Asset Retirement Obligations (ARO)
Future Removal and Restoration Costs
Some long-lived assets require future dismantling, removal, or environmental restoration. When a legal obligation exists, the present value of expected retirement costs is recognized both as a liability and as part of the asset's cost.
- Recognized when a legal obligation exists.
- Initially measured at present value.
- Added to the asset's carrying amount.
- Liability increases over time through accretion.
Note
ARO accounting combines asset capitalization with liability recognition and is occasionally tested on the CPA FAR exam.
Summary
Asset retirement obligations recognize future legal restoration costs at the time the asset is acquired.