An internal closure plan is not automatically a legal obligation. Recognition starts with the applicable law, regulation, contract, obligating event, and unit of account. The Linden Peak exercise stipulates those facts so learners can work the measurement sequence without pretending to provide legal advice.
If settlement in five years is $400,000 with 70% probability or $520,000 with 30% probability, the probability-weighted undiscounted cash flow is $436,000. Its present value at the supplied compatible rate becomes the initial liability. The same amount is added to the related asset as retirement cost. After initial recognition, accretion increases the liability. Depreciation or depletion allocates the asset cost but does not reduce the liability. Revisions and final settlement must remain visible in a rollforward.
Probabilities must be mutually exclusive and sum to one. Timing, cash-flow units, rates, and current guidance must align. The arithmetic cannot validate the legal premise or engineering scope.
ASC 410-20-25-4 sets the recognition timing when a reasonable fair-value estimate can be made. Paragraph 30-1 addresses expected present value and the credit-adjusted risk-free rate. Paragraph 35-3 separates passage-of-time changes from estimate revisions. A supplied classroom rate lets the learner calculate; it is not evidence that a reporting entity selected the proper rate.
Start with the Linden Peak worked example, then measure the independent four-year retirement scenario.
Put the concept to work
Understand this concept
- Separate the legal-obligation and obligating-event analysis from probability-weighted cash-flow measurement, accretion, revision, and settlement.
Apply this concept
- Measure a stipulated retirement obligation from complete supplied scenarios and reconcile initial liability, accretion, revisions, and settlement without treating depreciation as liability reduction.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Asset retirement obligation — Understand
To apply this concept: Required. Measurement is permissible only after the exercise supplies the recognition premise.
- Liability — Apply
To understand this concept: Required. The learner must identify a present obligation before measuring it.
- Present value — Apply
To apply this concept: Required. The initial measure uses supported future cash flows, timing, probabilities, and a compatible rate.
Lessons
Worked examples and cases
Practice
Common mistaken ideas
Sources
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Broader topics
Related concepts
Show 2 more related concepts
Use this idea next
- Accretion expense — Apply
Required level here: apply. Required. The rollforward is of that obligation.
- Accretion expense — Understand
Required level here: understand. Required. Accretion is the growth of that liability.
- Asset retirement cost — Understand
Required level here: understand. Required. No associated retirement cost arises in this model without the qualifying recognized obligation.
Show 1 more next steps
- Asset retirement obligation — Apply
Required level here: understand. Required. Measurement is permissible only after the exercise supplies the recognition premise.