Accretion expense definition
/What is Accretion Expense?
Accretion expense is the ongoing, scheduled recognition of an expense related to a long-term liability. The amount charged to expense represents the change in the remaining discounted cash flows of the liability. The concept is most commonly applied to asset retirement obligations, which usually extend for many years into the future, and so are measured using a discounted cash flows analysis.
An example of a journal entry used to record accretion expense for an asset retirement obligation appears in the following exhibit.
Accretion Expense vs. Amortization
Accretion expense refers to the periodic increase in the carrying value of a liability due to the passage of time and the application of a discount rate. Amortization, on the other hand, is the systematic allocation of the cost of an intangible asset or a deferred expense over its useful life. The key differences between these two concepts are as follows:
Application. Accretion expense is primarily used for liabilities that increase over time due to discounting, such as environmental obligations or bond discounts. Amortization applies to intangible assets like patents, trademarks, and goodwill, gradually reducing their book value over time.
Accounting treatment. Accretion expense is recorded as an interest expense in the income statement because it represents the unwinding of a discount. Amortization is recorded as an operating expense and directly reduces the book value of the asset on the balance sheet.
Impact on the financial statements. Accretion increases liabilities and decreases net income without affecting tangible assets. Amortization reduces the value of intangible assets and also decreases net income, but does not impact liabilities.
Timing and nature. Accretion expense increases over time as the liability approaches settlement, following an exponential pattern. Conversely, amortization is typically applied on a straight-line or accelerated basis, depending on the chosen method of expense recognition.