Definition
The term asset retirement obligation is used to describe an accounting process that recognizes the legal responsibility to dispose of assets at a future point in time. Asset retirement obligations are typically associated with long-lived assets and can involve an entire asset or a portion of it. The obligation can come about as a result of a law, statute, ordinance, or written contract.
Explanation
Also known as an ARO, an asset retirement obligation is a method of accounting for costs related to the future disposal of an asset. Accounting guidance is provided in FASB's Statement of Financial Accounting Standards No. 143 - Accounting for Asset Retirement Obligations. Examples of costs typically associated with AROs include plant remediation efforts, removal of underground tanks, disposal of asbestos, restoration of office space upon lease termination, as well as the demolition of certain plants.
Businesses are required to recognize the liability associated with an ARO in the period in which the commitment occurs, including the initial construction of an asset. The process involves the creation of a liability equal to the present value of the future remediation cost as well as an asset of equal value. This mechanism effectively increases the carrying amount of the asset.
Over time, the company will include certain costs on their income statement; this includes the depreciation of the asset, capitalized retirement costs, and accretion of the asset retirement liability. Publicly-traded companies are required by federal laws under the jurisdiction of the Securities and Exchange Commission (SEC) to disclose certain operating and financial information on an ongoing basis. As part of its Form 10-K filing, companies must disclose all material asset retirement obligations.
Related Terms
The term Management's Discussion and Analysis refers to a section of the annual report that provides investors with insights into how the business performed in the past, its current financial condition as well as projections of future performance. Management's Discussion and Analysis (MD&A) is normally included with a company's annual report or Form 10-K, allowing the investor-analyst to understand how the leaders of the business believe the company has performed over the last year and what the future may bring.
Moneyzine EditorJanuary 24th, 2024
The term critical accounting estimates refers to those assumptions and approximations that may have a material impact on the financial statements of a company due to the level of subjectivity involved in developing the estimate. The assumptions used when developing critical accounting estimates are outlined in a company's Form 10-K filing.Moneyzine EditorJanuary 12th, 2024
The term Liquidity and Capital Resources refers to a section of the Management's Discussion and Analysis of Financial Condition that provides insights into the company's need for cash as well as its sources of cash. A discussion of a company's liquidity and capital resources can be found in its Form 10-K filing.Moneyzine EditorJanuary 23rd, 2024- The term regulatory asset refers to specific costs that a government agency permits a regulated utility to defer to its balance sheet. Accounting for regulatory assets allows public utilities to defer the recognition of certain costs; bypassing the income statement in the near term by moving these costs to the balance sheet.Moneyzine EditorSeptember 21st, 2023
- The term regulatory liability refers to specific revenues or gains that a government agency permits a regulated utility to defer to its balance sheet. Accounting for regulatory liabilities allows public utilities to defer the recognition of certain gains; bypassing the income statement in the near term by moving these gains to the balance sheet.Moneyzine EditorSeptember 21st, 2023
- The term variable interest entity refers to a legal business structure that does not provide equity investors with voting rights, or structures involving equity investors that do not have sufficient resources to support the operation of the entity. If a business is the primary beneficiary of the variable interest entity, it must disclose the holdings of that entity as part of its consolidated balance sheet.Moneyzine EditorSeptember 21st, 2023
The term financing receivables is used to describe an arrangement whereby a business uses its receivables to gain immediate access to cash. Financing receivables usually fall into two broad categories, which involve either the sale of receivables or a secured loan.Moneyzine EditorJanuary 18th, 2024
