What the schedule does
ASC 410-20 requires a liability for a legal obligation to retire a tangible long-lived asset, recognized when incurred at fair value, with an equal increase in the carrying amount of the asset. The initial liability here is the expected undiscounted cost divided by (1 + r)^n. Each year the liability accretes at the rate for its layer until it reaches the undiscounted cost at settlement. The ARC is depreciated over the asset's life, so total annual expense is accretion plus depreciation. The default entries are Dr Asset retirement cost, Cr ARO at recognition and Dr Accretion expense, Cr ARO each period.
What an auditor tests
Recompute the opening and closing liability, trace the cost estimate to a quote, engineering report or contract, and evaluate the credit-adjusted risk-free rate and the probability weighting as part of auditing the accounting estimate under AU-C 540. Check that revisions use the right rate by direction, that the ARC adjustment is depreciated over the remaining life and that settlement gains or losses are recorded when the obligation is settled for more or less than the carrying amount. Link the asset side to the fixed asset rollforward.
Limits
Annual compounding, whole years, one settlement date and one revision. Multi-layer histories, conditional asset retirement obligations that are not reasonably estimable, leases (ASC 842 interaction) and environmental obligations under other subtopics are outside this tool. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
How is the initial ARO measured?
An asset retirement obligation is recognized at fair value when it is incurred, usually measured as the present value of expected settlement cash flows discounted at a credit-adjusted risk-free rate. The same amount is added to the carrying amount of the related long-lived asset as the asset retirement cost (ARC). This tool discounts the single expected cost you enter over the years to settlement.
What is accretion and where does it go?
Accretion is the increase in the liability each period as the discount unwinds. It equals the opening liability times the credit-adjusted risk-free rate used at initial measurement, and it is recorded with Dr Accretion expense, Cr ARO. ASC 410-20-45-1 treats accretion expense as an operating item in the income statement, not as interest cost.
Which discount rate applies to a revised estimate?
An upward revision in undiscounted cash flows is a new layer discounted at the current credit-adjusted risk-free rate. A downward revision is measured using the rate in effect when the original liability was recognized; where the affected layer cannot be identified a weighted-average rate may be used. Accretion on each layer keeps using that layer’s own rate. This tool takes one revision and uses the single original rate for a decrease.
How is the asset retirement cost depreciated?
The ARC is depreciated over the useful life of the related asset using the entity’s depreciation method. This tool uses straight-line with no salvage value. A revision adjusts the ARC and is depreciated over the remaining life; if the asset is already fully depreciated the adjustment is expensed.
Is there an unconditional obligation if the timing is uncertain?
Yes. When a law, regulation or contract requires retirement activity, the obligation is unconditional even though the timing or method of settlement is uncertain (the guidance in ASC 410-20 that came from FASB Interpretation No. 47). The liability is recognized when its fair value can be reasonably estimated, and the uncertainty enters the measurement rather than the recognition decision. Probability-weight the possible settlement dates and costs before entering a single expected cost.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.