Software Used to Simplify Asset Retirement Obligation Accounting
An asset retirement obligation (ARO) for oil and gas exploration and production companies is an unavoidable cost associated with retiring a long-lived asset through sale or abandonment. Consistent with FASB guidance in ASC 410-20, the fair value of the ARO liability should be recognized in the period when 1) the entity has an existing obligation associated with the retirement of a tangible long-lived asset, and 2) the amount of the liability can be reasonably estimated.
When an initial ARO liability is recorded, a corresponding asset is also recorded which is included in the proved property line item, along with the cost of the related wells, equipment and facilities. The liability is accreted over the useful life of the well such that the balance initially recognized at present value is adjusted to reflect the passage of time, generally using the units-of-production method on a quarterly basis. Accretion is calculated using an estimate for the inflation rate and credit adjusted risk free rate.
Complications in calculating accretion arise when there is a change in the original estimate of disposal costs, useful life, inflation rates or credit adjusted risk free rates. Such revisions result in an increase or decrease in the carrying amount of the ARO liability and require an additional “layer” to be added to the calculation. The original estimates continue to accrete as originally estimated while the incremental change in fair value is accreted separately.
The many layers become complicated to keep track of in a Microsoft Excel based calculation. Opportune utilizes the proprietary Assent software that simplifies the process. The software allows Opportune to import well data in Excel format, add layers as necessary when estimates change, and export the results in an easily auditable Excel format.