Question

How does an ARO affect the annual income statement for an oil and gas company?

Answer 1

ARO, also termed as Asset retirement obligation is the retirement of tangible, long term asset depending on an event in future which are not in the control of an obligated party. It is a legal obligation and accounting rule for accounting the cost of returning a piece of property in the original condition; thus provides an accurate and fair financial statements to know the company's obligations. ARO in an oil and gas company usually consists of removal of facilities at well site; removal of production equipment; and restoring the surface land of oilfield to it's original state before the gas and oil extraction. The company usually uses the expected present value technique for estimating the fair value of a liability for ARO. The ARO process creates amortization and depreciation expenses which reduces the annual income reported in the income statement for an oil and gas company