What is accretion expense asset retirement obligation?

Accretion expense is the cost associated with an increase in a liability’s carrying value over time. Generally, accretion is recognized as an operating expense in the statement of income and often associated with an asset retirement obligation.

What type of account is asset retirement obligation?

liability
An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. The liability is commonly a legal requirement to return a site to its previous condition.

Where does accretion expense go on an income statement?

Accretion expense is the cost associated with an increase in a liability’s carrying value over time. Generally, accretion is recognized as an operating expense in the statement of income and often associated with an asset retirement obligation.

How does accounting for asset retirement obligation work?

Accounting for Asset Retirement obligation requires to recognize the present value of the expected retirement expenses to be recognized as a liability and fixed asset. The interest rate used for discounting is the risk-free rate adjusted for the effect of the entity’s credit standing.

What is the cost of an asset retirement obligation ( Aro )?

For example, if you hold a 40-year lease on a piece of land, the cost of the ARO today is $10,000, and you expect inflation to run at 2% per year, then: The $22,080.40 is the approximate fair value that a company will need to spend when retiring the asset in 40 years.

How to calculate Aro as an accretion expense?

Note any increase in the carrying amount of the ARO liability as an accretion expense by multiplying the beginning liability by the credit-adjusted risk-free rate for when the liability was first measured. Note whether liability revisions are trending upward, then discount them at the current credit-adjusted risk-free rate.