Financial Accounting and Reporting-CPA Practice Exam

Under IFRS, what is the term used for an asset retirement obligation?

1. A statutory liability

2. A decommissioning liability

3. An exit plan liability

4. A deferred cost obligation

The correct answer is: A decommissioning liability

The term "asset retirement obligation" under IFRS specifically refers to a legal obligation associated with the retirement of a tangible long-lived asset, which often involves the dismantling or decommissioning of that asset. This is characterized as a decommissioning liability, as it pertains to the costs that a company expects to incur in fulfilling these legal obligations. When an entity recognizes a decommissioning liability, it reflects the present value of the expected future costs required to settle this obligation. This recognition is mandated by IFRS, which requires that such obligations be recorded as a liability on the balance sheet, acknowledging the environmental and regulatory responsibilities tied to asset retirement. The other options relate to different concepts. A statutory liability refers to obligations imposed by law, which may or may not involve asset retirement. An exit plan liability typically relates to costs expected from restructuring or downsizing operations rather than asset retirement. A deferred cost obligation suggests a prepayment of expenses rather than a liability resulting from an existing obligation. Thus, "decommissioning liability" accurately captures the essence of what an asset retirement obligation signifies under IFRS.