To: Professor Hughes
From: Zoe He, Chao Ma
Date: November 2, 2014
Topic: Potential Asset Retirement Obligation Liability of ARO
The major purpose of this memo is to help identify potential asset retirement obligation liabilities when ARO sells its 12 warehouses, which contain asbestos, in different situations. After studying related materials in ASC 410 rules, we have major conclusions summarized in this memo. In the situation that ARO plans to sell its 10 warehouses containing asbestos with special asbestos handling and removal laws, since the warehouses are neither demolished nor significantly renovated before this disposal, the laws are not applicable to this situation, meaning that ARO doesn’t have the obligation to remove the asbestos. (另一段？） However, this doesn’t mean that ARO have no obligations when selling them. In accordance with ASC 410-20-25-4, if a tangible long-lived asset with an existing asset retirement obligation is acquired, a liability for that obligation shall be recognized at the asset’s acquisition date as if that obligation were incurred on that date. Thus, when ARO acquired the warehouses, it debited “Buildings” and credited “Asset Retirement Obligations” (ASC 410-20-25-5) to recognize the obligation. Still in ASC 410-20-25-4 we find this rule: “An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made”. Because ARO plans to sell the 10 warehouses within 5 years, it needs to recognize the estimated fair value (ASC 410-20-25-6) of the incurred asset retirement obligations annually between the acquisition date and the selling date and use effective-interest-method to confirm the interest expense and depreciation expenses. Finally ARO may debit “Asset Retirement Obligation” and credit “Buildings” (or other entries according to the contract with the buyer) when selling the warehouses. That’s the potential...
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