Chapter 1 — Overview
Chapter 1 — Overview
1.1 Introduction
An environmental remediation liability is based on a legal
obligation to remove or remediate pollution or contaminants from environmental media
such as soil, groundwater, sediment, and surface water. Environmental remediation
obligations can arise from the operation, retirement, closing, or mere ownership of
a facility (currently or in the past) at or near a contaminated site. The FASB’s
guidance on accounting for environmental remediation liabilities is codified in ASC
410-30.
The guidance in ASC 410-30 is based on federal environmental laws
and regulations in the United States. Specifically, the guidance is based largely on
the Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA or the “Superfund”) and the corrective action provisions of the Resource
Conservation and Recovery Act of 1976 (RCRA). Since certain aspects of the
accounting guidance on environmental remediation liabilities refer specifically to
both statutes, it is beneficial for entities to understand the requirements of each
of those laws before applying the accounting guidance in ASC 410-30. Accordingly,
this Roadmap’s discussion of environmental remediation liabilities is designed to
provide both an overview of the legal and regulatory framework of environmental
obligations, primarily in the United States (see Chapter 2), and a detailed explanation of the
FASB’s guidance on accounting for environmental remediation liabilities (see
Chapter 3).
An ARO is a legal or contractual obligation associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, development, or normal operation of a long-lived asset. The FASB’s
guidance on accounting for AROs is codified in ASC 410-20.
In ASC 410-20, the guidance on AROs is predicated on the existence
of a legal obligation to retire an asset, which, in accordance with the definition
of a legal obligation in ASC 410-20-20, can arise from “an existing or enacted law,
statute, ordinance, or written or oral contract or by legal construction of a
contract under the doctrine of promissory estoppel.” However, unlike environmental
remediation liabilities, which are largely governed by comprehensive federal
statutes and regulations, AROs in the United States are largely the result of
contractual agreements as well as federal or state statutes and regulations and
typically arise as a result of asset-specific operating permits. Accordingly, our
discussion of AROs first addresses the accounting framework in ASC 410-20 (see
Chapter 4),
including relevant interpretive accounting and financial reporting guidance. The
Roadmap then gives an overview of certain legal and regulatory requirements and
certain specific accounting considerations related to various industry- and
asset-specific AROs (see Chapter
5).
In Chapters 2 and
5 of this Roadmap, much of the content
related to environmental remediation liabilities and AROs is
adapted from U.S. Environmental Protection Agency (EPA) and
other environmental literature. There are numerous links in
the text, as well as a compilation of environmental
literature in Appendix B, to direct
you to the various sources should you wish to explore the
material in greater detail.
1.2 Environmental Remediation Liabilities
An environmental remediation liability is a specific type of contingent
liability that arises, typically, from federal, state, and local environmental
regulations related to environmental contamination in soil, sediment, groundwater,
and surface water. These regulations often create a cleanup standard that defines
the level of contamination at or above which remedial action must be taken. For
example, governmental regulations may define the allowable amount of contamination
in drinking water before remediation is required.
In a manner consistent with the guidance in ASC 450-20, an environmental remediation liability should
be recognized when it is probable that such a liability has been incurred and the amount of the liability
can be reasonably estimated. The concepts of “probable” and “reasonably estimable” are based on the
framework outlined in ASC 450-20. ASC 410-30 provides additional guidance on how to apply these
concepts in the context of some of the unique characteristics of the environmental remediation statutes
and regulations in the United States.
An environmental remediation liability generally does not become fixed or determinable at a
specific point in time. Rather, the existence and amount of an environmental remediation liability
become determinable over a continuum of events and activities. That is, the activities associated
with environmental remediation often are dynamic and progress through stages in which both the
remediation requirements and the ability to estimate costs change. For example, a typical environmental
remediation process consists of (1) identifying entities that may have contributed to the contamination,
(2) performing a remedial investigation to identify possible remedies, (3) conducting a feasibility study
to evaluate the cost and viability of the various remedies identified, (4) completing the selected remedy,
and (5) operating and maintaining the site after completion of the remedy. Therefore, there is often
uncertainty about whether and, if so, when a legal obligation for environmental remediation has been
incurred.
Not all environmental remediation activities result in environmental obligations that are subject to the
guidance in ASC 410-30. Specifically, in accordance with ASC 410-30-15-3, the following transactions and
activities are outside the scope of ASC 410-30:
- “Environmental contamination incurred in the normal operation of a long-lived asset,” which is accounted for as an ARO under ASC 410-20. (See Section 1.4 for guidance on determining whether an environmental remediation liability is within the scope of ASC 410-20 or 410-30.)
- “Pollution control costs with respect to current operations or on accounting for costs of future site restoration or closure that are required upon the cessation of operations or sale of facilities.”
- “Environmental remediation actions that are undertaken at the sole discretion of management and that are not induced by the threat, by governments or other parties, of litigation or of assertion of a claim or an assessment.”
- “Recognizing liabilities of insurance entities for unpaid claims.”
- “Natural resource damages and toxic torts.”
- “Asset impairment issues.”
See Chapter 3 for additional guidance on accounting for environmental remediation obligations under U.S. GAAP.
1.3 Asset Retirement Obligations
An ARO is defined in ASC 410-20-20 as an “obligation associated with the retirement of a tangible long-lived asset.” The obligation arises from a legal requirement (i.e., a permit, court order, authorization, or lease) when the construction or operation of an asset results in the need to complete an action upon retirement of the asset. An ARO exists when the obligation to perform the asset retirement activity is unconditional even though there may be uncertainty about whether and, if so, how and when the obligation will ultimately be settled. The following are examples of common AROs:
- Landfill closure and postclosure care.
- Mine reclamation.
- Nuclear decommissioning.
- Oil well plugging and abandonment.
- Abatement of asbestos-containing materials.
- Underground storage tank removal.
See Chapter 4 for additional guidance on accounting for AROs under U.S. GAAP.
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. 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.