Sample Essay

The asset is thus reduced over the life of the issue as depreciation expense over the life of the asset while the liability undergoes an accretion expense, representing movement of the ARO liability towards its estimated future value. At the point of maturity, the asset is completely depreciated while the liability is equal to the complete amount of the obligation due for cleanup or taking the asset back to its original state.

The asset retirement obligation is important because if it is not recognized, assets on the balance sheet would be overrepresented. This is because at maturity, the asset will show a value equal to the cost of cleaning up that will be required and hence at the end this value will drop immediately, not representing the balance sheet or the position of the asset as it truly is. This gives a false presentation.

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