The estimated cost (on a current basis) may change over time, as cost increases vary from expected inflation or additional needs arise. If you change the “Current Cost” for an existing ARO, the amount of increase is not adjusted for inflation that has accrued on the original cost. Further, you may have multiple ARO layers that should be added together to calculate the current estimated cost.
Revise ARO Estimate allows you to adjust the cost by entering the new cost and selecting which AROs and layers for a property the new amount should be compared against. The inflation-adjusted cost for each selected item is calculated, and the difference is booked as a new layer to an ARO. The difference can be a positive or negative.
To revise an estimate, unlock the lease record. Select an entry in the tree that belongs to the ARO to be revised. From the ARO menu, choose Revise ARO Estimate, or click the = button.
For instance, say that you have an initial ARO with a current cost of 10,000 and an inflation rate of 2%. Two years later, you conclude that the current cost to satisfy the ARO is 12,000. The inflation-adjusted original cost is 10,404, so the appropriate increase is 1,596. Since this is an increase, you should use your current credit-adjusted risk-free rate for the new ARO. If it were a decrease, you would use the original risk-free rate. IFRS users always use the rate taken from their System Options table of accretion rates. If a payment has already been recognized on the ARO, its value (recalculated to reflect the impact of both inflation and present valuing) is subtracted from the estimated cost.
The default end date, inflation rate, and risk-free rate are automatically displayed based on the existing layers selected. The risk-free rate is a weighted-average rate of the active layers, which is particularly useful if you are reducing the estimate and the reduction is not associated with a specific layer. You can change these as needed.
You may select all or some of the layers of any of the lease’s AROs to serve as the comparison for the estimate. The change in estimate is set up as an additional layer on the ARO.