This excerpt taken from the VQ 8-K filed Jun 14, 2006.
Note 6Asset Retirement Obligation
The Company follows SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair value of a liability for an asset's retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying value of the long-lived asset. Subsequently, the asset retirement cost is amortized to expense over the useful life of the asset. The asset retirement obligation recorded relates to the expected plugging and abandonment costs of oil and natural gas wells and the removal of pipeline, compressor and related production facilities. As a result of the acquisition of oil and natural gas properties from TDC on October 1, 2004, the Company recorded a current asset retirement obligation of $531,000, a long-term retirement obligation of $6,711,000 and an increase to oil and natural gas properties of $7,242,000 based on the present value of the obligation. The present value of the retirement obligation will be accreted to full value over the remaining useful life of the Company's oil and natural gas properties and production facilities. As of December 31, 2004 and 2005, the Company had $906,000 and $467,000, respectively, classified in other assets for restricted cash and bonds pledged for the future plugging and abandonment of its oil and natural gas wells and related production facilities.
The changes to the Company's asset retirement obligation from Inception to December 31, 2004 and for the year ended December 31, 2005 are summarized as follows (in thousands):
The current portion of asset retirement obligations of $537,000 and $968,000 at December 31, 2004 and 2005, respectively, is classified with accounts payable and accrued liabilities.
The adoption of SFAS 143 on January 1, 2003 resulted in the Predecessor recording a net-of-tax cumulative effect of change in accounting principle loss of $11,460,000, a current asset retirement obligation of $11,512,000, a long-term asset retirement obligation of $12,589,000 and an increase to oil and natural gas properties of $12,641,000.
The changes to the Predecessor's asset retirement obligation for the year ended December 31, 2003 and for the nine months ended September 30, 2004 are summarized as follows (in thousands):