Accounting Link

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.