Sample Essay

Companies often undertake operations that cause damage to the environment or require cleanup operations to be carried out at the end of the life of the project. This is usually required by the government. Such obligations are characterized as asset retirement obligations. These obligations are recognized at the acquisition of the asset generally as a liability. A similar amount is added to the carrying value of the asset on the balance sheet, leading to an increase on both sides of the balance sheet, making the accounting equation balance without the need for immediate reduction in equity of the company.

The value that is added to both sides is the market value of the clean up required, which if not available, is replaced by present value of the future cash flows required to furnish the obligations which are discounted on a rate that is derived based on the current credit rating of the company.

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