Asset Retirement Obligation

3 Months Ended

Mar. 31, 2012

Asset Retirement Obligation [Abstract]

Asset Retirement Obligation [Text Block]

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Asset Retirement Obligation

FASB ASC 410-20, Asset Retirement and Environmental Obligations requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units-of-production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon the Company’s quarterly review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using the Company’s credit-adjusted-risk-free rate. The carrying value of the asset retirement obligation is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost related to oil property accounts. During the three months ended March 31, 2012, no revision was required to the Company’s estimates.

The following table reflects the changes in the ARO during the three months ended March 31, 2012.

	Amount
Asset retirement obligation - beginning of period	$	346,892
Current period accretion		14,655
Asset retirement obligation - end of period	$	361,547

The following table reflects the changes in the ARO during the year ended December 31, 2011.

	Amount
Asset retirement obligation - beginning of year	$	127,606
Current year revision to previous estimates		206,711
Current year accretion		12,575
Asset retirement obligation - end of year	$	346,892

The credit-adjusted-risk-free rate used in calculating ARO was approximately 18% at March 31, 2012 and December 31, 2011. This rate approximates the Company’s borrowing rate.

- Definition

The entire disclosure for an asset retirement obligation and the associated long-lived asset. An asset retirement obligation is a legal obligation associated with the disposal or retirement from service of a tangible long-lived asset that results from the acquisition, construction or development, or the normal operations of a long-lived asset, except for certain obligations of lessees.

+ References+ Details

La Cortez Energy, Inc. 10-Q