Asset Retirement Obligations

Asset retirement obligations are the future costs associated with the retirement of long-term tangible assets that are recognized on the financial statements today. FASB Statement No. 143 looks at accounting for the costs of retiring assets and these related future asset retirement obligations. These obligations often become due as a result of future events, such as decommissioning a power plant, closing a land-fill site, or replanting trees after they are cleared. According to KPMG's summary, FASB Statement No. 143 includes the following key provisions for asset retirement obligations:¹

1. Recognize a liability for all legal obligations associated with the retirement of tangible long-lived assets;
2. Recognize the liability at fair value (which is the amount that would be paid in order to settle the liability in the active market) and capitalize an equal amount as a cost of the asset and depreciate it over the estimated remaining useful life of the asset;
3. Increase the liability for the passage of time (accretion) and report the change as an operating expense (accretion expense);
4. Adjust the liability for changes in the timing or the amount of the estimated undiscounted cash flows with a corresponding change to the carrying amount of the asset;
5. Recognize a gain or loss on the settlement of the obligation, which generally occurs when the associated asset is retired; and
6. Recognize a liability for all existing asset retirement obligations and the associated asset retirement costs at the date of adoption.

References:

1. Guide to Accounting for Asset Retirement Obligations. KPMG. Retrieved from: http://www.kpmg.com/Ca/en/topics/Oil-and-Gas-Update/Documents/KPMG%20FAS%201431.pdf
2. FASB Statement No. 143

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