Final answer:
A company measures an asset retirement obligation at the net present value of the expected future costs to retire the asset, taking into account the time value of money and the associated legal and regulatory requirements.
Step-by-step explanation:
To measure an asset retirement obligation (ARO), a company typically calculates the net present value of the expected costs of dismantling and removing the asset, along with restoring the site where it was located. Unlike valuations for active market assets as outlined in the provided reference materials, which might be based on what another party is willing to pay, an ARO is a liability that requires a different approach based on future cost estimates determined by an array of factors, including legal and regulatory requirements, and then discounted.
An ARO is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Over time, the liability is accreted to its future value using a credit-adjusted risk-free rate, and the associated asset is depreciated over its useful life. This process aligns the actual expense with the periods benefited by the use of the asset. Therefore, when a student asks, "How does a company measure an asset retirement obligation?" the accurate answer is: at the net present value (3).