What is Asset retirement obligation (ARO)?
In short
An asset retirement obligation (ARO) is a legal obligation to retire a long-lived asset, such as dismantling an oil platform or restoring a mine site. It is recognized at fair value when incurred and added to the asset's carrying amount.
Key takeaways
- The capitalized cost is depreciated over the asset's life.
- The liability grows each period through accretion expense.
- It is usually measured at the present value of the expected cash flows, using a credit-adjusted risk-free rate.
Where it's tested
FAR: Property, Plant & Equipment — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under US GAAP, a long-lived asset held for use is tested for impairment. The carrying value is $500,000, undiscounted future net cash flows are $520,000, and fair value is $460,000. What impairment loss, if any, should be recognized?