Question

What are some of the variables, or assumptions, that enter into the initial measurement of a company’s asset retirement obligation? Consider, for example, a nuclear power plant that produces radioactive waste. What are some factors the company should consider when initially estimating the ultimate disposal cost of this asset? To fully respond, also consider implementation guidance.

Answer 1

Following are the assumptions that an entity should consider while estimating the fair value of a liability for an asset retirement obligation.(if talking about Asset retirement obligations these are the legal obligations associated with the retirement of tangible, long-lived assets, where a company must ultimately remove equipment or clean up hazardous materials from a leased site)

1. The costs that a third party would incur in normally performing the tasks necessary to retire the asset.

2 The amount of a third party’s costs or the timing of its costs would vary under different future scenarios.

3. Other values that a third party would include in determining the price of the transfer, will be inflation, overhead, equipment charges, profitmargin, and advances in technology, etc.

4. Amount of market- risk premium that is the price that a third party would demand and could expect to receive forbearing the uncertainties and unforeseeable circumstances.

For example nuclear power plant company that produces radioactive waste after the use of the respective plant the company may have to detoxicate like in nuclear plants or machinery or will have to remove it. The expected expenses to be incurred on such restoration are taken care of by Asset Retirement Obligations.