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What is an ARO?

For accounting and financial purposes, ARO stands for “asset retirement obligation”. ARO’s are a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event, the occurrence of which may not be within the control of the entity burdened by the obligation.

Common examples of ARO’s include:


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  • How is an asset retirement obligation recorded in the financial statements?

    ARO’s are a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event, the occurrence of which may not be within the control of the entity burdened by the obligation. ARO’s are typically recorded as a non-current liability unless the company expects they will have to settle the ARO within the next 12 months.

  • How is an asset retirement obligation measured?

    Under U.S. GAAP, the initial liability is recorded at the estimated fair value to remediate the liability. If the expected cash flow approach is used to estimate the fair value of the ARO, the company must use a credit-adjusted, risk-free rate. Under IFRS, the initial measurement is based on management’s estimate to remediate the liability. A pre-tax discount rate that reflects the current assessment of the risks specific to the liability is used to discount the liability.

  • What is a contingent liability and where do they usually arise from?

    A contingent liability is when the company could have a potential loss pending the outcome of a future event. There are plenty rules around how the contingent liability should be recorded or disclosed, but its more important to understand what areas typically generate contingent liabilities. Contingent liabilities that may arise may be from any of the following: