CPA FAR ARO 1-75

Question 1

ARO asset retirement obligation

Answer 1

A legal obligation associated with the retirement of a tangible LT asset
Cost of getting rid of an asset!
Ex Tenant has an obligation to pay for clean up at lease end. tenant must estimate the clean-up cost in advance to satisfy he future obligation.
Ex When the entity owns the land, but the land requires work such as decommissioning the site after mining, oil, or gas exploration.

DR Asset retirement cost (asset)
CR Asset retirement obligation (liability)

Question 2

Journal entry: ARO asset retirement obligation

Answer 2

journal entry:
DR Asset retirement cost (asset)
CR Asset retirement obligation (liability)

Question 3

asset retirement cost (asset)

Answer 3

This is an asset that is set up at PV of estimated future amount and gets depreciated.
Depreciation expense reduces the asset retirement cost asset reported on the balance sheet.
At the end of accretion period, the asset retirement cost should be fully depreciated.

DR Depreciation exp
CR Accumulated depreciation (ARC)

Question 4

Journal entry: asset retirement cost (asset)

Answer 4

journal entry:
DR Depreciation exp
CR Accumulated depreciation (ARC)

Question 5

Asset retirement obligation (liability)

Answer 5

this is originally recorded at a discounted amount = present value.
Accretion amount is the growth of the liability over time so that at the time the obligation is satisfied= it is reported at its non-discounted (future value) value like a mature bond.

Liability increases every year with interest (accretion) on the unpaid obligation

IFRS = calls this decommissioning liability

Question 6

Accretion amount (interest)

Answer 6

Accretion amount is the growth of the liability over time so that at the time the obligation is satisfied= it is reported at its non-discounted (future value) value like a mature bond.

end of accretion period= fully mature/full (future) value

Liability increases every year with interest (accretion) on the unpaid obligation

Question 7

If ARO is not included in the MLP (minimum lease payment), __

Answer 7

separate accounting for ARO will be needed

Question 8

Asset retirement obligation may be recorded for assets that are:
owned
leased
both
neither

Answer 8

Both!

Question 9

Asset retirement cost

Answer 9

asset on the balance sheet

Question 10

Asset retirement obligation

Answer 10

liability on the balance sheet

Question 11

IFRS and GAAP treatment ARO

Answer 11

same balance sheet treatment but different account names

GAAP= ARO or asset retirement obligation
IFRS = calls this decommissioning liability

Question 12

Present value

Answer 12

always discount the future cost of decommissioning to present value

Question 13

several values for cost

Answer 13

if no one amount is more likely than another, use the probability then PV
Ex 300,000 25% = 75,000
400,000 45% = 180,000
500,000 30% = 150,000
total = 405,000 then discount to PV for ARC/ARO