in accounting an asset retirement obligation aro describes a legal obligation associated with the retirement of a tangible long lived asset where a company will be responsible for removing equipment or cleaning up hazardous materials at some future date aros should be included in a company s financial statement to present a more accurate and holistic snapshot of the enterprise s overall value 
understanding asset retirement obligationsasset retirement obligation accounting often applies to companies that create physical infrastructure which must be dismantled before a land lease expires such as underground fuel storage tanks at gas stations aros also apply to the removal of hazardous elements and or waste materials from the land such as nuclear power plant decontamination the asset is considered to be retired once the clean up removal activity is complete and the property is restored back to its original condition an example of an asset retirement obligationconsider an oil drilling company that acquires a 40 year lease on a parcel of land five years into the lease the company finishes constructing a drilling rig this item must be removed and the land must be cleaned up once the lease expires in 35 years although the current cost for doing so is 15 000 an estimate for inflation for the removal and remediation work over the next 35 years is 2 5 per year consequently for this aro the assumed future cost after inflation would be calculated as follows 15 000 1 0 025 35 35 598 08 asset retirement obligations oversightbecause calculating asset retirement obligations can be complex businesses should seek guidance from certified public accountants to ensure compliance with the financial accounting standards board s rule no 143 accounting for asset retirement obligations under this mandate public companies must recognize the fair value of their aros on their balance sheets in an effort to render them more accurate this represents somewhat of a departure from the income statement approach many businesses previously used asset retirement obligation calculating expected present valueto calculate the expected present value of an aro companies should observe the following iterative steps asset retirement obligations do not apply to unplanned cleanup costs resulting from unplanned events such as chemical spills and other accidents 