• Asset retirement obligation to be considered at the beginning and as per present value technique, the corresponding liability amount to be increased every year using effective interest rate (EIR) and accordingly settlement to be made at the time of retirement This inflated amount has to be discounted back to the date of capitalisation of the building in the books of the entity since such ARO cost have to be capitalised as part of the cost of the asset as required by Ind AS 16. The principles are almost identical, but there are some differences – therefore, please be careful when preparing your financial statements under both standards. Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of such assets. The entity has received a report from its engineering wing about the current cost required to demolish a similar building and restore the site as. If in the above example after the lapse of 10 years, only the lease term is extended by 3 years and other things remaining same so that the timing of the fulfilment of the obligation i.e the demolition and restoration of the site stands postponed by 3 years. This applies under both the cost model and the revaluation model, Disclosure of adjustment to Profit and Loss. Hence the ARO is recognised in the financial statements as a provision as at the date at which they are incurred at its measured value. In case there is significant time gap between the period of estimation and the occurrence of past event, adjustment should be made for the effect of inflation. The ARO amount capitalised as part of the cost of the asset should be depreciated over the period of useful life of the related asset. Ind. The ARO amount to be recognised in the financial statement as on the date of incurrence of the obligation shall be calculated using the formula given below: Where C is the expected cost at the time of obligation, n is the time required to settle the obligation. Statement 143 requires an enterprise to disclose the following: A general description of the asset retirement obligation and the associated long-, The fair value of assets that are legally restricted for purposes of settling asset, A reconciliation of the beginning and ending aggregate recorded amount of the, asset retirement obligations showing separately the changes attributable to: (1). Ind AS Financial Statements 1. Thereafter finance cost is to be charged on the new ARO balance for each accounting period till the date of obligation. The asset retirement obligation ensures that investors are aware of the costs that will be spent on removing those assets and cleaning up any damage to the surrounding property. The entry will be as follows: 2. any increase in ARO liability shall be charged directly to profit and loss account unless       adjusted to the extent credit balance exists in revaluation surplus in respect of the             related asset. THE STATEMENT REQUIRES ENTITIES TO RECOGNIZE asset retirement obligations at their fair value—the amount at which an informed willing party would agree to assume the obligation. CO and The annual financial statements consist of: • Balance sheet • Profit and loss account • Notes • Additional notes • Cash flow statement – supplemented by a management report. For example, a provision is recognised for the expected cost of dismantling an oil rig when the rig is installed. Compendium of Indian Accounting Standards (Year 2020-2021) Volume I (Ind AS 101-116) Volume II (Ind AS 1-41) Compendium of Indian Accounting Standards (Year 2019-2020) They call it “asset retirement obligation (ARO)”. 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