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11.6 Asset retirement obligations
Publication date: 30 Apr 2022
us Financial statement presentation guide
ASC 410-20 describes standards for the recognition and measurement of an asset retirement obligation (ARO), which is a legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of that asset. ASC 410-20-25-4 through ASC 410-20-25-5 requires asset retirement obligations to be recognized at fair value in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset, referred to as an asset retirement cost (ARC). ASC 410-20-45-1 specifically requires that accretion expense be classified as an operating expense in the income statement using a caption that appropriately characterizes the nature of the expense. See PPE 3 for further discussion of AROs, including balance sheet and income statement presentation.
11.6.1 Disclosure requirements
ASC 410-20-50-1 requires multiple disclosures for entities that have AROs associated with their assets. A general description of any ARO and the associated long-lived assets is required. If a reporting entity has legally segregated any assets to settle the ARO, ASC 410-20-50-1(b) requires disclosure of the fair value of those assets. 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.
As discussed in ASC 410-20-50-1(c), a reporting entity is also required to reconcile the aggregate carrying value of the AROs at the beginning of the period to the aggregate carrying value of the AROs at the end of the period. This reconciliation is required for each income statement period presented, but is only required in reporting periods when there have been significant changes in liabilities incurred or settled, accretion expense, or revisions in estimated cash flows. 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, we believe that the reconciliation should be provided.
If a reporting entity cannot reasonably estimate the fair value of an ARO, ASC 410-20-50-2 requires disclosure of that fact and the reasons why it cannot be estimated. For example, if a reporting entity has an ARO 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.
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