I saw a problem involving calculations of the ARO and expenses incurred under ARO in one of the mocks, but in my schweser the LOS said Describe, not calculate. It is however, 2008 shweser, but i don’t remember seeing any updates, is this required now? Also, just to refresh, sales lease is if carrying value is below pv MLP, and financing is if its equal?
yes… ARO should be carried on the books as liability, pv of the actual liability and as we approach retirement, we would accrue the interest expenses and grow the liability to its actual value. The company’s cost of debt percentage (tax adjusted) would be used to accrue I guess.
The accretion expense on ARO’s is simple. You do the exact same PV calculation every year, with N decreasing by a year each time. So the interest rate is the same one you initially used, which I imagine would be provided.