Asset Retirement Obligation

Definition: Asset Retirement Obligation in Accounting refers to the legal obligation that a given company has to maintain and replace equipment and equipment components and clean up hazardous materials at or shortly after the asset’s retirement. Asset retirement obligations are unique because they are usually tied directly to an expected asset’s lifetime performance.

The objective of the ARO is to ensure that the company is financially responsible for the long-term physical health and safety of assets it has acquired. These types of obligations are often associated with manufacturing, construction, or exploration.

It’s a common misconception that companies independently audit their asset management procedures. Most states have regulations that require at least periodic audits by an independent firm. Incorporating an ARO can help give you clarity on how your company is managing its financial assets. The goal of an ARO is to ensure that the investment choices made by an organization are sound and sustainable.

Removing hazardous material from the environment is generally done under an ARO. For environmental remediation purposes, an ARO is commonly applied when an activity site, such as a former power plant, is being cleaned up and the potential for environmental contamination is high.

A business may have assets that it can legally invest in a variety of ways. These assets could include money, real estate, inventory, or even business assets such as equipment or machinery. Businesses typically hire a CPA to help calculate asset retirement obligations. An agent, firm, or professional responsible for auditing financial records and maintaining the integrity of a company’s books of account is an Asset Retirement Obligator (ART).

AROs are not typically triggered by an unanticipated expense, such as a natural disaster or an honest mistake; instead, they are triggered by events such as a natural disaster or a financial mistake that is so large that it causes home loss equity for which you are not responsible. The use of AROs has increased as both companies and employees have become more accustomed to a shorter tenure with an organization. There may be unique legal requirements or restrictions that impact how an entity computes its balance sheet. AROs balance sheet usually includes information on owner disposition, level of borrowing, short-term loans receivable, long-term debt service, and cash flow from operations.