Asset Retirement Obligations (ARO) are legal obligations associated with the retirement of tangible, long-lived assets which require a company to ultimately remove equipment or clean up hazardous materials from a leased or owned site. An Asset Retirement Obligation refers to the responsibility of a company to either retire or remediate assets to their state ''prior'' of commencing their usage or activities.

The Fair Value Accounting Standard 143 (FAS 143) issued by the US Financial Accounting Standard Board (FASB) outlines the regulations for recording ARO’s. This accounting standard requires companies to record all liability from non-cancellable lease obligations and asset retirement obligations collectively. As per this standard, companies would need to recognize a fair (or market) value of the obligation associated with an ARO on the balance sheet. Additionally, any expenses or revenue relating to Asset Retirement activities must also be recorded on the balance sheet.

Under the Fair Value Accounting Standard 143, Companies must identify the estimated costs associated with their ARO’s and disclose it in their Notes to Financial Statements. This is to ensure that the actual market value of the asset retirement is correctly and accurately recorded in the company’s financial statements.

The obligations associated with an ARO can vary. Typically companies hold a legal responsibility to remove any hazardous waste products, restore the site to its original state, or return it to government guidelines. Any costs associated with these obligations must be included in the ARO to fully account for the liability.

There are many advantages of ARO’s for companies. Firstly, ARO’s allow companies to accurately and reliably record any potential liabilities associated with their usage and activities of their assets. Additionally, it enables companies to plan for the retirement of their assets in an efficient and cost-effective manner, taking into account the liability associated with the asset retirement.

In conclusion, the Asset Retirement Obligation is a legal contract between a company and the government, outlining that the company must ultimately remove equipment or clean up hazardous materials from a leased or owned site. The Fair Value Accounting Standard 143, issued by the US Financial Accounting Standards Board, outlines the regulations for recording AROs and also requires companies to record all expenses and liabilities associated with Asset Retirement activity. The obligation of the company to adhere to these rules protects everyone from the potential risks posed by hazardous materials, and allows for the effective retirement of the asset.