Asset retirement cost definition
/What is Asset Retirement Cost?
An asset retirement cost is any expenditure that is expected to be incurred when an entity takes a long-term asset out of service. This cost is usually associated with the retirement of major assets, such as a nuclear reactor or a coal mine. Examples of these costs are as follows:
Asset removal. This involves taking down an asset and removing the components from the premises.
Site cleanup. This may involve soil sampling to determine the extent of any pollution, as well as treating the soil.
Restoration. The entity may be required to restore the location to how it looked beforehand. For example, it may be necessary to add a layer of topsoil to a mine site.
A business may be required to recognize these cost estimates as a liability, which is known as an asset retirement obligation. The offset to this liability is recorded as an asset, and is depreciated over the remaining life of the underlying asset.
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Example of Asset Retirement Costs
A utility company installs an underground fuel storage tank to support operations at one of its power plants. The tank is considered a long-term asset and is expected to be in use for 30 years. However, environmental regulations require the company to properly remove and decontaminate the tank site once the tank is no longer in service. This includes excavation, disposal of hazardous materials, and restoring the land to its original condition. The company estimates the future cost of these retirement activities to be $100,000.
Even though the actual removal will occur decades later, the utility company must recognize this asset retirement cost at the time the tank is installed. According to accounting standards, the estimated retirement cost is added to the initial value of the asset and recorded as a liability. Over the life of the asset, the company depreciates the capitalized cost and accretes the liability to reflect the passage of time.