4.2 Overview of ASC 410-20
ASC 410-20 provides the relevant guidance on accounting for AROs and generally applies to “[l]egal
obligations associated with the retirement of a tangible long-lived asset that result from the acquisition,
construction, or development and (or) the normal operation of a long-lived asset” (ASC 410-20-15-2).
An ARO is recognized when incurred if a reasonable estimate of fair value can be made, and it should
be initially measured at fair value. If its fair value cannot be reasonably estimated, the ARO should be
recognized when a reasonable estimate of fair value can be made. Uncertainty about the timing of
settlement of the ARO does not affect ARO recognition but will affect measurement of the ARO.
When initially recognizing an ARO, an entity should capitalize the ARC by
increasing the long-lived asset’s carrying value
by the same amount as the ARO. Subsequently,
changes to the ARO should be recognized for
changes due to the passage of time (accretion of
the ARO) and revisions to either the timing or the
amount of the original estimate of cash flows used
for measuring the fair value of the liability. The
entity should recognize changes due to the passage
of time as an operating expense and an increase to
the ARO by applying an interest method allocation
to the ARO at the beginning of the period, using
the credit-adjusted risk-free rate at the time the
initial ARO was recognized and measured. Changes
in subsequent measurement of the ARO resulting
from revisions to the estimated timing or amount
of cash flows should be recognized as an increase
or decrease in the carrying amount of the ARO and
the related long-lived asset. See Chapter
5 for additional industry
considerations (e.g., the asset that is increased
for regulated utilities). The entity should
measure increases in estimated cash flows by using
the current credit-adjusted risk-free rate
(creating an additional “layer” of the ARO), and
it should measure decreases in estimated cash
flows by using the credit-adjusted risk-free rate
that existed when the ARO was initially
recognized. In addition, the entity should
subsequently recognize as expense (depreciate) the
amount capitalized as part of the cost of the
related long-lived asset by using a systematic and
rational method over the long-lived asset’s
economic useful life.
Application of the guidance in ASC 410-20 can be complex and requires
significant management estimates and judgment. The next sections further discuss the
scope of ASC 410-20 as well as the initial and subsequent recognition and
measurement provisions of this guidance, including some of the practical challenges
that entities may encounter in applying those provisions.