Fasb Codification Case

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FASB Codification/ARO Case

1. According to FASB the asset retirement obligation should be recorded in the period in which the liability meets FASB’s definition of a “probable future sacrifice of economic benefits arising from a present obligation,” and in which its amount can be reasonably measured. Uncertainty with respect to the timing or method of settlement that is conditional on future occurrences does not affect the recognition of the liability but may be factored into its measurement. The obligation is to be recorded at fair value, which represents the amount that a third party would require to assume the liability. If an active market for these obligations does not exist, the company must use the expected present value technique outlined in Statement of Financial Accounting Concepts 7, Using Cash Flow Information and Present Value in Accounting, which results in measuring the asset’s and related liability’s present value by using each company’s credit-adjusted rate. In this case risk-free interest rate of 9% will be used.

2. Capitalized cost of the coal mine is determined as:
Purchase of rights to operate a coal mine 15,000,000
Development costs 6,000,000
Restoration costs
3,000,000 x 20% = 600,000
4,000,000 x 30% = 1,200,000
5,000,000 x 25% = 1,250,000
6,000,000 x 25% = 1,500,000
4,550,000
x 0.77218 (PV of $1, n = 3, i = 9%)
3,513,419
Total cost24,513,419

3. Journal entry to record the acquisition costs of the mine is Coal mine24,513,419
Cash21,000,000
Asset retirement liability 3,513,419

4. FASB says that accretion expense is calculated by multiplying the beginning of the period liability balance (3,513,419) by the credit adjusted risk-free rate (9%) that existed when the liability was first measured. So, in 2013 the company will record $316,208 of accretion expense in its income statement. The liability on the other hand should be adjusted for accretion prior to adjusting for revisions...
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