Section 3110: Asset Retirement Obligations

ASPE: 3110

An asset retirement obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset that an entity is required to settle as a result of an
- existing or enacted law, statute, ordinance or
- written or oral contract or
- by the doctrine of promissory estoppel (reliance on a promise is reasonable and foreseeable; and damage would result to the party promised if promise not enforced)
Retirement of a long-lived asset is the permanent removal from service by sale, abandonment, recycling or disposal in some other manner

A liability is recognized for the ARO when a reasonable estimate of the amount of the obligation can be made
The ARO must also meet the definition of a liability
- they embody a duty to others that entails yielding of economic benefits
- little or no discretion to avoid it; and
- event obligating the entity has already occurred
Therefore, if the obligation is to clean up a site, the ARO is recorded as the contamination occurs

The amount recognized as an ARO shall be the best estimate of the cost required to settle the present obligation at the balance sheet date
- The amount entity would pay to settle the obligation at the balance sheet date
- This best estimate is usually the present value of the future cash outflows
The estimate is made using the technology currently available (unless the development of new technology is supported by sufficient objective evidence)
New legislation is taken into account when sufficient objective evidence exists that the legislation is virtually certain to be enacted
ARO is reviewed at each balance sheet and adjusted to reflect the current best estimate

When the liability for an ARO is recognized, increase the carrying amount of the related long-lived asset by the same amount (cr. Liability, dr. long-lived assets)
The ARO that is recognized as a long-lived asset is amortized over the useful life of that long-lived asset
The changes to the liability recognized due to the passage of time (i.e. from discounting) is recognized as accretion expense on the income statement (it is not classified as interest expense)
The changes to the liability recognized due to changes in the cash flows are adjusted to the liability and the long-term asset the ARO applies to

ARO Is covered under IAS 37 (Provisions) and IAS 16 (PPE)
Under IFRS
- ARO can arise due to constructive obligations (in addition to legal obligations)
- Accretion expense if called Interest expense under IFRS