Question

An entity, upon initial recognition of an asset retirement obligation, should not take which of the following actions?

A.Allocate asset retirement cost to expense over the useful life of the related asset.
B.Capitalize the asset retirement cost by increasing the carrying amount of the related asset.
C.Measure the asset retirement cost at fair value.
D.Capitalize the asset retirement cost at its undiscounted cash flow value.

Answer 1

An entity, upon initial recognition of an asset retirement obligation, should not allocate asset retirement costs to expense over the useful life of the related asset.

Step-by-step explanation:

When an entity initially recognizes an asset retirement obligation, it should not take the action of allocating asset retirement costs to expense over the useful life of the related asset. Instead, it should do the following:

1. Capitalize the asset retirement cost by increasing the carrying amount of the related asset.
2. Measure the asset retirement cost at fair value.
3. Capitalize the asset retirement cost at its undiscounted cash flow value.