An asset retirement obligation is recorded at the present value of what retirement will cost. Every year that passes, the settlement date is closer, so the present value is higher.
That increase is accretion expense. Compute it by applying the original measurement rate to the opening liability. It is an operating expense rather than interest expense, even though the arithmetic resembles interest.
The entry debits accretion expense and credits the obligation. Nothing touches the asset. That is the part worth holding onto. The original recognition created two things: a liability, and a capitalized retirement cost added to the asset. They move independently from then on. The liability grows by accretion until it equals the amount actually paid. The capitalized cost is depreciated or depleted over the asset's life like any other component of it.
Two expenses therefore appear every year from one original event, and a student who nets them will get both the liability and the asset wrong.
Read the two authority paths separately
Under ASC 410-20-35-5, the opening obligation and an interest allocation determine the time-based increase. Paragraph 35-2 places the associated retirement cost on its own useful-life allocation path. These requirements apply to separate balances. ASC 360-10-35-4 provides the broader allocation context for productive assets.
Control the rollforward
Begin with the unrounded opening liability. Apply the supported accretion rate, then show new obligations, cash-flow revisions, settlements, and the ending balance on distinct rows. Reconcile depreciation or depletion in the asset records. Do not use either expense to force the other schedule to tie.
Use the Linden Peak retirement example before completing the accretion comparison task.
Put the concept to work
Understand this concept
- Explain what accretion expense measures and why it is separate from the depreciation of the retirement cost capitalized into the asset.
Apply this concept
- Compute accretion expense for a period and roll an asset retirement obligation forward to its settlement amount, writing the entry each year requires.
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Build on these ideas
- Accretion expense — Understand
To apply this concept: Required. Rolling the liability forward requires knowing what accretion measures.
- Asset retirement cost — Understand
To understand this concept: Required. The capitalized cost is the other half of the original entry and is depreciated separately.
- Asset retirement obligation — Apply
To apply this concept: Required. The rollforward is of that obligation.
Show 1 more prerequisites
- Asset retirement obligation — Understand
To understand this concept: Required. Accretion is the growth of that liability.
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Use this idea next
- Accretion expense — Apply
Required level here: understand. Required. Rolling the liability forward requires knowing what accretion measures.