Volume 10, No. 11

 
Straight ARO's: Fair Valuing The Cost Of Closing Shop:  That's ARO, as in Asset Retirement Obligation. While much media attention has been devoted to the "New Economy" and the service industries in recent years, it's almost easy to forget that the United States still has a significant industrial base - one that constantly regenerates itself through capital expenditures for "greenfield" plants while shuttering unproductive facilities. "Shuttering unproductive facilities" may sound easy - but it can entail substantial costs for restoring a factory site, a mine or a power plant to greenfield status. Companies have long recognized that they have a responsibility for restoration efforts, but differ in their accounting for such activities. After a couple of tries dating back to 1994, the FASB has released a standard that will require companies to present the liabilities linked to closing up shop in a consistent fashion that will be more comparable from company to company. The standard will present a better description of a firm's obligations, but it might improve returns on equity without improvements in operations. Worse, it will create some unusual earnings management opportunities.

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