How does treating/adjusting an ARO like debt create tax-savings? Having a little trouble processing the implications of adjusting an ARO to reflect long-term debt… Can someone clarify?
interest expense (accretion expense) is tax deductible
Fair enough. That makes much more sense. I must’ve missed that part in the book. Thank You.
BTW. You may also check what happens to DTA/DTL when an ARO needs to be maintained. When ARO expense become tax deductible only when paid, a DTA is recorded.
so does an ARO create a new liability that must be accreted until original condition is restored? thanks, John
Yes, the ARO is a liability that is created. The change in the ARO from period to period is the accretion expense reported on the I-stmt every period. It does not create a NEW liability every period~ it merely compounds (like interest on debt accrues) as time goes on - until it reaches the target amt. needed to fulfill the retirement obligation.