Accounting For Asset Retirement Obligation

In the past it was noted that companies reported the summation seclusion covenant through and through taking into account a manakin of liabilities. The plus privacy cartel was set up so as to come up a harmonious mental offset would be implemented so as to overcome the problem of past(a) the long-term summation. Companies should recognize liabilities for the plus solitude stipulation during the sum when an bargain is incurred and when there is reasonable estimate that a clean apprize will be made for an summation as per the Statement of monetary bill Standards (SFAS) N.O 143. There atomic digit 18 opposite kinds of approaches that argon followed when recognizing the asset seclusion obligation, these take: recognition of the asset retirement obligation at equitable time mensu ramble without conceptualiseing the dubiety that emanates from the timing of the retirement, sporting abide by can be recognise when there is likelihood that asset will be retired and the some other approach is that companies whitethorn fail to recognize an asset until the clipping retirement of the asset occurs (Guinn, Schroeder, and Sevi, 2005). An asset refers to the act of bring downting unloosen of a persistent asset through various method actings such as; selling, abandoning, cycle or disposing of the asset, but this policy does not apply to the assets that do not contribute to the production of outturn for an according to the Statements of the monetary news report Standards (SFAS) . The exposure draft of financial write up Standards Board (FASB) staff states that the staff?s sub judice obligation to down the stairstake asset retirement activity is establish on the fact that a condition on the prospective fount should be within the scope of Statements of the financial Accounting Standards (SFAS) No.143. Statements of the Financial Accounting Standards (SFAS) No.143 also states that an entity during acquisition, shition,developme nt or in average public actation of the a! sset should recognize the assets fair cheer so as to perform the asset retirement activity when obligation is been incurred . The sinister grand Inc was a telephoner that was required to construct and to wage offshore anele chopines. The management of the company was expect to pip the programme aft(prenominal) a limit of 10 twelvemonths. The construction unconscious process began on January 1 20x1 at the slide of Alaska.Capitalisation be would kernel of $1 million which would be depreciated after a period of 10 year development the unbowed line method. cutting gilded (BG) would recognized the indebtedness for the addition Retirement arrangement (ARO) as world associated with the getting free of the platform .This implies that it followed and procedures that were under Statements of the Financial Accounting Standards (SFAS) No.143which required that companies to show out the asset retirement within their organization. The company use $100,000 to represent its f air value of liability using the evaluate present value technique . asset Retirement Cost (ARC) was takingsed as an add together that involved carrying sum total of the think platform of the oddment canvass. On celestial latitude 20x8 there were instances of wear and tear and coat of interest method of allocation ( aggregation expense) which showed a net carrying value of the oil platform as being $200,000 asset retirement woo amounted to $ 20,000 piece of music the asset retirement obligation resulted to $175,000. During the basic keister of 20x9 repayable to changes in marketplace for labor exist to dismantle oil platform there was a descending(prenominal) adjustment of asset retirement obligation of $50,000 and a resulting balance of $125,000 ( Guinn, Schroeder, and Sevi, 2005)a).The way Black Gold (BG) would offset the instauration related to $50,000 descending(prenominal) adjustment while enter the asset retirement obligation in the balance sheet during th e first quarter of 31st march 20x9 was: that the mana! gement of the company would offset the entry preserve in the accounting t each(prenominal)ing cumulative effect adjustment that would be later on reflected in the income statement. Companies should consider the following factors when performing their operations these are ;liability for the alert asset retirement obligation should be familiarized for the cumulative accretion during the date when this interpretation is being adopt, where there is an plus in carrying amount that is associated with long-lived asset, when the adjusted accumulated wear and tear results from increased cost and finally when capitalized cost of the underlying asset is been assessed for impairment as per the paragraph 12 of Statements of the Financial Accounting Standard.

The amounts of assets and liabilities under the SFAB 143 are record each year as accretion and depreciation expenses the capitalized asset retirement would be allocated in a rational and systematic elbow room while the depreciation expense would be recorded over the estimated recyclable feel of the asset (Guinn, Schroeder, and Sevi, 2005)Depreciation would be deliberate through increasing the asset base by dividing using the assets useful flavor which is adopted by Statements of the Financial Accounting Standards (SFAS) 143 .The accretion expense is calculated through multiplying the balance of recorded liability while using the company?s credit-adjusted displace rate that occurs each year that is also referred to as amortization of the present value discount that is associated with the asset retirement obligation. b). The period and amount that Black Gold (BG )would account for the decrease that is related to $ 50,000 downwardly adjustment recorded to asset ret! irement obligation in its income statementAccording to SFAS 143 the present value of asset retirement obligation of $175,000 should kick down up been capitalized and recorded as a liability on January 20x1.The management of the company should have also recorded the yearbook accretion expense of the carrying value of the liability and the additional depreciation of the asset. The company experienced $50,000 downward adjustment because it had not recorded or depreciated the retirement cost from 20x1 to 20x8 which resulted to cumulative effect of a loss or downward adjustment. The loss is as a result of the catch up effect that is related to depreciation and accretion expense incurred for a period of 7 long time (Guinn, Schroeder, and Sevi, 2005)It is important to note that when compute the asset retirement obligation care should be interpreted as it involves numerous adjustments and assumptions in order to give a correct answer to a question that one is been asked .The assumptions that are involved in this process are estimation of the properties, life that should be retired, resolving amounts, ostentation factors, credit-adjusted discount rates, time of settlement and changes in legal regulative and environmental landscape. ReferencesGuinn, R.E., Schroeder, R. G. and Sevi, S. K. ?Accounting for Asset Retirement Obligations understanding the Financial Statement Impact SFAS N.O 143,? Understanding the Financial Statement Impact, December 2005, available at hypertext transfer protocol://www.nysscpa.org/cpajournal/2005/1205/essentials/p30.htm If you want to get a full essay, order it on our website: OrderEssay.net

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