Certain assets require special handling upon their withdrawal from service. The cost is called the asset retirement obligation or ARO. Everything will have to be accounted for from the moment of acquisition until their end of life. ARO accounting must be done carefully by skillful personnel who are well-trained in this area of finance. They will often use dedicated software to automate the process especially for cases in which periodic recalculation is required to reflect current conditions.
Asset retirement obligation accounting is a complex process but it cannot be ignored or avoided because it is extremely useful to companies. By diligently going through it for every vital asset, the following gains are achieved:
Anticipate Future Costs
The cost of retirement can be quite massive for a number of items and definitely significant for others. Failing to account for future expenses could lead to a shock in the annual budget that will take time to recover from. Anticipate the amount required to prevent unwanted surprises. In fact, it should factor into the decision to acquire the item in the first place.
Those that are designed to carry toxic substances should get particular focus. These are tricky to handle and as such will need expert treatment. This means a lot of money will have to be paid to get things done. Look into the current averages and extrapolate using historical inflation rates.
Comply with Legal Obligations
ARO accounting is not an optional matter in some cases. Reporting standards at the international level require strict provisions about the methods that must be used for the calculations. The numbers are expected to appear in annual reports as part of providing a clear and transparent picture of the company’s financial status. Regulators will also check whether those who have sensitive assets have the means to dispose of it properly if they need to and have taken the appropriate measures to ensure this. It is part of their responsibility. Anything less may expose the public to unacceptable risks.
Guarantee Safety
Safety is paramount. In many ways, it is the concern for the well-being of everyone concerned that the assets in question are getting such careful treatment. Oil tanks, for example, may begin to weaken to unacceptable levels after a number of years. They can leak their content into their environment causing catastrophic damage to the ecological system and the health of those located in the immediate vicinity.
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