1.4 Determining Whether an Environmental Remediation Liability Is Within the Scope of ASC 410-20 or ASC 410-30
An environmental remediation liability may arise in connection with an obligation to retire a tangible long-lived asset. In such situations, the environmental remediation liability may be within the scope of either ASC 410-20 or ASC 410-30 depending on the facts and circumstances. Determining which set of guidance to apply to an environmental remediation liability is critical because there are significant differences between ASC 410-20 and ASC 410-30, as summarized in the table below.
Concept | Accounting Under ASC 410-20 | Accounting Under ASC 410-30 |
|---|---|---|
Recognizing a liability | ||
Timing | When or as incurred (if a reasonable estimate of fair value can be made). | When an event has occurred and it is probable that (1) a liability has been incurred and (2) the amount of the liability is reasonably estimable. |
Manner | Capitalized as an ARC. Under ASC 410-20-25-5, the reporting entity recognizes the liability “by increasing the carrying amount of the related long-lived asset by the same amount as the liability.” | Expensed. The liability is generally expensed as incurred as a loss contingency. However, environmental remediation costs may be capitalized if certain conditions are met. |
Measuring a liability | ||
Initial measurement | Fair value (discounted). An entity typically measures the
fair value of an ARO by using
an “expected present value”
technique. | Estimated costs to remediate the
site (generally undiscounted). Environmental liabilities are
generally undiscounted; however,
they may be discounted if certain
conditions are met. |
Subsequent measurement | Changes attributable to the
passage of time are accounted for
under the interest method. An entity accounts for changes in the timing or amount of expected future cash
flows by adjusting (1) the carrying amount of the
liability and (2) the amount of the related
capitalized ARC. | Continually update the
estimated costs to complete
the remediation, with changes
accounted for as changes in
estimate. |
Effects of uncertainty | Uncertainty is factored into the
measurement of the fair value of
the liability. | Uncertainty is factored into
both the recognition and the
measurement of the liability. |
The scope of ASC 410-20 is limited to those obligations that cannot be realistically avoided, assuming
that the asset is operated in accordance with its intended use. Contamination arising from “normal”
operations generally is expected or predictable, gradual (or occurring over time), integral to operations,
or unavoidable and does not require an immediate response.
If an environmental remediation obligation results from either “improper”
operation of an asset or a catastrophic event, it
would be subject to the guidance in ASC 410-30 or
ASC 450-20. Contamination arising from improper
use of an asset or a catastrophic event is
generally unexpected, requires immediate response
or reporting, generally could have been controlled
or mitigated, and is the result of a failure in
equipment or noncompliance with company
procedures.
The two examples below illustrate differences between environmental remediation
liabilities that should be accounted for under ASC 410-20 and those that should be
accounted for under ASC 410-30.
Example 1-1
Environmental Remediation Liability Under ASC 410-20
An entity that operates a nuclear power plant has a legal obligation to decontaminate the site upon the closure of the facility. As stated in the U.S. Nuclear Regulatory Commission’s fact sheet on decommissioning nuclear power plants, the obligation is related to decommissioning activities that include, but are not limited to, the “permanent removal of such major components as the reactor vessel, steam generators, large piping systems, pumps, and valves.” Because the obligation results from the normal operation of the asset, the obligation should be accounted for under ASC 410-20.
Example 1-2
Environmental Remediation Liability Under ASC 410-30
An entity operates a nuclear power plant at which the occurrence of a catastrophic accident results in the contamination of land surrounding the site. Under local and federal laws, the entity is required to remediate the radioactive materials. Because the obligation to remediate the land around the site results from a catastrophic event (i.e., improper operation of the asset), the obligation should be accounted for under the ASC 450-20/ASC 410-30 probability model.