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Phase |
Balance sheet |
Income statement |
Statement of cash flows |
Passage of time (PPE 3.4.3)
|
Increase the ARO through periodic accretion expense
Allocate the ARC to expense using a systematic and rational method over the related long-lived asset’s useful life
|
Record accretion expense as a component of operating expense
Record ARC expense as depreciation
|
Classify accretion and depreciation as noncash adjustments to net income within operating cash flows
|
Changes in expected cash flows (PPE 3.4.4.2)
|
Adjust the ARO for the impact of the change
Record a corresponding change to the carrying amount of the ARC
|
No immediate impact
Reflect change in accretion and depreciation prospectively
|
No immediate impact
Classify accretion and depreciation as noncash adjustments to operating cash flows
|
Retirement
(PPE 3.5) |
Derecognize ARO as remediation costs are incurred
Derecognize any unamortized ARC
|
Record a gain or loss for the difference between the actual cost of settling the ARO and the recorded liability
Record a loss for any unamortized ARC
|
Classify cash outflows for settlement of the ARO in operating cash flows
Any settlement difference is a noncash adjustment to net income within operating cash flows
|
Excerpt from ASC 410-20-55-4
Excerpt from ASC 410-20-25-6
Excerpt from ASC 410-20-30-1
An expected present value technique will usually be the only appropriate technique with which to estimate the fair value of a liability for an asset retirement obligation.
Determine unit of account |
The unit of account is the legal obligation, in whole or in part, to retire a long-lived asset. ASC 410 requires an ARO to be recorded at fair value when a legal obligation is incurred. When a new ARO layer is established due to a change in the timing or amount of expected cash flows, the new layer is treated as a separate unit of account.
|
Evaluate valuation premise |
Since AROs are not commonly held as assets by other parties, a reporting entity should consider the valuation of its AROs assuming they are transferred to a market participant.
|
Assess principal market |
It is unlikely that there is a principal market for asset retirement obligations as they are not actively traded and there is little or no observable data about the price to transfer an ARO.
|
Determine the most advantageous market |
The most advantageous market is the market that would minimize the amount that would be paid to transfer the ARO. We expect that reporting entities will generally develop a hypothetical market to determine the fair value of AROs.
|
Determine valuation approach and technique |
ASC 820 requires that a reporting entity consider the use of all valuation approaches and techniques appropriate in the circumstances. However, ASC 410-20-30-1 states that an expected present value technique will usually be the only appropriate technique.
|
Determine significant inputs |
The example in ASC 820-10-55-77 through ASC 820-10-55-81 details inputs commonly used in valuing AROs, including labor costs, overhead costs, compensation to a market participant for assuming the ARO, the effect of inflation on related costs, the time value of money, and nonperformance risk.
|
Factors |
Key considerations |
Timing
|
|
Amount
|
|
Discount rate
|
|
Excerpt from ASC 410-20-25-11
Probability |
Timing |
Estimated third-party cost |
Credit adjusted risk-free rate |
Present value |
Probability-weighted present value |
|
Dismantle in 2030; use U.S. Department of Energy (DOE) disposal facilities |
65% |
2030; one-time cost |
$1,775 |
10% |
$161 |
$105 |
Entomb plant in 2030; ongoing monitoring for 50 years |
30% |
2030; Annual |
1,500
10
|
10%
10%
|
137 |
41 |
Dismantle in 2030; DOE facilities are not available, third party paid to assume disposal liability |
5% |
2030; one-time cost |
5,000 |
10% |
455 |
23 |
Expected value |
$169 |
Excerpt from ASC 410-20-35-8
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