Pollution Remediation Obligations

Primary Objective: This project provided accounting guidance regarding recognition and disclosure of certain pollution remediation obligations and set forth methods for measuring and reporting pollution remediation liabilities.

Status: Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, was issued on November 30, 2006.

• GASB Issues Final Standard on Accounting for Pollution Remediation Obligations
  
  • News Release  
  • Question-and-Answer Fact Sheet 
  • Plain-language article  
• Minutes for Deliberations
  
• Major Tentative Decisions to Date
• Relevant Links
  
  
• Articles and News Releases
  • Plain-language article about the proposed standards  
  • News Release: GASB Issues Exposure Draft That Would Put the Cost of Cleaning Up Pollution on Governments' Financial Statements—New Proposal Identifies Five Key Circumstances Under Which Accounting for Pollution Remediation is Required 
  • News Release: Governmental Accounting Standards Board Issues Preliminary Views on Issues Related to Accounting and Financial Reporting for Pollution Remediation Obligations 
• Project staff:
  • Wesley Galloway
  
  

  Pollution Remediation Obligations—Project Plan

  Project Description: The objective of the project is to provide accounting guidance regarding display and disclosure of certain pollution remediation obligations and setting forth the methods for measuring and reporting pollution remediation liabilities.

  The scope of the project is limited to pollution (including contamination) remediation obligations and their related costs. It excludes pollution abatement or prevention obligations. It also excludes accounting for future pollution events during the periods leading to the future cleanups (for example, nuclear plant decommissioning or other pollution related to the normal operation of a facility).

  Background: This project is needed to address the financial reporting of pollution remediation obligations for which no specific guidance exists for governments. Based on initial research, it was found that governments took different approaches to reporting pollution remediation obligations. This project is intended to provide preparers with specific guidance on how to report pollution remediation obligations, which should result in more consistent reporting, benefiting users of financial statements. A survey of GASAC members conducted in 2001 indicated that a project on environmental liabilities was important and should be added to a list of potential agenda topics.

  Accounting Issues: The Pollution Remediation Obligations project includes, among others, the following issues:

  4. What constitutes an environmental liability?
     
     
     • What types of environmental events are included in the project?
     • What laws or regulations exist regarding environmental liabilities?
  5. Are such liabilities measurable or reasonably estimable?
      
  6. To what degree and how are environmental liabilities reported currently?
      
  7. What should be the architecture for reporting environmental liabilities?
     
     
     • How measured?
       
       • Cost accumulation versus fair value
       • Discounting versus current cost
         • Expected present value versus expected cash flow
     • When reported?
       • What events trigger commencement of recognition?
     • How reported?
       • Restatement of prior periods versus reporting in current period
       • Where reported?
       • Display, disclosure, RSI, SI
     • Capitalizing costs versus expensing
     • Effect of insurance recoverability and reimbursements

  Project History:

  The project came onto the Board’s active agenda in June 2002. In a series of meetings from June to November 2002, the Board discussed research on the state of reporting for environmental liabilities by state and local governments. Based on the results of the research, the Board decided to provide accounting and reporting guidance and to limit the scope of the project to pollution remediation obligations.

  The project originally contemplated issuing an Exposure Draft (ED) of a proposed Statement of Governmental Accounting and Reporting Standards. However, due to concerns about the proposed use of the expected cash flow technique and the impact that technique could have on other aspects of governmental accounting, the Board approved a change in the project technical plan calling for the issuance of a Preliminary Views (PV) document, rather than an Exposure Draft, in the fourth quarter of 2004.

  In arriving at its tentative conclusions, the GASB considered its own standards and those of others, including the FASB, the AICPA, the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting, the Canadian Institute of Chartered Accountants, and the SEC.

  On March 25, 2005 the GASB issued a Preliminary Views document, Accounting and Financial Reporting for Pollution Remediation Obligations. At the end of the three-month comment period the GASB held a public hearing on the PV. Nine testifiers provided testimony and 39 comment letters were received. At the August through November 2005 meetings, the Board discussed respondent comments and testimony on the PV and reached tentative conclusions on the issues raised. At the December 2005 meeting, the Board reviewed a draft of the Exposure Draft.

  At the January 2006 meeting, the Board reviewed and approved for issuance the Exposure Draft, which was released on January 31, 2006 and had a three-month comment period. Forty-five comment letters were received.

  Pollution Remediation Obligations—Minutes for Deliberations
  

  Minutes of Meeting, November 6, 2006 Teleconference

  The Board reviewed a ballot draft of a final Statement on pollution remediation obligations and suggested final minor editorial changes to the draft. The Board then unanimously approved issuance of Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations.

  Minutes of Meeting, October 10–12, 2006

  The Board reviewed a preballot draft of the proposed Statement, requested minor editorial changes, and authorized production of a ballot draft.

  Minutes of Meeting, August 29-31, 2006

  The Board continued redeliberations on the standards proposed in the Exposure Draft (ED) by reviewing respondent comments on the capitalization criteria and proposed accounting for recoveries. The Board tentatively approved forwarding these provisions to the Statement with certain changes and elaborations, including the following:

  • The introduction to the capitalization criteria in paragraph 20 will be amended to indicate that some land improvement projects, remodeling projects, and some other projects, such as dredging a waterway for shipping, for which the primary objective is not pollution remediation may include pollution remediation activities. In that case, the incremental outlays attributable to pollution remediation activities (outlays that would not be incurred absent pollution) should be reported as an expense when a pollution remediation liability is recognized unless one of the capitalization criteria is met.
     
  • Paragraph 79 in the Basis for Conclusions, which discusses the recognition point for recovery assets from other responsible parties, will be amended to indicate that the recovery may be realizable at the time the parties agree to cost sharing, or realizability may depend on performance of remediation activities.
     
  • The accounting for insurance recoveries guidance in paragraph 17 will be amended to clarify that it covers only recoveries from insurance policies that indemnify the government for its pollution remediation obligations.
     
  • The footnotes to paragraph 17 will be amended to clarify and emphasize that expected recoveries, or portions therefore, that are expected to result in capitalized assets should not reduce the measurement of the government’s pollution remediation expense or liability. Rather, those recoveries should be reported as capital contributions (revenue) when that portion of the recovery becomes recognizable.

  The Board also reconsidered the implementation date and tentatively decided that the final standard should be effective for periods beginning after December 15, 2007. This six-month delay will allow governments at least a year after the Statement is issued before they are required to measure beginning balances of pollution remediation liabilities.

  Minutes of Meeting, July 11-13, 2006

  The Board continued redeliberations on the standards proposed in the Exposure Draft (ED) by reviewing respondent comments on the obligating events, recognition benchmarks, expected cash flow measurement technique, effective date, and other miscellaneous issues. The Board tentatively approved forwarding these provisions to the Statement with the following changes and elaborations:

  • To clarify the scope of the Statement, paragraph 3 will be split in two with a new paragraph 4.
     
  • The implementation guide will include a discussion of pollution remediation obligations that are conditional asset retirement obligations, such as potential future asbestos removal. It will state that those obligations should not be accrued as asset retirement obligations but that they should be accrued when the recognition requirements of the Statement are met.
     
  • To clarify which government oversight and enforcement-related activities are considered to be pollution remediation activities, ED paragraph 4(c) will be amended to refer to external government oversight and enforcement-related activities.
     
  • To add a new paragraph that establishes a recognition and measurement framework.
     
  • To remove an implication that an imminent endangerment could cause accounting recognition to occur before a site has even been examined to determine if it poses a threat.
     
  • Paragraph 58 will be amended to explain why obligating event 9(e) is different than the others.

  Minutes of Meeting, May 31–June 2, 2006

  The Board commenced redeliberations on the standards proposed in the Exposure Draft (ED) by reviewing miscellaneous respondent comments. The Board tentatively approved the following changes:

  • The Basis for Conclusions will include a discussion of how the standard generally will impact accounting for Brownfield remediation projects, noting that those remediation costs often will be capitalized rather than expensed.
     
  • The second sentence of paragraph 61, which discusses the measurement using cost accumulation, will be amended as follows: "It requires governments to measure a pollution remediation liability at its current value; however, only in situations when the government intends to hire another party to perform the work should the current value incorporate profit and risk premiums that are expected to be to be charged by the other party."
     
  • A reference in the summary and in paragraphs 1 and 71 to the standard requiring earlier reporting of liabilities will be replaced. Instead, the standard will refer to "more timely and complete reporting."
     
  • Paragraph 3 notes that the standard does not apply to asset retirement obligations. The paragraph will be amended to clarify that, for asset retirement obligations that involve pollution remediation, the standard does apply at the time of the retirement.

  The Board will continue discussing miscellaneous issues and then turn its attention to recognition issues at the next Board meeting.

  Minutes of Meeting, January 24-26, 2006

  The Board reviewed a ballot draft of an Exposure Draft on accounting for pollution remediation obligations and unanimously approved it for issuance.

  Minutes of Meeting, December 13-15, 2005

  The Board reviewed a preballot draft of the Exposure Draft (ED) and requested certain changes, including the following:

  • Paragraph 2 of the Summary will include a reference to the flowchart.
     
  • Footnote 13 is amended as follows: "There is a presumption that a lawsuit can be excluded from consideration if it is substantially the same as a lawsuit that previously has been determined within the relevant jurisdiction as having no merit."
     
  • The language in the disclosure provisions indicating that disclosure "may be necessary for the financial statements not to be misleading" will be removed.
     
  • A fourth capitalization criterion will be added for the estimated service utility of property, plant, and equipment that will be used after pollution remediation activities have ceased.
     
  • The ED will remove the definitional footnotes if those definitions are included in the Glossary.
     
  • The term outlays will be defined in the Glossary.
     
  • The numerical examples from paragraphs 14 and 17 will be moved to a footnote, and staff will continue to work on the language in those paragraphs to better illustrate the concepts.
     
  • The ED will state that, in governmental funds, estimated recoveries should reduce any pollution remediation expenditures when the recoveries are "measurable and available."
     
  • Illustrative disclosures for the optional inclusion of estimated indirect outlays in a pollution remediation liability will be included in an illustration.

  Minutes of Meeting, November 21, 2005 Teleconference

  The Board continued discussing disclosure issues and tentatively decided that the remaining PV disclosures would be carried forward to the ED without modification. In addition, the Board tentatively decided that provisions of the proposed Statement supersede the disclosure requirements in FASB Statement No. 5, Accounting for Contingencies. Thus, no disclosure is required for reasonably possible pollution remediation contingencies unless one of the obligating events has occurred.

  The Board then reviewed respondent comments regarding capitalization issues. In regard to the capitalization provisions, the Board tentatively decided the following:

  • The ED will include the three capitalization criteria proposed in the PV.
     
  • Paragraph A19 will be amended to read as follows (in markup format):

  Pollution remediation outlays generally should be reported as an expense when a liability is recognized as discussed in paragraphs A9 through A18. For example, a pump-and-treat system to be installed for pollution remediation generally would be reported as an expense. However, outlays to acquire land as part of a pollution remediation activity should be capitalized in the government-wide and proprietary fund statements when the land is acquired if the land has a present or future alternative use. In addition, pollution remediation outlays should be capitalized in the government-wide and proprietary fund statements when goods and services are acquired if acquired for any of the following circumstances:

  • Footnote 19 will be amended to add the following: "In the case of restoration of an impaired asset, the outlays necessary to obtain a similar unimpaired asset may be indicative of the amount necessary to place the asset into its intended location and condition for use."
     
  • The Basis for Conclusions will explain that capitalization of restoration costs is not a reversal of an impairment loss.
     
  • Paragraph 45 will continue to state that "the primary purpose of such [dual-use remediation] systems is pollution remediation" and that, "unless a capitalization criterion is met, they should be recognized as liabilities when reasonably estimable rather than as assets when outlays are incurred."
     
  • To clarify the reporting of movable equipment, some additional explanation such as "professional judgment is needed to determine whether movable equipment should be expensed or capitalized" will be provided in the Basis for Conclusions.

  Minutes of Meeting, November 1-3, 2005

  At the previous meeting, the Board requested that staff research whether a more appropriate example than the currently referenced Resource Conservation and Recovery Act (RCRA) is available for use in the second obligating event. Staff reported that RCRA continues to be the most appropriate example, but that the second obligating event also could make reference to "similar state laws." The Board tentatively agreed with this addition.

  The Board reviewed respondent comments to the Preliminary Views document covering benchmarks, current value, outlays, reporting (display), recoveries, and disclosures. The Board tentatively decided to move the benchmark provisions and reporting at current value forward to the Exposure Draft (ED) without modification, except for removing a reference to discounted present value in paragraph 20. With regard to the outlay provisions, the Board tentatively decided the following:

  • The ED will not address methodologies for allocating employee benefit costs, including pension and OPEB costs, in determining pollution remediation liabilities.
     
  • The ED will not address governments’ policies for including or excluding indirect outlays.
     
  • The Basis for Conclusions will explain that drinking water filtration systems would not be included in pollution remediation liabilities because their primary purpose is to prepare water for use rather than to conduct pollution remediation.

  After reviewing respondent comments on reporting (display) issues, the Board tentatively decided to carry forward the provisions without modification. Regarding accounting for recoveries, the Board tentatively decided the following:

  • The ED will clarify the guidance on accounting for recoveries by adding examples of accounting for reimbursements to paragraph A16. The Board also requested staff to rewrite portions of the paragraph to remove inferences that expected outlays are equivalent to a government’s reportable liability and expense when recoveries also are expected.
     
  • The following sentence will be added to paragraph A18: "Display requirements for recoveries are provided in paragraphs A20 and A21."
     
  • The last sentence of paragraph A21 will be amended as follows (see underscored text):

  Consistent with paragraphs A16 through A18, estimated recoveries of pollution remediation outlays from insurers and other responsible parties or PRPs for which the government is performing remediation activities should reduce any pollution remediation expenditures when the recoveries are realized.

  Lastly, the Board tentatively decided that PV disclosures be carried forward to the ED with the following changes:

  • In response to concerns that disclosures may be harmful to an entity’s bargaining position in legal disputes, the following disclosure text will be added to Example 7, which deals with a lawsuit: "The measurement of the liability represents a probability-weighted average of possible outcomes and is based on professional experience with similar claims, some of which are higher and some of which are lower. The Borough has not admitted fault and intends to vigorously challenge the claim."
     
  • To clarify its meaning, paragraph A23 is amended as follows (see markup text):

    For pollution remediation outlays liabilities, or portions thereof, that are not yet recognized because they are not reasonably estimable, governments should disclose a general description of the nature of the pollution remediation activities.

  • The paragraph A23 disclosure box in the nonauthoritative recognition flowchart also will be amended to clarify its meaning.

  The Board will continue discussing disclosure issues and also address respondent comments on capitalization issues at the November teleconference.

  Minutes of Meeting, September 20-22, 2005

  The Board reviewed respondent comments covering obligating events and the expected cash flow technique and tentatively decided to move the obligating events forward to the Exposure Draft with the following changes:

  • The first obligating event is modified to read as follows: "The government is compelled to take pollution remediation action because pollution creates an imminent and substantial endangerment to public health or welfare or the environment, leaving it little or no discretion to avoid." It also will include a footnote clarifying that the criterion applies to events that compel a government to take remediation action where no law requires such action, and that it is not limited to the Superfund law and the Resource Conservation and Recovery Act, which provide the federal government with authority to enforce remediation actions when pollution causes an imminent and substantial endangerment.
     
  • Regarding the second obligating event, which deals with violations of pollution prevention–related permits or licenses, the Board requested that after further research the staff provide a recommendation on whether a more appropriate example than the currently referenced RCRA is available. Further, the Basis for Conclusions will explain that notifications of violations need not be received from external parties.
     
  • The third obligating event is modified as follows:

  The government is named, or evidence indicates that it will be named, by a regulator as a responsible party or potentially responsible party (PRP)10 for remediation, or as a government responsible for sharing costs.¹¹

  ¹⁰The term potentially responsible party is used in the Superfund law, which provides that the federal government can hold parties potentially responsible for causing or contributing to pollution at a Superfund site. However, as used in this Statement, the term refers to a party that is similarly held by law as potentially responsible for pollution at any site. It is not limited to parties associated with Superfund sites.

  ¹¹For example, Section 104(c)(3) of the Superfund law, as amended [42 U.S.C. 9604(c)(3)], requires, in part, that states pay or ensure payment of 10 percent of the cost of remedial action, and 100 percent of the cost of operations and maintenance, at sites that were privately owned or operated and for which no financially viable potentially responsible party can be found.

  • The Basis for Conclusions will explain that the meaning of the phrase evidence indicates is based on professional judgment, but it does not require governments to search for evidence of which they are not aware. In addition, the Basis for Conclusions will explain that the nature of evidence indicating that a government "will be named" also is based on professional judgment but, similar to the guidance in SOP 96-1, need not be limited to situations where a regulator already is aware of a government’s potential involvement in a site under investigation.
     
  • To be consistent with changes made to the third obligating event, the fourth obligating event is modified to read as follows: "The government is named, or evidence indicates that it will be named, in a lawsuit to compel the government to participate in remediation." It also will include a new footnote indicating that "there is a presumption that a lawsuit can be excluded from consideration if it is substantially the same as a lawsuit that previously has been ruled as having no merit." The Basis for Conclusions will further elaborate on the presumption proposed by this new footnote.
     
  • The footnote of the final obligating event, which deals with obligations voluntarily entered into, is modified to read as follows:

  ¹²For example, a government that sells polluted land may obligate itself to perform remediation activities as part of the agreement of sale. Also, a government may voluntarily sign a consent decree making itself a responsible party for cleanup activities.

  The Basis for Conclusions will emphasize that pre-cleanup activities are excluded from the obligating event and will provide more appropriate examples of voluntarily commenced remediation that is legally required to be completed.

  The Board noted that none of the respondents offered additional obligating events. Because of the specificity of pollution remediation problems, and other issues, the Board decided against trying to develop a broad recognition principle. However, the Exposure Draft will again include a question soliciting respondents in regard to any additional obligating events that should be included.

  After discussing comments for and against the expected cash flow technique, the Board tentatively decided to carry it forward to the ED and to add a footnote explaining circumstances where state-developed cost averages may appropriately be used by governments. The Board instructed staff to fully address in the Basis for Conclusions the reasons that the Board is proposing the expected cash flow technique for pollution remediation and to address misunderstandings regarding subjectivity of the technique and other perceived weaknesses. In addition, the Basis for Conclusions will explain that programs that insure external parties for, for example, storage tank cleanup costs are not within the scope of the Statement.

  Lastly, the Board considered and tentatively rejected discussing in the Exposure Draft the meaning of a reasonable estimate of a range.

  Minutes of Meeting, August 9-11, 2005

  The Board reviewed a summation of respondent comments on the Preliminary Views (PV) document for pollution remediation obligations and approved a project schedule calling for issuance of an Exposure Draft (ED) in January 2006. The Board commenced redeliberation of the provisions in the PV by reviewing respondent comments covering miscellaneous issues and tentatively made the following decisions:

  • Footnote 5 will be amended to clarify that "governments that retain risk for pollution remediation liability contingencies should apply the provisions of the Statement for recognition of such liabilities."
     
  • The ED will include a glossary providing descriptions of terms.
     
  • The final sentence in paragraph 34 of the PV, which currently discusses reporting increases in estimates of pollution remediation liabilities, will be amended to also discuss reporting of decreases.
     
  • The flowchart will be amended to provide a description of liability recognition in governmental funds.

  The Board also discussed respondent comments on transition provisions and considered an effective date. Staff recommended retroactive application but noted that FASB Statement No. 154, Accounting Changes and Error Corrections, states that retroactive application is impracticable if it "requires assumptions about management’s intent in a prior period that cannot be independently substantiated" or "requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that . . . existed [and] . . . would have been available" in the earlier period. These provisions potentially impact application of the expected cash flow technique to measurements in prior periods. Accordingly, the Board tentatively agreed that governments that have sufficient objective and verifiable information to apply the expected cash flow technique to measurements in prior periods would apply the provisions of the proposed Statement retroactively for all such prior periods. Governments that do not have that information would apply the provisions of the proposed Statement as of the effective date. The Board also tentatively agreed that the effective date would be for periods beginning after June 15, 2007, with a clarification that pollution remediation liabilities would be measured (using the expected cash flow technique) at the beginning of that period to ensure that beginning net assets can be restated.

  Minutes of Meetings, March 15 and April 5–7, 2005 Teleconference

  The Board reviewed and unanimously approved the ballot draft of the Preliminary Views document with minor editorial changes for clarification. The document is scheduled to be posted to the GASB website on March 25.

  Minutes of Meetings, January 31 and February 22–24, 2005 Teleconference

  The Board reviewed a revised draft of a proposed Statement on accounting for pollution remediation obligations that will appear as an appendix to a Preliminary Views document on that topic. The Board tentatively approved the draft and requested staff to make certain editorial changes for clarification.

  Board Meeting

  The Board reviewed a preballot draft of a Preliminary Views (PV) document covering accounting for pollution remediation obligations. The Board tentatively approved the drafts with certain editorial changes for clarification. The Board instructed staff to prepare a ballot draft for review at the Board’s teleconference meeting on March 15. The PV document is expected to be posted to the GASB website later in March.

  Minutes of Meeting, January 11–13, 2005

  The Board reviewed a draft of a Preliminary Views (PV) document covering accounting for pollution remediation obligations, including the latest draft of a proposed Statement that appears as an appendix to the PV. The Board tentatively approved the provisions presented in drafts and requested staff to make certain editorial changes for clarification.

  Pollution Remediation Obligations—Major Tentative Decisions to Date

  Statement No. 49 , Accounting and Financial Reporting for Pollution Remediation Obligations, was approved in November 2006.
  

  Pollution Remediation—Relevant Links
  • Federal Environmental Protection Agency
    
    
  • Environmental Law Institute (ELI); Analysis of State Superfund Programs- 50 States Studies
     
  • ASTM International; Committee E50 Standards on Environmental Assessment, Risk Management and Corrective Action
     
  • Association of State and Territorial Solid Waste Management Officials (Environmental Links page)
     
  • Tribal Association for Solid Waste and Emergency Response (TASWER)
     
  • US Conference of Mayors, Brownfields reports
     
  • National Governors Association, Brownfields resources