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Asset Retirement Obligation

Initially Accounting for an Asset Retirement Obligation

To account for an asset retirement obligation, you should recognize the fair value of the liability  in the period incurred, if you can make a reasonable estimate of its fair value. You should be able to make such an estimate if any of these conditions exist:

• The fair value of the obligation is clearly included in the acquisition price of an asset.
• There is an active market for transferring the obligation.
• There is sufficient information available to apply an expected present value method.

If you cannot make such an estimate, then recognize the liability as soon thereafter as you can make such an estimate.

If you acquire an asset having an existing asset retirement obligation, then recognize the liability at the asset acquisition date.

When you initially recognize an asset retirement obligation, you should also capitalize its cost as an increase in the carrying amount of the related asset.

If you incur an additional asset retirement obligation in a subsequent period, then account for it as an additional layer of the original liability. Measure each asset retirement obligation layer at its fair value, and use it to alter the carrying amount of the asset. If you make an upward adjustment in the amount of undiscounted estimated cash flows, then discount these changes at the current risk-adjusted risk-free rate. If you make a downward adjustment in the amount of undiscounted estimated cash flows, then discount these changes using the credit-adjusted risk-free rate existing when you originally recognized the obligation.

Determining the Fair Value of an Asset Retirement Obligation

The only allowable method for determining the fair value of an asset retirement obligation is the expected present value technique, using a discount rate that is based on a credit-adjusted risk-free rate. You can infer the appropriate rate of interest from the observable rate of interest of some other liability having cash flow characteristics similar to those of the liability being measured.

Charging an Asset Retirement Obligation to Expense

You should use a systematic method for allocating the asset retirement obligation to expense over the useful life of the associated asset, by applying an interest method of allocation to the amount of the liability, using the interest rate you originally used when you initially measured the obligation. In each period, recognize this expense as “accretion expense.” Accretion expense is not considered to be interest expense.

In addition, in each succeeding period, you should recognize period-to-period changes in the asset retirement obligation liability resulting from revisions to the timing or amount of the original estimate of undiscounted cash flows.

If, over time, it becomes apparent that no retirement activities will be required, then you should reduce both the liability and the remaining unamortized asset retirement obligation to zero.