AROs :(

[bsc1280]

Shweser FSA books says something about AROs (Asset retirement obligations) that firms should add the PV of teh obligation to its asset at teh start of the project and then also accrue interested expense and liabilitiesa sthe years go by.

I can not digest this. Can someone please help about when and what to add to assets, liabilites and income statement for these.

Thanksssss

 

[CFAMontreal]

read this http://www.nysscpa.org/cpajournal/2005/1205/essentials/p30.htm. it helped me a lot when I was studying this

 

[CFAHouston]

ARO really didn't appear on the test, but here how it works:

ARO is an obligation company would have to pay once they finish or abandon a project. For example, an oil company drilling a well on governments land. They would have to return that land in its original condition once well is abandoned. This cost would come out of ARO.

Since this cost is associated with new asset, you take the PV of ARO expense and add it to the asset. As time goes by, you have to take accrue interest on this, called accretion expense which is liab value * interest.

Remember, ARO lowers Asset turnover & ROA. PV of the ARO is added to the balance sheet as an asset and liability. Depreciation will be higher, so NI will be lower. Also, every year, liab will get higher due to Accretion expense, meaning NI will get lower and lower.

Hope that makes sense, rather than me confusing you. I wouldn't emphasize too much on this for the exam.