DEFINITION of 'Asset Retirement Obligation'

An accounting rule established by Financial Accounting Standards Board Rule No. 143 in June 2001 that requires public companies to recognize the fair value of retirement obligations for tangible, long-lived assets in order to make their balance sheets more accurate. This focus on the balance sheet represents a change from the income-statement approach many businesses previously used.

BREAKING DOWN 'Asset Retirement Obligation'

An asset is considered retired when it is permanently taken out of service, such as through sale or disposal. Retirement obligations can be recognized either when the asset is placed in service or during its operating life at the point when its removal obligation is incurred.

Accounting for asset retirement obligations is a complex process requiring the assistance of a CPA.

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