ARO
You dig oil today. 10 years later you will be done digging oil, you will need to clean up the field and plant some tree because of law. It cost you $1million to do that. you don't do a “Dr. Tree Expense 1m” 10 years later. According to matching? principle, that 1m should tie with your revenue in selling oil today.
so you use “credit-adjusted risk-free rate” to PV that 1m.
In the 1st year yo do :
Dr. ARO Asset XXX
Cr. ARO obligation XXX
In the next 10 years you do :
Dr. ARO expense XX
Cr. ARO obligation XX <- to bring this to 1m
Dr. Depreciation expense
Cr. ACC-Dep for ARO <- to expense the ARO asset created in the 1st year
At the end, you paid $ to plant tree
Dr. ACC-Dep for ARO X
Dr. ARO obligation X
Cr. ARO asset X
Cr. Cash X
Whatever difference is your plug for gain / loss 🙂
REG 90
FAR 95
AUD 98
BEC 84
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