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ARO: Is an asset retirement obligation , it 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.
ARO., is recorded in accounting system as follows:
I- Up Initiating:
Dr. Asset ( Face Value )
Cr. Asset Retirement Obligations ( Face Value )
II- To Record Interest:
Dr. Interest Expense
Cr. Asset Retirement Obligations
III- Upon Payment:
Dr. Asset Retirement Obligations
Cr. Cash.
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. A business should recognize the fair value of an ARO when it incurs the liability and if it can make a reasonable estimate of the fair value of the ARO. If a fair value is not initially obtainable, recognize the ARO at a later date, when the fair value becomes available.If a company acquires a fixed asset to which an ARO is attached, recognize a liability for the ARO as of the fixed asset acquisition date. Recognizing this liability as soon as possible gives the readers of a company's financial statements a better grasp of the true state of its obligations, especially since ARO liabilities can be quite large. Source: https://www.accountingtools.com/articles//5/5/asset-retirement-obligation
