Asset Retirement Obligation
Section ASC, 410-20 of U.S. GAAP gives the guidelines for accounting obligations for retiring tangible long-lived assets (Deloitte, 2018). The asset retirement cost is treated as an expense whose value is determined by the useful value of the asset as an estimate at the property commissioning. Initial recognition of an ARO liability has to be fairly estimated at the acquisition of the property if it is possible to estimate the ARO’s fair value (Ernest Young, 2018, p. 312). In this case, Zimmer Chemical Co. has already determined that the fair value is $2 million, which will be incurred to dismantle and clean up the facility. This cost would, therefore, be passed as an expense at the end of the fifteen years of operation
Under IFRS, section IAS 18 provides the guidelines for accounting for the cost of retiring a plant or equipment and restoring the site where the plant is located. IFRS provides that a plant or equipment includes the initial estimate of the ARO unless it is incurred during the period when the property was used to produce inventory. In this case, the ARO is added to the carrying amount of the inventory (Deloitte, 2018). The initial estimated cost of dismantling and removing an item to restore the site to its original form is one of the components of a property. The corresponding liability obligation may be incurred in two ways (Deloitte, 2018). First, the estimate may be made when the item is acquired. The second way is by using the item during the property’s lifetime for processes other than producing inventory. Section IAS 2 on inventories provides that accounting for the cost of an item at the acquiring stage has the same results as accounting for the cost as a part of the equipment cost at its decommissioning. In this regard, $2 million will be charged to the inventory (Deloitte, 2018).
Deloitte. (2018, July 18). Asset retirement obligations — Key differences between U.S. GAAP and IFRSs. Retrieved from US GAAP Plus: https://www.iasplus.com/en-us/standards/ifrs-usgaap/aro
Ernest Young. (2018). US GAAP/IFRS accounting differences aidentifier tool. New York: EY.
ORDER A PLAGIARISM-FREE PAPER HERE
We’ll write everything from scratch
TOPIC: ASSET RETIREMENT OBLIGATIONS DATABASES: FASB CODIFICATION & EIFRS
Zimmer Chemical Co. has chemical manufacturing facilities around the world. Recently, Zimmer erected a new facility in South Korea at a cost of $48 million and plans to operate the new facility for a period of fifteen years. The South Korean government requires that, at the time Zimmer concludes operations at the facility, Zimmer dismantle the facility and clean up any chemical spills that might have occurred at the location during manufacturing operations. The estimated cost of the dismantling and cleanup is $2 million.
Zimmer’s management has concluded that the accounting for the asset retirement obligation (ARO) could be handled in one of three ways:
- Record the $2 million as an expense at the time of dismantling and cleanup (at the end of the fifteen-year-life of the facility).
- Increase the cost of the asset (manufacturing plant) by $2 million, for a total cost of $50 million.
- Charge the $2 million to inventory, since the ARO should be part of production costs of inventory.
In discussions with the South Korean government, Zimmer is informed that the South Korean manufacturing facility will be required to prepare and report its financial statement in accordance with IFRS. As a result, Zimmer’s managers are attempting to decide the acceptable accounting treatment for the ARO. They assume that the accounting is the same under U.S. GAAP and IFRS. They turn to you, the outside accounting firm representative, for advice.
- Conduct research to determine the appropriate accounting recognition of the ARO under U.S. GAAP and IFRS. Prepare a report to be presented to Zimmer’s management with specific authoritative literature references.
Have a similar assignment? "Place an order for your assignment and have exceptional work written by our team of experts, guaranteeing you A results."