Large and tangible (especially fixed) assets need to be managed in a special and precise manner. Finance leaders often deploy specific processes to manage the retirement of these assets. One such management practice is called Asset Retirement Obligation (ARO). VIZIO helps you ensure seamless Asset Retirement Obligation management with in house build ARO Business Application on SAP Analytics Cloud.
PS 3280.09 requires an ARO to be recognized as at the reporting date when a legal obligation exists to incur retirement costs related to a tangible capital asset as a result of past transaction or event giving rise to the liability with expectations that any future economic benefits associated with the said asset will be given up and that a reasonable estimate of the amount can be made.
PS 3280.16, states that an ARO can result from acquisition, construction, development, or normal use of a tangible capital asset. It is this, and not the existence of the contract, agreement, legislation or other legally enforceable right, that is the obligating event.
PS 3280.24-25 requires that after the initial recognition of a liability for an ARO, an Asset Retirement Cost (ARC) must be recognized by increasing the carrying amount of the related tangible capital asset (or a component thereof) by the same amount as the liability. The ARC should be allocated to expense in a rational and systematic manner over the useful life of the tangible capital asset (or a component thereof).
The estimate of a liability should include costs directly attributable to asset retirement activities. In periods after initial measurement, revisions to either the timing, amount of the original estimate of the undiscounted cash flows or discount rate are recognized as part of the tangible capital asset. The passage of time is recognized as accretion expense
ASC 410-20-50-1 requires multiple disclosures for entities that have AROs associated with their assets. A general description of an ARO and the associated long-lived assets is required:
ASC 410-20-50-1(b) requires disclosure of assets at their fair values If a reporting entity has legally segregated any assets to settle the ARO. This requirement only applies to assets that have been legally restricted for settlement of the ARO, such as in a sinking fund, trust, or other arrangement, and not to any general internal funding policy that a reporting entity may adopt.
ASC 410-20-50-1(c) requires a reporting entity to reconcile the aggregate carrying value of the ARO at the beginning of the period to that at the end of the period. This is required for each income statement period presented but only in reporting periods when there have been significant changes in liabilities incurred or settled, accretion expense, or revisions in estimated cash flows.
The best practice would be to include the reconciliation (or information sufficient to allow the user to construct the reconciliation) if any of the amounts in the reconciliation are significant, without regard to whether they have changed. A reporting entity should not look only to significant changes in the components of the reconciliation, but also look to significant changes in the liability year over year.
For instance, if AROs incurred during the period are significant each year but constant, then the reconciliation should be provided.
ASC 410-20-50-2 requires that if a reasonable fair value of an ARO cannot be estimated, then a reporting entity should provide disclosure of the fact and the reasons as to why estimation is not possible.
For example, if an ARO is associated with an asset with an indeterminate life, no reasonable estimation of the fair value of the ARO is possible and no liability is recorded. However, management should consider disclosure of the potential cash flows (based on current estimated costs) related to this unrecognized ARO.