Question

Question: When must a company recognize an asset retirement obligation?

Short answer

Answer

A company recognizes asset retirement obligation when:

1. There is an existence of legal obligation against the asset.
2. The amount of liability can be estimated.

Step-by-step solution

Definition of Asset Retirement Obligations

The obligations that a business entity will incur at the time of retirement of a fixed asset are known as asset retirement obligations. Such obligations must be included in the financial statements of the business entity to reflect the correct financial position.

Conditions under which the company must recognize the asset retirement obligation

The business entity must recognize the assets retirement obligation when the business entity has a legal obligation against the retirement of fixed assets, and the obligation related to the retirement can be estimated. Such obligation is recorded at its fair value.