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.
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.