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Cost of Disposal

Moneyzine Editor
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Moneyzine Editor
1 mins
January 12th, 2024
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Cost of Disposal

Definition

The term cost of disposal is used to describe the incremental expense directly attributed to the disposal of an asset, contract, or cash-generating entity. Cost of disposal is oftentimes a future liability that flows as an expense to the income statement as it is incurred.

Explanation

Also known as an exit obligation, GAAP requires companies to calculate the cost of disposal when the company first realizes the asset's value has been impaired. The liability should be measured at fair market value. If the fair market value cannot be reasonably determined, companies are permitted to defer recognizing this liability until the cost can be reasonably determined. Changes in these costs are recognized as an increase or decrease to expense as well as the liability account.

Cost of disposal is oftentimes associated with the accounting concept of "value in use," which is equal to the asset's fair value less its cost of disposal. In addition to assets, cost of disposal can be associated with contracts, one-time employee termination benefits, as well as facility closures.

The expenses associated with cost of disposal include items such as attorney fees, permits, payments associated with removing an asset from service, as well as preparing an asset for sale.

Related Terms

  • The financial accounting term value-in-use is used to describe the present value of future cash flows derived from the use of an asset. Companies will determine an asset's value-in-use as part of a process that evaluates if an asset's value is impaired.
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  • Impairment in Value
    The term impairment in value is used to describe an event that suddenly and permanently lowers the value of an asset appearing on the company's balance sheet. When this occurs, companies will write-down the asset to the new market value. Accounts typically affected by impairment include goodwill as well as accounts receivable.
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    The financial accounting term fair value accounting refers to the estimating of prices that would be received if an asset were traded or a liability transferred. Fair value accounting can be used to estimate the value of an asset or liability appearing in a company's financial statements. Generally, these estimates are grouped into three levels, which are characterized by the availability of market information.
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