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An asset retirement obligation (ARO) 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. Capital-intensive companies may have significant AROs due to their ownership of major productive assets that ultimately will be removed from service. AROs are common across various industries including those where companies utilize landfills, nuclear and other power plants, oil and gas operations, asbestos-containing materials, and mining operations. AROs may also arise in connection with operating leases and leasehold improvements that may require the removal of certain assets at the end of the lease. ASC 410-20, Asset Retirement and Environmental Obligations – Asset Retirement Obligations, contains the guidance for the recognition, measurement, and disclosure of AROs. This chapter addresses common issues in accounting for AROs.
The provisions of ASC 410-20 do not apply to obligations that result from improper operation of an asset, including environmental remediation liabilities, which are subject to ASC 410-30, Asset Retirement and Environmental Obligations – Environmental Obligations. The scope of ASC 410-20 differs from ASC 410-30 in that ASC 410-20 addresses an obligation that arises due to the normal operation of an asset, whereas ASC 410-30 addresses an obligation that results from the improper operation of an asset. See PPE 9 for more information on accounting for environmental obligations under ASC 410-30. Additionally, see PwC’s Utilities and Power Companies guide for specific accounting considerations relating to rate-regulated utilities.
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