Question

Which topic (give the number and name) in the FASB ASC covers asset retirement obligations? The number must be formatted as: XXX-XX1pts

                                               

a.   How does the glossary define an asset retirement obligation? 1pts

                       

b. Read about asset retirement obligations in your textbook and list four                                        examples.1pts

                       

C. According to 410-20-25-Recognition, what must an entity do upon initial recognition of a liability for an asset retirement obligation? 2pts

                       

D.   According to 410-20-25-Recognition, under what three conditions does an entity have sufficient information to reasonably estimate the fair value of an asset retirement obligation? 2pts

E.   According to 410-20-35-Subsequent Measurement, how is the cost of the retirement obligation treated over the life of the asset? 1pts

Answer 1

FASB ASC 410 - 20 covers asset retirement obligations.

a) As per Rule 143, " establish accounting standards for recognition and management of a liability for an asset requirement obligation and an associated asset requirement cost."

b) A company builds a gas station, with underground tanks to store the fuel. The tanks have an estimated life of 40 years (or, alternatively, the station site is leased for 40 years). The current cost to remove the tanks is $15,000. The company estimates future inflation for this type of work to be 2.5% per year. The company's credit-adjusted risk-free rate (cost of borrowing) is 9%.

The estimated future cost of removing the tanks in 40 years is $15,000 * (1.025 ^ 40) = $40,275.96. The present value of this cost is $40,275.96 / (1.09 ^ 40) = $1,282.29. At installation of the tanks, the company books an asset retirement cost (asset) and an asset retirement obligation (liability) of $1,282.29. The asset isdepreciated, usually straight-line, over 40 years (depreciation expense of $32.06 per year). The liability is accreted (interest for each period is calculated and added to the balance), using the interest method. (Accretion expense would be $115.41 the first year, $125.79 the second year, etc.) Over the 40 year life, the liability thereby increases to $40,275.96. At retirement of the tank, the expenses actually incurred to remove the tank are booked against the ARO, and a gain or loss is recognized for the difference.

c) An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. If a tangible long-lived asset with an existing asset retirement obligation is acquired, a liability for that obligation shall be recognized at the asset’s acquisition date as if that obligation were incurred on that date.

d) An entity shall identify all its asset retirement obligations. An entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation if any of the following conditions exist:
a. It is evident that the fair value of the obligation is embodied in the acquisition price of the asset.
b. An active market exists for the transfer of the obligation.
c. Sufficient information exists to apply an expected present value technique.

e) An entity shall subsequently allocate that asset retirement cost to expense using a systematic and rational method over its useful life. Application of a systematic and rational allocation method does not preclude an entity from capitalizing an amount of asset retirement cost and allocating an equal amount to expense in the same accounting period. For example, assume an entity acquires a long-lived asset with an estimated life of 10 years. As that asset is operated, the entity incurs one-tenth of the liability for an asset retirement obligation each year. Application of a systematic and rational allocation method would not preclude that entity from capitalizing and then expensing one-tenth of the asset retirement costs each year