Chapter 1 — Overview

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, we believe that 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 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.

See Chapter 4 for additional guidance on accounting for AROs under U.S. GAAP.

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.