Wednesday, 23 Jun 2021
Many small business owners in Melbourne are not aware of the term Asset Retirement Obligation (ARO), but it is a significant part of accounting and bookkeeping. It is a legal obligation related to the retirement of tangible and long-term assets.
It is utilised when the business has to remove all the equipment or clean up hazardous materials from the leased site to return it to its original condition. Bookkeepers in Melbourne help businesses to comply with the ARO liability during the timeframe when it was incurred.
The ARO should be a part of the financial statements of the business as it provides a comprehensive and accurate view of the company’s overall value. It is relevant for businesses in Melbourne that have to set up infrastructure on a leased property and demolish it before the end of the lease.
As stated above, ARO is a legal requirement that is applicable to businesses that install an infrastructure for operating from the premises. Companies that are covered by the International Financial Reporting Standards (IFRS) apply International Accounting Standard 37 to AROs.
At the time of the construction of the site, the ARO liability should be accounted for at the current value of the estimated asset retirement or remediation costs by the bookkeeper. An example of a business that needs setting up of infrastructure on a leased site is a company that requires fuel for production.
They need to build fuel tanks on the property that must be dismantled at the time of the end of the lease. Similarly, a company using chemicals for production of goods needs to remove the toxic substances before moving out. The expenses incurred in the restoration of the property at the end of the lease is managed by ARO.
It is applicable to the removal of hazardous materials as well. Thus, it is predominantly used by businesses in Melbourne that are involved in oil drilling, nuclear plants, power plants, and mining.
The long-term asset becomes retired after its elimination from the site and the property is brought back to its original condition. However, it is not applicable to the clean-up required in case of spillage on the site.
The ARO liability is recognised by the bookkeeper in the term it is incurred, which begins at the time of the construction or acquisition. It is needed to get a fair value of a legal obligation so that the current value of the business in Melbourne is presented accurately with credibility. Bookkeepers utilise ARO to prepare for future problems.
ARO is incurred when a long-term asset is installed with the intention of removal in the future. Bookkeepers create a discounted liability on the balance sheet with the corresponding asset as soon as the construction begins.
There is a fixed increase in the liability over time so that it matches the estimated obligation at the end of the asset’s life term. To calculate it correctly, bookkeeping companies find out the fair value of the incurred liability.
However, if a company in Melbourne is unable to identify the fair value of the liability, it must be determined when the fair value is available. It is better to find the fair value as quickly as possible as it is helpful for the stakeholders since these are high-value liabilities.
Bookkeeping involves accounting for ARO, which covers identifying the current value of the estimated retirement cost to be viewed as a liability and fixed asset. Discounting uses risk-free interest rate that is adjusted for the effect of the Melbourne-based company’s credit holding.
The risk-free rate is used for increasing the liability annually and is calculated at regular intervals for the alterations in the estimated cost. The rise in the liability is identified as accretion expense on the profit and loss statement, which is determined by multiplying liability with the risk-free rate.
The alterations in the estimated costs are adjusted in the liability balance during the regular assessments. The long-term asset recognised on the balance sheet gets depreciated and the cost is showcased in the profit and loss statement.
AROs are essentially utilised by bookkeepers in Melbourne who are employed with companies operating in the oil and gas sector or are dealing with hazardous chemicals. The obligation is necessary for identifying accurate financial statements of such businesses.