Asset Retirement Obligation: Why Do You Record Both an Asset and a Liability?
An ARO contains both a future obligation and a cost of using or acquiring the related long-lived asset.
Liability
The future retirement obligation creates a liability when applicable recognition criteria are met, generally using present-value concepts initially.
Asset
The related retirement cost is generally added to the carrying amount of the associated long-lived asset.
Over time
The capitalized cost is depreciated while the liability grows through accretion toward the expected settlement amount.
Settlement
At settlement, compare the actual amount with the recorded obligation and apply the relevant accounting.
The takeaway
ARO creates a future liability and an additional asset cost today.
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FAQ
Is the liability initially recorded at the undiscounted future cash payment?
Initial measurement generally incorporates present-value concepts.
What is accretion expense?
Growth in the retirement obligation over time.
Is the capitalized retirement cost depreciated?
Yes.