Asset Retirement Obligations accounting software


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). AROs apply equally to owned assets; if an owned gas station is closed, for instance, the fuel tanks must be removed.

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.



Consider a gas station with a 40 year lease. Five years after the lease begins, a new underground storage tank is installed. The tank has an estimated useful life of 40 years. The current cost to remove a tank is $15,000. You estimate inflation over the next 40 years at 2.5% per year. Your credit-adjusted risk-free borrowing rate is 8%.

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.

Sample ARO journal entries, first year
Account Debit Credit
 Asset retirement cost (ARC) 2,407.66  
     Asset retirement obligation   2,407.66
 (Initial booking)    
 Accretion expense (2,407.66 * 8%)
      Asset retirement obligation
 (Annual ARO accretion)    
 Depreciation expense (2,407.66 / 35)
      ARC accumulated depreciation
 (Annual depreciation)    
Sample ARO journal entries, second year
Account Debit Credit
Accretion expense ( (2,407.66 + 192.61) * 8%)
      Asset retirement obligation
 (Annual ARO accretion)    
 Depreciation expense
      ARC accumulated depreciation
 (Annual depreciation)    

The obligation continues to accrete at compounded amounts until at the end of the useful life of the tank, the total ARO on your balance sheet is 35,598.08, while the ARC asset has fully depreciated to zero. You then hire a contractor to dig up the tank, calculating the expenses involved. If the final cost is 34,000:

Sample ARO journal entries, end of asset life
Account Debit Credit
 Asset retirement obligation 35,598.08  
 ARC accumulated depreciation
     Cash (for services rendered)   34,000.00
     Asset retirement cost (ARC)
     Gain on termination
 (Retirement of asset: tank removal)    


FCS offers ARO accounting in two applications: EZ ARO, for ARO accounting only, and EZ13 for combined lease & ARO accounting. Features of the FCS ARO solution include:

  • Multiple AROs per lease/property
  • AROs for owned assets
  • Varying probability estimates (for obligations of uncertain requirement or uncertain cost)
  • Start and end date defined by individual ARO, not by lease/property
  • Inflation-based calculation of future cost to satisfy ARO; ability to change inflation rate at any point during life of ARO
  • Present-valued calculation of initial ARO and accretion during life
  • Recalculation when estimates of cost or termination date change
  • Delayed booking with catch-up accounting
  • Early terminations and transfers
  • For IFRS users: automatic recalculation of ARO when credit-adjusted risk-free rate changes (table-driven, with optionally varying rates for different groups of leases)
  • Upload additions and changes from spreadsheet
  • Determination of when ARO requirements compel exercise of lease options due to economic penalty concept (EZ13 only)
  • Reports (these can be output to spreadsheet files for convenient transfer to other systems):
    • Accretion/depreciation tables (by lease/asset or by individual ARO)
    • Roll forward for a fiscal period (by lease/asset or by individual ARO)
    • Income statement and balance sheet activity
    • Journal entries (with account numbers for G/L upload)
    • Notice dates (reminders)
    • Current value (asset, liability, and inflation-adjusted expected cost)
    • Listing of all input data

Test out our ARO reporting in the trial version of either EZ13 (with lease accounting) or EZ ARO, which you may download for free.


EZ ARO for ARO-only accounting is priced the same as a regular EZ13 license, in three editions:

Standard Edition: Unlimited number of properties and databases: $3495 for a single-computer license. Additional seat licenses available for $1250 each.

Optional: SQL Server connection: $2500 (any number of seats).

Lite Edition: One database: $1095 for up to 50 properties/150 AROs, $1995 for 100 properties/300 AROs. (The Lite Edition does not include account numbers, and allows selecting properties for reporting subgroups only based on the beginning characters of the property number; report periods can be full months, quarters, years, or 28 or 35 days, not variable lengths, but can start any day.)
Mini Edition: Same limitations as Lite Edition: $275 for 10 properties/30 AROs, $545 for 20 properties/60 AROs, $795 for 30 properties/90 AROs. (Download only; printed documentation available at extra cost.)
Sales tax extra in CT and PA. International orders may have additional taxes and duties; all prices in US dollars.
EZ ARO can be purchased by check, money order, or credit card (MasterCard, Visa, or Discover); purchase orders accepted (except for Mini Edition). Order online, send us an order form, or call (203) 652-1375. Price includes a comprehensive manual describing both the FAS 143 and IAS 37 standards and usage of EZ ARO. Free (toll call) technical support, for both program usage and ARO accounting assistance, as well as program updates, are provided for one full year after purchase. Ongoing support contracts are available.

If you want both lease and ARO accounting, the additional cost for EZ13 with the the ARO module is:

  • Standard Edition: $2000 for initial license, $500 for each additional seat license
  • Lite & Mini Edition: 50% increase on the regular license price

Use the EZ13 online catalog or order form to purchase combined lease and ARO accounting.

Return to FCS home page for more information on how we can help you with your lease & ARO accounting needs, now and into the future.


FCS offers cost-effective ARO accounting software, available as either the standalone EZ ARO or as a module of our EZ13 lease accounting software. Either tracks Asset Retirement Obligations in keeping with FAS 143 (now known as ASC 410-20). Our ARO software is also compatible with IAS 37 accounting for provisions for IFRS (international accounting) users, including the ability to recalculate provisions when rates change.