A Study On Accounting For Asset Retirement Obligations

Asset retirement obligation means that enterprises should undertake the obligations of decommission,removing,environment rehabilitation for tangible long-lived assets in the future retirement stage as acquiring, constructing,exploring and using of these assets. It is a compelled obligation that usually required by practices and rules on the basis of environment protection. Accounting for asset retirement obligation is the framework and regulation of confirmation,measurement and disclosure for asset retirement obligation by companies. FASB (financial accounting standards board) in America first issued FAS143:<Accounting for Asset Retirement Obligations>in2001, while in China there are only fragmentary regulations distributed in some relative principles like <Contingent Event>,<Fixed Assets>,<Oil and Gas Exploration>and there is still no complete standards system for asset retirement obligation(ARO). According to the investigation and practices, there are66listed companies of extractive industry who took the responsibility of asset retirement obligation, and74%of them didn't recognize a provision for ARO liability. Consequently, this dissertation which discusses accounting for ARO is of great significance to construction of domestic ARO principles in the future.This essay primarily represents the background and meaning of research, establishes the research contents and technique. Then it studies current situation of ARO accounting in various countries (including China) to discover advantages and disadvantages of present ARO accounting. Based on theory of ARO accounting, the thesis constructs the ARO conceptual framework which contains the purpose of accounting, assumption quality of information,theory of accounting recognization, measurement and information disclosure, it studies more on the specific standard for ARO accounting of confirmation,measurement and disclosure. Eventually it analyzes the guarantee mechanism for ARO accounting implementing in China.According to the above research, it concludes that:1.The purpose of ARO accounting. It now has the opinions of decision-making availability and accountability approach. On the basis of the history and development of accounting purpose, characterizes of ARO itself and the level capital market development, the dissertation concludes that the purpose for ARO is providing useful information to financial information users, it specializes in regulating decision-making availability information which related to ARO during confirmation,measurement and disclosure.2.The linkage and recognization standards of accounting elements in ARO. Acquisition, construction, development, normal using and the introduction of new laws and regulations, which requires enterprises to take ARO in the future for long-term tangible assets, are triggered matters of business to take the real ARO. In the initial recognization stage of ARO accounting, there is linkage confirmation system between liabilities (ARO liabilities) and assets (fixed assets); in subsequent recognization stage, there are a linkage between cost (increased costs) and liabilities (ARO liabilities), the costs (overhead) and assets (accumulated depreciation). In a reasonable estimate for the prerequisite conditions ARO liabilities should be directly recognized while the uncertainty of estimate in lead times and (or) method be included in area of measurement, and it does not affect the confirmation. Combining the characteristics and existing of disposal market supervision requiring in China, three criteria are made for judgment of reasonable estimate additionally.3.The measurement standards for ARO. The thesis emphases on measurement of ARO liability and concludes that fair value measurement based on the perspective of market participants is superior to measurement based on the view of particular subject when comparing the demand of relevance and faithful Representation. The measuring of ARO liability should consider fully of risks and uncertainties (including market risk) when constituting a project of future cash flows in retirement obligations, pricing assumption, the choice of valuation method under unsure cash flow and time. In terms of ARO subsequent measurement of liabilities, liabilities which arising from increasing over time costs and are changed in the estimation of future cash flows and the discount rate should be adjusted.4.The accounting standard of ARO information disclosure. Due to theory analysis and construction of principle of disclosure of accounting information disclosure, this study shows that notes to the financial statements are important forms of ARO accounting information disclosure. Disclosure in the notes should be focused on:accounting policies and calculation methods, measurement assumptions, forms of abandoned project and selection the depreciation rate of cost and other information; Information about book value changes of ARO liability ought to include book value of ARO at beginning and end balance date, liabilites increased as a result of over time increased cost, change of present value of estimated ARO, new confirmation of ARO liabilities, fulfilling ARO and so on. In order to build an implementing system of ARO information disclosure, it should be combined with variety of disclosure forms in and out of balance sheet additionally.5.The guarantee mechanism for ARO accounting implementing. According samples of listed companies of extractive industry in China related to ARO and through the Logit and Ologit model, the essay researches on factors which influence ARO accounting in China. The result illustrates that it needs to construct environmental legal system related to ARO, advance environmental governance and supervision on ARO accounting simultaneously, guide the specialization development of accounting firms, strengthen the supervision on specific business and develop preferential tax policies, so as to enhance the effect of ARO accounting.The innovation in the dissertation is to establish the ARO accounting conceptual framework systematically. It contains the guidance framework of ARO accounting purpose,assumption and quality of information, and it also includes general theory of ARO accounting recognization, measurement and disclosure. Specifically, it studies a lot in the recognization of ARO and the linkage system of assets,liabilities, expenses and profits during the recognization stages.In addition, this essay researches systematically ARO accounting in different accounting standards. Through controling related influential factor maximally, it chooses listed companies of coal,mental mine,oil and gas industry as IFRS samples in UK and Australia, which have developed economy and capital market as well as analogous of American legislation background and history origin, takes the corresponding companies in Canada and America as FASB samples, compares them with corresponding companies in China, analyzes implementing of ARO, and finally acquires the main current situation,advantage and problems of accounting standards for ARO around the world. When research designing in deflactor factor, this essay also fully consider the existing differences standard for relevant assets and promote existing international comparative study design.Finally, based on the background of the economic environment and legal system, this dissertation investigates guarantee mechanism for implementing ARO accounting in China.Existing studies only relate to characteristics of audit and corporate finance in U.S. companies, without involving the background factors of the environment, the rule of law and local government environmental governance, not to mention the background of ARO accounting in China. According to the theory of plan behavior, this paper build decision-making mechanism framework for management to recognize ARO liabilities when corporate assume ARO obligations. Taking fully into account the factors of the institutional background and the management incentives, independent audit, corporate finance characteristics, empirical research are carried out why the majority of enterprises are not recognized ARO liabilities for listed companies of extractive industries in China.