{"id":3072,"date":"2025-04-22T07:05:02","date_gmt":"2025-04-22T11:05:02","guid":{"rendered":"https:\/\/visuallease.com\/?p=3072"},"modified":"2025-04-22T10:06:03","modified_gmt":"2025-04-22T14:06:03","slug":"asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87","status":"publish","type":"post","link":"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/","title":{"rendered":"Asset retirement obligation under ASC 842, IFRS 16 and GASB 87"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#What_is_Asset_Retirement\" >What is Asset Retirement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#When_Is_an_End_of_Term_Obligation_an_Asset_Retirement_Obligation\" >When Is an End of Term Obligation an Asset Retirement Obligation?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#Examples_of_Asset_Retirement_Obligation_ARO\" >Examples of Asset Retirement Obligation (ARO)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#Differences_ARO_in_Other_Standards\" >Differences ARO in Other Standards<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#What_is_the_Accounting_Entry_for_Asset_Retirement\" >What is the Accounting Entry for Asset Retirement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#How_Are_Asset_Retirement_Obligations_AROs_Treated_Under_Different_Accounting_Standards\" >How Are Asset Retirement Obligations (AROs) Treated Under Different Accounting Standards?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#ASC_410_FASB_US_GAAP\" >ASC 410 (FASB, US GAAP)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#IFRS_16_IASB\" >IFRS 16 (IASB)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#GASB_87\" >GASB 87\u00a0<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/visuallease.com\/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87\/#How_Are_ARO_Changes_Accounted_For\" >How Are ARO Changes Accounted For?<\/a><\/li><\/ul><\/nav><\/div>\n<p><span style=\"font-weight: 400\">If you have signed an operating lease for space, <\/span><a href=\"https:\/\/visuallease.com\/leasehold-improvements-what-you-need-to-know-for-asc-842\/\"><span style=\"font-weight: 400\">built leasehold improvements<\/span><\/a><span style=\"font-weight: 400\">, and determined that you are legally required to take out the leasehold improvement when the lease expires, then you have already encountered an asset retirement obligation or ARO for short. However, not all obligations at the end of the lease term are considered ARO.\u00a0 Some of these differences are subtle, but they dramatically change the proper accounting treatment. A full, definitive explanation of the differences is beyond the scope of this document, but we can summarize some of the rules. As always, refer to your accounting advisors for final determinations.<\/span><\/p>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"What_is_Asset_Retirement\"><\/span><strong>What is Asset Retirement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400\">Asset retirement refers to the process of removing, disposing of, or decommissioning an asset that is no longer in use or has reached the end of its useful life. In many industries, asset retirement obligations (AROs) are recognized as a liability. These obligations represent the estimated future costs of retiring certain assets, especially in cases where environmental or safety considerations are involved.<\/span><\/p>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"When_Is_an_End_of_Term_Obligation_an_Asset_Retirement_Obligation\"><\/span><strong>When Is an End of Term Obligation an Asset Retirement Obligation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400\">The guidance of <\/span><a href=\"https:\/\/visuallease.com\/compliance\/asc-842\/\"><span style=\"font-weight: 400\">ASC 842<\/span><\/a><span style=\"font-weight: 400\">, <\/span><i><span style=\"font-weight: 400\">Leases<\/span><\/i><span style=\"font-weight: 400\">, and ASC 410, <\/span><i><span style=\"font-weight: 400\">Asset Retirement Obligations<\/span><\/i><span style=\"font-weight: 400\">, can be somewhat circular and hard to follow.\u00a0 Each standard refers to the other, and both discuss contract versus regulatory requirements, as well as a host of other considerations.\u00a0 While these factors may impact the ultimate determination, ASC 842 gives us a simple rule of thumb:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If the obligation is to remove an improvement to the underlying asset, and the asset has been recognized on the lessee\u2019s balance sheet, the obligation to remove that asset should generally be accounted for as an ARO.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If the asset is owned by the Lessor, then the cost to remove the asset would be considered a lease payment. It increases the lease liability and the right of use <\/span><span style=\"font-weight: 400\">of assets<\/span><span style=\"font-weight: 400\">. Amortization of this asset increase will then increase the lease expense.\u00a0\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Note that this \u201cownership\u201d issue is based on accounting ownership, not legal ownership, which may be different.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">There is a third subset of end of lease obligations which arise out of environmental considerations.\u00a0 These are covered by a different section of ASC 410.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Examples_of_Asset_Retirement_Obligation_ARO\"><\/span><strong>Examples of Asset Retirement Obligation (ARO)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ol>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Biglaw, LLC, leases 40,000 square feet in a class A office building. The landlord agrees to build out offices and conference rooms to Biglaw\u2019s specification, at a cost not to exceed $1 million. Biglaw approves the plans but is not involved in the construction.\u00a0 They are obligated to return the space to its original condition at the end of the lease term.\u00a0 Biglaw does not place a Tenant Improvement on their balance sheet.This end of lease obligation is not considered an ARO. Biglaw will estimate the cost to remove the improvements at the end of the lease and consider that a final lease payment. The lease liability and right of use asset include the cost to remove.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Justeatz, Inc. leases 4,000 square feet to use as one of their chain restaurants.\u00a0 The space requires significant work to accommodate all their restaurant equipment, both general kitchen equipment and their signature finishes and signage. At the end of the term, Justeatz will remove their equipment and branded materials. Justeatz pays the contractor and puts a Leasehold Improvement on their balance sheet, then the landlord reimburses them. While the asset and liability are reduced by the amount of the incentive, the estimated cost to remove the leasehold improvements is handled as an ARO.<\/span><\/li>\n<\/ol>\n<h3><span class=\"ez-toc-section\" id=\"Differences_ARO_in_Other_Standards\"><\/span><strong>Differences ARO in Other Standards<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><a href=\"https:\/\/visuallease.com\/compliance\/ifrs-16\/\"><span style=\"font-weight: 400\">IFRS 16 <\/span><\/a><span style=\"font-weight: 400\">does not contain this sort of differentiation. Any obligation to dismantle and remove an underlying asset, the site or the underlying asset is accounted for under IAS 37 <\/span><i><span style=\"font-weight: 400\">Provisions, Contingent Liabilities and Contingent Assets<\/span><\/i><span style=\"font-weight: 400\"> and is treated as an adjustment to the Right of Use Asset.<\/span><\/p>\n<p><a href=\"https:\/\/visuallease.com\/compliance\/gasb-87\/\"><span style=\"font-weight: 400\">GASB 87<\/span><\/a><span style=\"font-weight: 400\"> does not specifically address ARO for lessees. A clarifying statement in GASB 83, <\/span><i><span style=\"font-weight: 400\">Certain Asset Retirement Obligations<\/span><\/i><span style=\"font-weight: 400\">, goes further to require that lessors must recognize ARO\u2019s associate with the leased property, but \u201ca lessee\u2019s liability as a result of obtaining the right to use an underlying asset generally would be incorporated into lessee\u2019s lease payments\u201d.<\/span><\/p>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Accounting_Entry_for_Asset_Retirement\"><\/span><strong>What is the Accounting Entry for Asset Retirement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400\">During ARO accounting, business must recognize the fair value of the ARO upon incurring the liability if it can obtain a realistic estimate of the ARO\u2019s fair value. But if the fair value is initially unobtainable, then the ARO must be recognized at a later date when the fair market value is already available.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Note that this does not apply if there is just uncertainty as to the amount of the obligation, only when the entity has insufficient information to estimate the present value. All three accounting standards contain similar provisions.<\/span><\/p>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"How_Are_Asset_Retirement_Obligations_AROs_Treated_Under_Different_Accounting_Standards\"><\/span><strong>How Are Asset Retirement Obligations (AROs) Treated Under Different Accounting Standards?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"ASC_410_FASB_US_GAAP\"><\/span><strong>ASC 410 (<a href=\"https:\/\/visuallease.com\/fasb-accounting-overview-for-corporate-real-estate\/\">FASB<\/a>, US GAAP)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400\">Under <\/span><span style=\"font-weight: 400\">ASC 4<\/span><span style=\"font-weight: 400\">10, the initial measurement starts with a recognition of the expected future costs to retire the asset. ASC 410 notes that using the expected cash flow technique is usually the only appropriate method for measuring the liability. This method calls for the entity to estimate the costs to meet the obligations today. If there are several possible scenarios or costs to estimate, the entity should establish a weighted average cost based on the probability of each being the correct value. This weighted average cost should then have an <a href=\"https:\/\/www.fe.training\/free-resources\/project-finance\/modelling-inflation\/\">expected inflation factor <\/a>applied to estimate the cost to be incurred at the time of remediation.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Note that the time of remediation is not necessarily the end of the lease term. The expected date of remediation may occur before or after the lease expiration date.<\/span><\/p>\n<p><span style=\"font-weight: 400\">This expected expenditure is then discounted using a risk-free interest rate, adjusted for the entity\u2019s credit risk. This discounted value is the <\/span><i><span style=\"font-weight: 400\">Asset Retirement Obligation<\/span><\/i><span style=\"font-weight: 400\">, which is recorded as a liability on the balance sheet. Interest (at the discount rate)<a href=\"https:\/\/visuallease.com\/understanding-accretion-in-lease-accounting\/\"> accretes<\/a> to the obligation each period.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When recording the ARO, the offsetting debit entry is the <\/span><i><span style=\"font-weight: 400\">Asset Retirement Cost<\/span><\/i><span style=\"font-weight: 400\">. This cost is expensed \u201cusing a systematic and rational method over the useful life of the asset.\u201d This is commonly amortized on a straight-line basis, although other methods may be used.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"IFRS_16_IASB\"><\/span><strong>IFRS 16 (IASB)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400\">IFRS 16 and IAS 37 work together to account for asset retirement obligations in leases.\u00a0 IAS 37 starts with a best estimate of the expenditure to settle the obligation. The future obligation is discounted just as in ASC 410, except that the discount rate is a pre-tax rate that reflects current market assessments and the risks specific to the liability. The resulting value is called the <\/span><i><span style=\"font-weight: 400\">Provision<\/span><\/i><span style=\"font-weight: 400\">. Interest accretion is recognized as a borrowing cost.<\/span><\/p>\n<p><span style=\"font-weight: 400\">The provision is then entered as an increase to the<\/span><a href=\"https:\/\/visuallease.com\/guide-to-right-of-use-assets-and-lease-liabilities-under-asc-842\/\"><span style=\"font-weight: 400\"> Right of Use Asset<\/span><\/a><span style=\"font-weight: 400\"> in the lease accounting schedule, with an offsetting credit against the IAS 37 provision. The Provision is therefore expensed in equal monthly installments as the ROU asset is amortized.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"GASB_87\"><\/span><strong>GASB 87\u00a0<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400\">Recall that GASB 87 does not specifically address ARO for lessees. GASB 83, <\/span><i><span style=\"font-weight: 400\">Certain Asset Retirement Obligations<\/span><\/i><span style=\"font-weight: 400\">, states that \u201ca lessee\u2019s liability as a result of obtaining the right to use an underlying asset generally would be incorporated into lessee\u2019s lease payments\u201d. Therefore, the cost of satisfying the asset retirement obligation is merely considered a final payment during the lease term.<\/span><\/p>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"How_Are_ARO_Changes_Accounted_For\"><\/span><strong>How Are ARO Changes Accounted For?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400\">As ARO\u2019s are always a forward projection of likely expenses, they are subject to change.\u00a0 Inflation factors can change, technology can change the cost of accomplishing the work, and regulatory influences can change the scope, just to name a few factors.\u00a0 Each of the standards provides for re-measuring the ARO as these conditions change.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">The factors to consider and thresholds for change are too many to consider here.\u00a0 However, each standard calls for a periodic review, which may be supplemented when conditions are known to change. Changes which are material would be handled as remeasurements, as in ordinary lease accounting.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Our<\/span> <a href=\"https:\/\/visuallease.com\/solutions\/lease-accounting-software\/\"><b>Lease Accounting software<\/b><\/a> <span style=\"font-weight: 400\">can ensure you that you are properly accounting for your ARO. Don\u2019t believe it,<\/span> <a href=\"https:\/\/visuallease.com\/schedule-demo-ub\/\"><b>request a demo<\/b><\/a> <span style=\"font-weight: 400\">to see for yourself. We provide our users with a time-saving, compliant ARO accounting solution.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you have signed an operating lease for space, built leasehold improvements, and determined that you are legally required to take out the leasehold improvement when the lease expires, then&#8230;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[170,109,184],"tags":[],"company_size":[],"company_portfolio_size":[],"company_industry":[],"case_study_topic":[],"class_list":["post-3072","post","type-post","status-publish","format-standard","hentry","category-lease-accounting","category-lease-administration","category-lease-management"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts\/3072","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/comments?post=3072"}],"version-history":[{"count":0,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts\/3072\/revisions"}],"wp:attachment":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/media?parent=3072"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/categories?post=3072"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/tags?post=3072"},{"taxonomy":"company_size","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_size?post=3072"},{"taxonomy":"company_portfolio_size","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_portfolio_size?post=3072"},{"taxonomy":"company_industry","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_industry?post=3072"},{"taxonomy":"case_study_topic","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/case_study_topic?post=3072"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}