Asset Retirement Obligation (ARO) accounting guidelines are laid out by the SFAS 143, which is Topic 410-20 in FASB Accounting Standards Codification, and by IFRS IAS 37. ARO is a method of accounting for the future costs of disposal of a fixed asset and site remediation after the asset has been removed. The ARO liability must be recognized during the period in which it was incurred—at acquisition or construction—and the total ARO liability is equivalent to the total present value of the expected remediation and retirement costs.
So how is ARO accounted for? An asset that is equal to the initial liability must be added onto the balance sheet and then depreciated over the life of the asset. This increases both the assets and the liabilities but over time the total expected cost is recognized and the accrual steadily increases on a compounded basis.
Who should be concerned with Asset Retirement Obligation accounting guidelines? Organizations in asset-intensive industries such as utilities, telecom, oil & gas, retail, and mining find the ARO4000 solution most beneficial as there are oftentimes hefty costs involved with site remediation and costs associated with disposal, such as decontaminating a nuclear power plant or removing fuel tanks. ARO accounting does not however apply to unplanned cleanup costs from an accident.