BROWSE

Abandonment

What is 'Abandonment'

Abandonment is the act of surrendering a claim to, or interest in, a particular asset. In securities, abandonment is the permitted withdrawal from a forward contract that is made for the purchase of deliverable securities. In many instances, an option may not be worthwhile or profitable to exercise, so the purchaser of the option lets it expire without being exercised.

Explaining 'Abandonment'

An abandonment option in a contract allows either party to leave the contract before fulfilling obligations. Neither party incurs penalties for withdrawing from the contract. For example, when a worker withdraws from an employment contract containing an abandonment clause, the employer cannot contest the resignation.

Abandonment of Business Asset

Abandonment of a business asset requires accounting for the asset’s removal on the company’s financial statements. Abandonment typically results in a loss affecting net income and is reported on the income statement. If using the indirect method when creating the cash flow statement, the section on cash flows from/used by operating activities reflects non-cash related activities affecting net income. The loss incurred on the asset’s abandonment is included as an adjustment in that section.

Abandonment Clause

An abandonment clause may be part of an insurance contract allowing the owner to abandon damaged property while still receiving a full settlement. The insurance company then owns the abandoned property. Such clauses are common in marine property insurance policies on homes at greater risk for flood or other damage from natural disasters. Policyholders may evoke the clause when recovering or repairing the property is greater than the property’s value, or the damage results in a total loss. For example, when a boat is lost at sea, recovering the boat is more expensive than replacing it with proceeds from an insurance policy.

Abandonment and Salvage

Abandonment and salvage involves one party’s relinquishment of an asset and another party’s subsequent claim to the asset. A clause allowing this action commonly appears in insurance contracts. If the owner abandons an insured asset or piece of property, the insurance company may rightfully claim the item for salvage. The owner must express in writing his intention in abandoning the asset or property. For example, if a homeowner abandons a house due to heavy flood damage, the owner provides a written notice of intentionally abandoning the home to the insurance company. The insurance company lays claim to the house and attempts to resell it. Because abandonment and salvage can be lucrative for the salvager, multiple parties may try laying claim to an abandoned asset or property.


Further Reading


Abandonment decisions and the market value of the firm: The case of nuclear power project abandonment
www.sciencedirect.com [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …

Completion or abandonment of mergers and acquisitions: Evidence from the newspaper industry, 1981–2000Completion or abandonment of mergers and acquisitions: Evidence from the newspaper industry, 1981–2000
www.tandfonline.com [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …

Abandonment of construction projects in Nigeria: causes and effectsAbandonment of construction projects in Nigeria: causes and effects
www.ingentaconnect.com [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …

Investor valuation of the abandonment optionInvestor valuation of the abandonment option
www.sciencedirect.com [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …

Geographies of financial exclusion: financial abandonment in Britain and the United StatesGeographies of financial exclusion: financial abandonment in Britain and the United States
www.jstor.org [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …

Shut-In and abandonment decision economicsShut-In and abandonment decision economics
www.onepetro.org [PDF]
… Investigating the valuation effects of announcements of voluntary corporate sell-offs. Journal of Finance 39(2): 503-517 … The gains to bidding finns from merger. Journal of Financial Economics 11(1--4): 121-139 … Capital investment under uncertainty with abandonment options …



Q&A About Abandonment


Why do you have to abandon oil wells?

To ensure that no hydrocarbons leak into surface water or into the atmosphere.

How do you calculate abandonment costs?

You calculate it by calculating the cost of removing equipment, plugging wells and any environmental clean-up necessary to shut down a well.

What does abandoning require?

Abandoning requires accounting for assets removal on company financial statements and reporting any loss on income statement as well as cash flow statement if using indirect method when creating cash flow statement by operating activities reflects non-cash related activities affecting net income The loss incurred on assets' removal is included as adjustment in that section.

What is abandonment?

Abandonment is the act of surrendering a claim to, or interest in, a particular asset. In securities, abandonment is the permitted withdrawal from a forward contract that is made for the purchase of deliverable securities. In many instances, an option may not be worthwhile or profitable to exercise, so the purchaser of the option lets it expire without being exercised.

What is an example of an abandoned oil well in Texas?

A typical abandoned oil well in Texas has been plugged with cement and capped off at both ends. It may be surrounded by a fence or other barrier to keep animals out, but it is otherwise left alone.

What does the term "abandonment" refer to?

The abandonment of a business venture.

What is the definition of abandonment costs?

Abandonment costs are associated with the abandonment of a business venture.

What does abandonment allow?

An abandonment option in a contract allows either party to leave the contract before fulfilling obligations. Neither party incurs penalties for withdrawing from the contract. For example, when a worker withdraws from an employment contract containing an abandonment clause, the employer cannot contest the resignation.