Asset retirement obligations

An asset retirement obligation (ARO) is the legal obligation to dismantle and remove a plant at the end of its life. Under Japanese accounting standards (ASBJ Statement No. 18), you do not wait until decommissioning to recognize that cost. You recognize the discounted present value of the future removal cost as a liability as soon as the plant enters service, capitalize the same amount as part of the asset, and then unwind both over the plant's life.

Tensor Cloud generates the full ARO schedule automatically for any CAPEX payment with ARO enabled, and it flows into your financial baselines month by month.

info

ARO is configured per CAPEX payment, not per asset. A single asset can have some CAPEX items with ARO and others without. The ARO discount rate is set on the Disposal tab of each CAPEX payment.

How ARO is calculated

Recognition

ARO is recognized at the commercial operation date (COD) of the associated solar system or battery, in that calendar month. Both the liability and the capitalized ARO asset appear in full in the recognition month.

caution

ARO recognition always follows the COD of the solar system or battery. It is not affected by the Depreciation start date setting, even when you override that date, and it is not tied to the CAPEX payment date. If you pay for equipment during construction, no ARO is recognized until the plant enters service.

Initial liability

The initial liability is the disposal amount discounted back from the end of the schedule to the recognition month:

$$L_0 = \frac{C}{(1 + m)^N} \qquad \text{where} \qquad m = (1 + r)^{\frac{1}{12}} - 1$$

• $C$ is the disposal amount configured for the CAPEX payment
• $r$ is the annual ARO discount rate
• $m$ is the equivalent monthly rate
• $N$ is the whole number of months from the recognition month up to and including the month that contains the day before the disposal date, counting both ends

$N$ is counted in whole months rather than days. This keeps the discounting consistent with the monthly accretion schedule, so that full fiscal years of accretion grow at a constant rate rather than showing a bump in the final year.

Accretion

Each month the liability grows by the monthly rate:

$$\text{Accretion}_t = L_{t-1} \times m$$

The first accretion charge falls in the recognition month itself. Accretion is booked to Accretion expense (5020) and continues for the whole life of the obligation, including after the ARO asset has finished depreciating. This is deliberate: the obligation is not settled at the end of the plant's useful life, so it keeps accruing until removal.

The last accretion charge is calculated as the remaining balance rather than as a percentage, so the liability lands exactly on the disposal amount with no rounding residual. It falls in the month before settlement, and because no accretion is booked in the settlement month itself, this final charge covers two periods and is roughly double an ordinary month.

The ARO asset and its depreciation

The same amount as the initial liability is capitalized as an ARO asset, in Generation equipment ARO (1522) or Battery equipment ARO (1510) depending on the type of CAPEX item.

It is depreciated using the host CAPEX payment's own depreciation method and useful life from its Depreciation tab, as required by ASBJ 18. If the host item uses declining balance, so does the ARO asset, and the same applies to straight line and sum-of-years-digits. When Apply depreciation is off for the host CAPEX payment, the ARO asset falls back to straight line over the period up to disposal.

Only the method and the useful life are inherited. The ARO asset runs on its own start and end months, described below, so if you override the host's depreciation start date the two schedules will not line up.

The first depreciation charge falls in the recognition month. The last falls in whichever comes first:

• the month before the end of the useful life measured from recognition, or
• the month before disposal

Charges go to Generation equipment ARO - Depreciation (5022) or Battery equipment ARO - Depreciation (5021), with the accumulated balance in 2520 or 2510.

Settlement

In the month containing the day before the disposal date, the liability is removed from the balance sheet and the disposal amount is paid out as cash. This appears as ARO settlement in the financial statements.

caution

When ARO is enabled and the disposal method is Discard, no disposal expense is booked. The removal cost has already been recognized through the ARO liability, so booking it again as an expense would double count it. Generation equipment disposal expense (5307) and Battery equipment disposal expense (5308) are only used when ARO is switched off.

Any disposal gain or loss is still recognized separately, in the disposal month itself.

note

Settlement and the disposal gain or loss therefore fall in different months, and where the disposal date is the first of a month they fall in consecutive months. If that boundary is also your fiscal year end, the cash settlement lands in one fiscal year and the gain or loss in the next. The worked example below shows this: ¥50,000,000 is paid in March 2052 while the gain or loss is recognized in April 2052.

Timing reference

Event	ARO liability	ARO asset	Accretion	ARO depreciation
CAPEX payment	n/a	n/a	n/a	n/a
COD (recognition)	100% of discounted amount, same month	100% of discounted amount, same month	First charge, same month	First charge, same month
End of useful life, if before disposal	Continues	Net book value reaches zero	Continues	Last charge
Month containing the day before disposal	Removed; settled in cash	Net book value reaches zero, if disposal comes first	Last charge is the month before	Last charge, if disposal comes first
Disposal month	n/a	n/a	n/a	n/a

Worked example

A generation CAPEX payment with a 20 year useful life, a COD of 1 April 2022, a disposal date of 1 April 2052, a disposal amount of ¥50,000,000 and a 3% ARO discount rate:

• $N$ = 360 months (April 2022 through March 2052)
• Initial liability $L_0$ = ¥50,000,000 / 1.03³⁰ ≈ ¥20,599,000, recognized in April 2022. Discounting 360 months at the monthly rate is the same as discounting 30 years at the annual rate, so the exponent is 30 rather than 360
• ARO asset of ¥20,599,000 capitalized in April 2022
• Accretion runs April 2022 through February 2052: 359 charges, the last one covering two periods
• ARO depreciation runs April 2022 through March 2042 (240 months)
• Liability removed and ¥50,000,000 paid in March 2052
• Any disposal gain or loss is recognized in April 2052

Current and non-current classification

The liability is split between current and non-current based on how close the settlement is:

• More than 12 months away: ARO - non-current (2700)
• 12 months or less away: ARO - current (2324)

The whole balance moves at once. It is not split proportionally.

Accounts used

Code	Name	Used for
1510	Battery equipment ARO	Capitalised ARO asset, battery CAPEX
1522	Generation equipment ARO	Capitalised ARO asset, generation CAPEX
2324	ARO - current	Liability due within 12 months
2510	Battery equipment ARO - Accum Depreciation	Accumulated ARO depreciation, battery
2520	Generation equipment ARO - Accum Depreciation	Accumulated ARO depreciation, generation
2700	ARO - non-current	Liability due in more than 12 months
5020	Accretion expense	Monthly unwinding of the discount
5021	Battery equipment ARO - Depreciation	ARO asset depreciation, battery
5022	Generation equipment ARO - Depreciation	ARO asset depreciation, generation

See the Accounts reference for the complete chart of accounts.

ARO vs decommission reserve

Tensor Cloud has two separate features that both relate to end-of-life costs. They are independent of each other, and you can use either one without the other.

	ARO	Decommission reserve
What it is	An accounting estimate	A cash savings plan
Does cash move?	Only at settlement	Yes, over the reserve period; the timing depends on whether the reserve is self-managed
Configured under	Disposal tab of a CAPEX payment	OPEX settings
Accounts	1510, 1522, 2324, 2510, 2520, 2700, 5020, 5021, 5022	2300, 5218, 1801

ARO involves no cash movement until settlement, and the settlement is paid out of Asset cash (1000).

Related settings

• ARO discount rate
• Disposal date
• Disposal method
• Disposal amount
• Depreciation method and useful life, which the ARO asset inherits