What happens to an ARO in the periods following initial measurement?

The Asset Retirement Obligation (ARO) is recognized at its fair value when it is incurred, typically at the time the asset is acquired or constructed. After the initial measurement, significant changes occur in the accounting for the ARO in subsequent periods.

The ARO liability is generally adjusted over time for the passage of time, which is known as accretion. This means that the carrying amount of the ARO liability increases as we get closer to the time when the obligation must be settled. Additionally, the ARO asset, representing the right to use the asset until the retirement obligation is fulfilled, is subject to depreciation. This depreciation reflects the systematic allocation of the asset's cost over its useful life, aligning the expense recognition with the period during which the asset is used in operations.

Thus, as the entity recognizes depreciation for the ARO asset and adjusts the liability for the accretion, both components are updated in the financial statements. This continuous accounting treatment ensures that the financial impact of the retirement obligation is properly reflected over time.

The other choices do not accurately capture the necessary accounting treatments for ARO in subsequent periods, as they either involve incorrect adjustments or an absence of necessary actions like depreciation or liability modifications.