ARO???

[delhirocks]

Iam at SS#9 and going over Asset Retirement Obligations, If I understand it correctly, ARO is calculated by taking the PV of the expected future cash outflows to restore the site after the company is done using the asset.

I can't get my head around the following concepts

Why do we add the amount of ARO to the asset?
Can someone conceptually explain the accretion process?
What happens at period n (end of asset life)?

Thanks for your help...



Edited 1 time(s). Last edit at Saturday, June 16, 2007 at 05:06PM by delhirocks.

 

[patkeenan]

If i remember correctly, I believe you add the PV of the ARO to the asset and then you depreciate it over the life of the asset. So it is a way of allocating one big outlay at the end of the assets life over the life of the asset. Think of it as a capital expenditure, you recognize the entire amount as an asset and then depreciate it (even though you actually pay out the cash when you acquire the asset)

 

[oagra]

The PV of the ARO is added to the assets book value and depreciated over its life time. Its just an extra cost of the asset, just like delivery, installation, etc...

 

[delhirocks]

great..thx oagra, Pat. I think I understand the accretion process as well now, CFAI texts had a great explanation