ARO ASPE 3110 IAS 37 Parts

Question 1

What is the definition of an Asset Retirement
Obligation (ARO)?

Answer 1

ASPE 3110
* Legal or contractual obligation associated with the retirement of a tangible long-lived asset

IAS 37
* No equivalent definition – apply general guidance on provisions which are recognized when:

‒ There is present obligation (legal or constructive) as a result of a past event

‒ It is probable that an outflow of resources will be required to settle the obligation

‒ A reliable estimate can be made of the amount of the obligation

Question 2

At what amount should an ARO be
recognized?

Answer 2

ASPE 3110 and IAS 37

• Best estimate of the expenditure required to
  settle the present obligation at the end of the
  reporting period e.g., PV of expected future cash
  outflow
• If a reasonable estimate can’t be made – don’t
  recognize until a reasonable estimate can
  be made

Question 3

What is the balance sheet and income statement impact on initial recognition of the ARO and
in subsequent years?

Answer 3

ASPE 3110

• Balance sheet impact is a liability equal to fair value of ARO (PV of future cash outflow) and offsetting
  entry to increase related asset by the same amount
• Each period recognize amortization (which reduces the asset) and accretion expense (which increases
  the liability)
• At the time the liability is due the asset will have been eliminated and the liability will be equal to the face value
• Changes to estimated amount of the liability are treated as a change in estimate (prospective)

IAS 37
* Same except that increase in the liability due to passage of time is charged to interest expense (not referred to as accretion expense)

• Changes to liability are dealt with in IFRIC 1 (look up if required)