FCS is delighted to announce the release of a module of our EZ13 lease accounting software that tracks Asset Retirement Obligations in keeping with FAS 143 (now known as ASC 410-20).

Asset Retirement Obligations (AROs) record the costs involved in retiring an asset, such as the responsibility to remediate an asset (usually real estate) after the user is done with it or to dispose of the asset when disposal involves nontrivial expense. In a leasing context, a common example would be a lease of a gas station, at the end of which the operator is required to remove the underground fuel storage tanks to protect against leaks. Another example is a leased oil well site, which must be remediated when the well is capped. An ARO is an expense which is legally required of the operator at the retirement of the asset, which does not fit into the category of minimum lease payments under FAS 13 (for example, because it is not paid to the lessor; the work might be done by a third party, or even by the operator).

Since the obligation is a performance requirement in the future, the exact cost is normally not known in advance. Instead, the lessee estimates the future cost, typically by determining the current cost and then making an estimate of inflation to determine the assumed future cost. This is then present valued back to the inception of the lease (or installation of the item that creates the obligation, whichever is later), using as the discount rate the lessee's "credit-adjusted risk-free rate," to determine the initial ARO. The ARO is set up as an asset and liability. The asset is depreciated over the remaining term of the lease; the liability is accreted (liability is added, using the interest method) such that at the end of the lease, the total liability is equal to the originally estimated future cost. Once the asset is actually retired, the ARO is removed from the books, the actual expenses involved in retiring the asset are recognized, and a gain or loss is recognized for the difference.

The life of the tank cannot extend past the life of your lease, so you must assume retirement of the tank after 35 years. The assumed future cost (after inflation) of removing the tank in 35 years is 15,000 * (1 + .025) ^ 35 = 35,598.08. The present value of that is 35,598.08 / (1 + .08) ^ 35 = 2,407.66. This is your initial ARO.

EZ13 now provides ARO accounting. Multiple AROs for a single lease can be reported (with varying probability estimates). Reports include accretion/depreciation tables, rollforwards, income statement and balance sheet activity, and journal entries. Like all EZ13 reports, these can be output to spreadsheet files for convenient transfer to other systems.

The trial version of EZ13 currently on our website does not include ARO. For a trial with ARO, please contact us (see left).