Chapter 3 — Accounting for Environmental Obligations

3.3 Recognition of Environmental Remediation Liabilities

Environmental remediation liabilities arise when a reporting entity is (or was) associated with a particular site at which remedial actions must take place. The recognition guidance in ASC 410-30-25-3 is generally consistent with CERCLA’s recognition of various types of PRPs, which is discussed in Section 2.3.7. As illustrated in the diagram below, ASC 410-30-25-3 acknowledges six types of involvement that a reporting entity may have with a site.

For an environmental remediation liability to be recognized in the financial statements, one of the types of involvement illustrated above must have occurred on or before the reporting date. Once this condition is met, recognition of an environmental obligation is based on the framework in ASC 450-20, which requires a reporting entity to recognize a liability if (1) it is probable that a loss has been incurred and (2) the amount of that loss can be reasonably estimated.

In addition to the general recognition framework in ASC 450-20, there are several recognition benchmarks in ASC 410-30 that correlate with the various stages of the environmental remediation process that the EPA generally applies. Under ASC 410-30, a reporting entity is required, at a minimum, to evaluate whether it needs to recognize an environmental remediation liability upon the occurrence of each of the benchmarks. Further, ASC 410-30 mandates the recognition of a liability upon the occurrence of certain benchmarks. However, the benchmarks in ASC 410-30 are not meant to override the general recognition criteria outlined in ASC 450-20. The diagram below illustrates the relationship between the recognition framework in ASC 450-20 and the recognition benchmarks in ASC 410-30.

The next section and Section 3.3.2 focus on the application of (1) the recognition framework in ASC 450-20 to environmental remediation liabilities and (2) the specific recognition benchmarks included in ASC 410-30.

3.3.1 Probability That a Liability Has Been Incurred (the “Probability Criterion”)

ASC 410-30

25-4 In the context of environmental remediation liabilities, the probability criterion in paragraph 450-20-25-2 consists of two elements; the criterion is met if both of the following elements are met on or before the date the financial statements are issued or are available to be issued (as discussed in Section 855-10-25):

Litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or an assessment is probable. In other words, it has been asserted (or it is probable that it will be asserted) that the entity is responsible for participating in a remediation process because of a past event.
Based on available information, it is probable that the outcome of such litigation, claim, or assessment will be unfavorable. In other words, an entity will be held responsible for participating in a remediation process because of the past event.

25-5 What constitutes commencement or probable commencement of litigation or assertion or probable assertion of a claim or an assessment in relation to particular environmental laws and regulations may require legal determination.

25-6 Given the legal framework within which most environmental remediation liabilities arise, there is a presumption that the outcome of such litigation, claim, or assessment will be unfavorable if both of the following conditions exist:

Litigation has commenced or a claim or an assessment has been asserted, or commencement of litigation or assertion of a claim or assessment is probable.
The reporting entity is associated with the site — that is, it in fact arranged for the disposal of hazardous substances found at a site or transported hazardous substances to the site or is the current or previous owner or operator of the site.

Generally, the determination of whether it is probable that a liability has been incurred (i.e., whether the probability criterion is met) is a factual matter. That is, if an environmental site has been identified for remediation and available evidence connects a reporting entity with that site, the probability criterion is generally met. This evidence can be discovered internally (e.g., through environmental studies) or externally (e.g., upon notification from the EPA).

Connecting the Dots

We believe that the probability criterion is generally met once an entity has received a general or special notice letter from the EPA identifying the entity as a PRP (see Section 2.3.7). Such notification represents the assertion of a claim or assessment, as well as evidence that an entity is associated with the site.

However, an entity does not need to receive a notice letter from the EPA to conclude that the probability criterion has been met. Rather, an entity is required to evaluate (1) whether pollution or contamination has occurred at a particular site as a result of the entity’s current or prior involvement with the site and (2) whether it is probable that remediation will be required for that site. Therefore, an entity may conclude that it is probable that a liability has been incurred before the entity receives a notice letter from the EPA identifying it as a PRP.

The example below illustrates the application of the probability criterion.

Example 3-1

Operator X is aware of contamination at Site A resulting from the release of hazardous substances for which X had arranged disposal. While federal and state environmental regulations hold X liable for the remediation of Site A, no actions have been taken against X. No studies related to Site A have been prepared, and X does not plan to commence remediation actions until the regulators force it to do so. However, X believes that if the regulators were aware of the contamination, it is probable that they would require X to clean up Site A.

In this scenario, we believe that the probability criterion has been met because (1) X is legally obligated to clean up Site A and (2) X believes that it is probable that the regulators would assert a claim or assessment against X and thereby require X to clean up Site A if they were aware of the contamination. Since X was directly involved in arranging for the disposal of hazardous substances at Site A and it is probable that the regulators would assert a claim or assessment against X, there is a presumption that the outcome of such a claim or assessment would be unfavorable, and the probability criterion has been met (see ASC 410-30-25-6).

The decision tree below summarizes the FASB’s guidance on determining whether the probability criterion has been met.

3.3.2 Ability to Reasonably Estimate the Liability (the “Estimable Criterion”)

ASC 410-30

25-7 Estimating environmental remediation liabilities involves an array of issues at any point in time. In the early stages of the process, cost estimates can be difficult to derive because of uncertainties about a variety of factors. For this reason, estimates developed in the early stages of remediation can vary significantly; in many cases, early estimates later require significant revision. The following are some of the factors that are integral to developing cost estimates:

The extent and types of hazardous substances at a site
The range of technologies that can be used for remediation
Evolving standards of what constitutes acceptable remediation
The number and financial condition of other potentially responsible parties and the extent of their responsibility for the remediation (that is, the extent and types of hazardous substances they contributed to the site).

25-8 Section 450-20-55 concludes that the criterion for recognition of a loss contingency in paragraph 450-20-25-2(b) is met when a range of loss can be reasonably estimated.

25-9 An estimate of the range of an environmental remediation liability typically is derived by combining estimates of various components of the liability (such as the costs of performing particular tasks, or amounts allocable to other potentially responsible parties but that will not be paid by those other potentially responsible parties), which are themselves likely to be ranges. For some of those component ranges, there may be amounts that appear to be better estimates than any other amount within the range; for other component ranges, there may be no such best estimates. Accordingly, the overall liability that is recorded may be based on amounts representing the lower end of a range of costs for some components of the liability and best estimates within ranges of costs of other components of the liability.

25-10 At the early stages of the remediation process, particular components of the overall liability may not be reasonably estimable. This fact should not preclude the recognition of a liability. Rather, the components of the liability that can be reasonably estimated should be viewed as a surrogate for the minimum in the range of the overall liability.

25-11 For example, a sole potentially responsible party that has confirmed that it sent waste to a Superfund site and agrees to perform a remedial investigation and feasibility study may know that it will incur costs related to the remedial investigation-feasibility study. The potentially responsible party, although aware that the total costs associated with the site will be greater than the cost of the remedial investigation-feasibility study, may be unable to reasonably estimate the overall liability because of existing uncertainties, for example, regarding the kinds and quantities of hazardous substances present at the site and the technologies available to remediate the site. This lack of ability to quantify the total costs of the remediation effort, however, shall not preclude recognition of the estimated cost of the remedial investigation-feasibility study. In this circumstance, a liability for the best estimate (or, if no best estimate is available, the minimum amount in the range) of the cost of the remedial investigation-feasibility study and for any other component remediation costs that can be reasonably estimated shall be recognized in the entity’s financial statements.

25-12 Uncertainties relating to the entity’s share of an environmental remediation liability shall not preclude the entity from recognizing its best estimate of its share of the liability or, if no best estimate can be made, the minimum estimate of its share of the liability, if the liability is probable and the total remediation liability associated with the site is reasonably estimable within a range (see paragraphs 410-30-30-1 through 30-7).

25-13 Uncertainties are pervasive in the measurement of environmental remediation liabilities, and reporting entities are required to recognize their best estimate at the particular point in time (or, if no best estimate can be made, the minimum estimate) of their share of the liability and to refine their estimate as events in the remediation process occur.

The recognition guidance in ASC 410-30-25-7 through 25-13 acknowledges that it is often difficult to estimate the total cost of environmental remediation, particularly in the early stages of the remediation process (e.g., when a reporting entity is named a PRP). However, such difficulty during the estimation process does not preclude recognition of a liability. Rather, a reporting entity must attempt to estimate the cost of the environmental remediation upon determining that the probability criterion is met.

Generally, a point estimate of the total cost to remediate an environmental site will not be determinable in the early stages of the remediation process given the number of external factors typically involved in site cleanup. Rather, total cost will become estimable over time as more information becomes available as a result of performing the required remediation steps. However, ASC 410-30-25-9 acknowledges that “an environmental remediation liability typically is derived by combining estimates of various components of the liability.” For example, the components of the total liability may consist of (1) completion of remedial investigation, (2) completion of a feasibility study, (3) remedial design, (4) the remediation itself, and (5) postremediation monitoring. ASC 410-30-25-11 states that if any one component of the environmental remediation liability is reasonably estimable, that estimate should be used as the minimum in the range of total costs to remediate the site. Therefore, we generally believe that an entity will be able to reasonably estimate the environmental remediation liability (i.e., the estimable criterion will be met) in the early stages of the cleanup process on the basis of the costs of completing a particular component of the liability, which the entity can use to establish a minimum amount. In many cases, a point estimate provided by a specialist or expert may be the best estimate of the remediation liability. Regardless of the determination of the amount representing the best estimate, an entity should thoroughly document key judgments, significant assumptions, and its support for a determination of the recorded amount.

We have observed that reporting entities sometimes delay the recognition of an environmental remediation liability because of certain misconceptions about meeting the estimable criterion. The table below highlights some common misconceptions, along with our interpretive responses to these misconceptions.

Misconception About Meeting the Estimable Criterion	Interpretive Response
A liability should not be recognized if the total cost of the entire remediation effort is not reasonably estimable.	Often, it will not be possible to estimate the total cost of the entire environmental remediation process. In such a case, ASC 410-30 requires a reporting entity to evaluate the individual components of the environmental remediation process to determine whether it can reasonably estimate one or more of the components. Accordingly, the reporting entity would be required to recognize a liability for each component that can be reasonably estimated even if the total cost of site remediation cannot be reasonably estimated.
A liability should not be recognized if a reporting entity’s allocable share of an environmental remediation obligation (when the entity is one of several PRPs) is uncertain.	If the total liability, or a component of the liability, can be reasonably estimated, the reporting entity should estimate its allocable share (or a range of allocable shares) in accordance with the guidance in ASC 410-30-30-5 and 30-6. Environmental remediation liabilities are typically joint and several. Therefore, a reporting entity may be financially responsible for the entire remediation effort even if it contributed very little to the overall contamination of the site.
If more than one course of action has been proposed (i.e., there are multiple remediation alternatives), a liability should not be recognized until a specific course of action has been selected.	We generally believe that when a feasibility study or another proposed course of action contains several remediation alternatives, a range of the total remediation costs has been established. If one course of action is more likely to be taken than the others, that course of action should be used for recognizing the liability. Conversely, if each course of action is equally likely to be taken, the alternative with the lowest cost estimate establishes the low end of the range and should be used for recognizing the liability. However, if one of the alternatives is “no action” and has a cost estimate of zero, the entity should disregard that alternative when establishing the range. The “no action” alternative simply provides a baseline for comparison with other alternatives and therefore does not represent a viable alternative with respect to remediating a site (see Section 3.4.1.2).

The example below illustrates the application of the estimable criterion.

Example 3-2

Company Z receives notification from the EPA that it is a PRP at Site B because of its role as a transporter of waste to the site. Therefore, Z concludes that the probability criterion has been met.

Company Z is one of many entities identified as PRPs at Site B, and as of the date Z receives the notice from the EPA, no site study has been initiated or prepared. Upon receiving notice from the EPA, Z concludes that the cost of performing the entire remediation effort at Site B is not reasonably estimable. However, on the basis of Z’s prior experience with similar environmental remediation obligations, Z estimates that the cost of the remedial investigation or feasibility study will range from $5 million to $15 million. Further, given Z’s previous work at similar sites and its role in the contamination at Site B, Z expects to be responsible for only 2 percent to 5 percent of the total cleanup costs at Site B. Therefore, Z determines that a range of costs is reasonably estimable for a component of the overall cleanup effort.

In addition, Z concludes that no single amount or percentage appears to be a better estimate than any other amount or percentage in the range. Therefore, Z measures its liability by using the low end of the range and records a liability of $100,000 ($5 million × 2%).

3.3.3 Recognition Benchmarks

Sections 3.3.1 and 3.3.2 describe the overall recognition framework prescribed by ASC 410-30. However, ASC 410-30 also lists specific benchmarks that an entity must consider when evaluating (1) the probability that a loss has been incurred and (2) the extent to which any loss related to an environmental obligation is reasonably estimable.

ASC 410-30

25-14 Certain stages of a remediation effort or process and of potentially responsible party involvement (see paragraph 410-30-05-24 for a discussion of these stages) provide benchmarks that should be considered when evaluating the probability that a loss has been incurred and the extent to which any loss is reasonably estimable. Benchmarks should not, however, be applied in a manner that would delay recognition beyond the point at which the recognition criteria in Subtopic 450-20 are met.

25-15 The following are recognition benchmarks for a Superfund remediation liability; analogous stages of the Resource Conservation and Recovery Act corrective-action process are also indicated. At a minimum, the estimate of a Superfund (or Resource Conservation and Recovery Act) remediation liability should be evaluated as each of these benchmarks occurs.

Identification and verification of an entity as a potentially responsible party. The Resource Conservation and Recovery Act analogue is subjection to facility permit requirements. Receipt of notification or otherwise becoming aware that an entity may be a potentially responsible party compels the entity to action. The entity must examine its records to determine whether it is associated with the site. If, based on a review and evaluation of its records and all other available information, the entity determines that it is associated with the site, it is probable that a liability has been incurred. If all or a portion of the liability is reasonably estimable, the liability shall be recognized. In some cases, an entity will be able to reasonably estimate a range of its liability very early in the process because the site situation is common or similar to situations at other sites with which the entity has been associated (for example, the remediation involves only the removal of underground storage tanks in accordance with the underground storage tank program). In such cases, the criteria for recognition would be met and the liability shall be recognized. In other cases, however, the entity may have insufficient information to reasonably estimate the minimum amount in the range of its liability. In these cases, the criteria for recognition would not be met at this time.
Receipt of unilateral administrative order. The Resource Conservation and Recovery Act analogue is, generally, interim corrective measures. An entity may receive a unilateral administrative order compelling it to take a response action at a site or risk penalties of up to four times the cost of the response action. Such response actions may be relatively limited actions, such as the performance of a remedial investigation and feasibility study or performance of a removal action, or they may be broad actions such as remediating a site. Under section 106 of Superfund, the Environmental Protection Agency must find that an “imminent and substantial endangerment” exists at the site before such an order may be issued. No preenforcement review by a court is authorized under Superfund if an entity elects to challenge a unilateral administrative order. The ability to estimate costs resulting from unilateral administrative orders varies with factors such as site complexity and the nature and extent of the work to be performed. The benchmarks that follow should be considered in evaluating the ability to estimate such costs insofar as the actions required by the unilateral administrative order involve these benchmarks. The cost of performing the requisite work generally is estimable within a range, and recognition of an environmental remediation liability for costs of removal actions generally should not be delayed beyond this point.
Participation, as a potentially responsible party, in the remedial investigation-feasibility study. The Resource Conservation and Recovery Act analogue is Resource Conservation and Recovery Act facility investigation. At this stage, the entity and possibly others have been identified as potentially responsible parties and have agreed to pay the costs of a study that will investigate the extent of the environmental impact of the release or threatened release of hazardous substances and identify site-remediation alternatives. Further, the total cost of the remedial investigation-feasibility study generally is estimable within a reasonable range. In addition, the identification of other potentially responsible parties and their agreement to participate in funding the remedial investigation-feasibility study typically provides a reasonable basis for determining the entity’s allocable share of the cost of the remedial investigation-feasibility study. At this stage, additional information may be available regarding the extent of environmental impact and possible remediation alternatives. This additional information, however, may or may not be sufficient to provide a basis for reasonable estimation of the total remediation liability. At a minimum, the entity should recognize its share of the estimated total cost of the remedial investigation-feasibility study. As the remedial investigation-feasibility study proceeds, the entity’s estimate of its share of the total cost of the remedial investigation-feasibility study can be refined. Further, additional information may become available based on which the entity can refine its estimates of other components of the liability or begin to estimate other components. For example, an entity may be able to estimate the extent of environmental impact at a site and to identify existing alternative remediation technologies. An entity may also be able to identify better the extent of its involvement at the site relative to other potentially responsible parties; the universe of potentially responsible parties may be identified; negotiations among potentially responsible parties and with federal and state Environmental Protection Agency representatives may occur; and information may be obtained that materially affects the agreed-upon method of remediation.
Completion of feasibility study. The Resource Conservation and Recovery Act analogue is corrective measures study. At substantial completion of the feasibility study, both a minimum remediation liability and the entity’s allocated share generally will be reasonably estimable. The feasibility study should be considered substantially complete no later than the point at which the potentially responsible parties recommend a proposed course of action to the Environmental Protection Agency. If the entity had not previously concluded that it could reasonably estimate the remediation liability (the best estimate or, if no amount within an estimated range of loss was a better estimate than any other amount in the range, the minimum amount in the range), recognition should not be delayed beyond this point, even if uncertainties, for example, about allocations to individual potentially responsible parties and potential recoveries from third parties, remain.
Issuance of record of decision. The Resource Conservation and Recovery Act analogue is approval of corrective measures study. At this point, the Environmental Protection Agency has issued its determination specifying a preferred remedy. Normally, the entity and other potentially responsible parties have begun, or perhaps completed, negotiations, litigation (see paragraphs 410-30-35-8 through 35-11), or both for their allocated share of the remediation liability. Accordingly, the entity’s estimate normally can be refined based on the specified preferred remedy and a preliminary allocation of the total remediation costs.
Remedial design through operation and maintenance, including postremediation monitoring. The Resource Conservation and Recovery Act analogue is corrective measures implementation. During the design phase of the remediation, engineers develop a better sense of the work to be done and are able to provide more precise estimates of the total remediation cost. Further information likely will become available at various points until the site is delisted, subject only to postremediation monitoring. The entity should continue to refine and recognize its best estimate of its final obligation as this additional information becomes available.

The diagram below illustrates the relationship between the recognition benchmarks outlined above and the probability and reasonably estimable criteria discussed in ASC 410-30-25-4 through 25-13.

Connecting the Dots

As noted above, recognition benchmark (d) in ASC 410-30-25-15 states that an environmental remediation liability must be recognized upon “substantial completion of [a] feasibility study.” Benchmark (d) further states that a feasibility study is “substantially complete no later than the point at which the potentially responsible parties recommend a proposed course of action to the [EPA].” Therefore, benchmark (d) inherently presumes that the feasibility study will always be completed and issued by the PRPs.

We have observed in practice that the EPA is not legally required to follow the steps in the order described in ASC 410-30 and that therefore, these recognition benchmarks do not always occur in sequential order. Consequently, it is possible that the EPA will perform and complete its own feasibility study for an environmental site. An EPA-conducted feasibility study may be performed in lieu of, or in addition to, a PRP-conducted feasibility study. Thus, a PRP-recommended course of action, as referenced in benchmark (d), may not always take place, or it may occur after the EPA’s completion of a feasibility study and related recommended course of action.

We believe that regardless of whether a feasibility study and a proposed course of action are completed by the PRPs or by the governmental agency charged with making the ultimate remediation decision, they both provide the type of evidence necessary for a reporting entity to make a reliable estimate and therefore require recognition of an environmental remedial liability in a manner consistent with ASC 410-30-25-15(d). Thus, we believe that if the EPA completes a feasibility study for a particular site before the PRPs have recommended their proposed course of action, benchmark (d) is met and a liability must be recognized at the time the EPA completes the feasibility study.

The example below illustrates the application of the recognition benchmarks.

Example 3-3

Company C has been identified as one of many PRPs at a Superfund site. All of the PRPs formed a group (the “PRP Group”) to (1) coordinate efforts with the EPA and (2) allocate the costs of completing the environmental remediation. Given the scope of the remediation, the EPA and the PRP Group performed separate remedial investigation and feasibility studies. Company C has agreed to fund 15 percent of the total cost of the PRP Group’s remedial investigation and feasibility study.

On November 22, 20X6, the EPA published its remedial investigation and feasibility study. As of this date, the PRP Group had not yet completed its remedial investigation and feasibility study. The EPA’s remedial investigation and feasibility study contains four alternative proposed courses of action for remediating the Superfund site but does not specify the EPA’s preferred remedy. Cost estimates for the site remediation range from $500 million to $1.5 billion. Before the release of the EPA’s remedial investigation and feasibility study, C recognized a liability for its allocable share of the cost of completing the PRP Group’s remedial investigation and feasibility study. However, C did not record an environmental remediation liability for the remediation and postremediation components of the cleanup effort.

Recognition benchmark (d) was met on November 22, 20X6, even though the PRP Group had not substantially completed its remedial investigation and feasibility study. Therefore, C should recognize an additional liability for its allocable share of the estimated cost of remediating the Superfund site. The additional liability should be based on C’s best estimate of its share of the remediation liability or, if no best estimate can be made, C’s minimum estimate of its allocable share of the total remediation liability.

3.3.4 Capitalization of Environmental Costs

While environmental costs are generally charged to expense as incurred, they should be capitalized in certain circumstances, as noted below.

ASC 410-30

25-17 In certain situations, such as those described in paragraphs 410-30-25-18 through 25-21, it may be appropriate to capitalize environmental remediation costs.

25-18 Those costs may be capitalized if recoverable but only if any one of the following criteria is met:

The costs extend the life, increase the capacity, or improve the safety or efficiency of property owned by the entity. For purposes of this criterion, the condition of that property after the costs are incurred must be improved as compared with the condition of that property when originally constructed or acquired, if later.
The costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities. In addition, the costs improve the property compared with its condition when constructed or acquired, if later.
The costs are incurred in preparing for sale that property currently held for sale.

The examples in the implementation guidance of ASC 410-30-55, some of which are reproduced below, elaborate on the application of criteria (a) and (b) in ASC 410-30-25-18, which require that the costs incurred result in a future economic benefit.

ASC 410-30

Example 5: Illustrations of Whether Costs to Treat Environmental Contamination Should Be Capitalized or Charged to Expense

Case D: Lead Pipes in Office Building That Contaminate Drinking Water

55-22 The following table provides a summary for determining whether costs to treat environmental contamination should be capitalized or charged to expense.

Environmental Contamination, Treatments	Evaluation of Criteria
Lead Pipes in Office Building Contaminate Drinking Water: A. Remove lead pipes and replace with copper pipes	Removing the lead pipes has improved the safety of the building’s water system compared with its condition when the water system was built or acquired. By removing the lead pipes, the building’s owner eliminated an existing environmental problem and prevented any further contamination from that lead. However, by removing the existing pipes, the building’s owner has not mitigated or prevented environmental problems yet to occur, if any, from future operation of the building. Conclusion: Costs to remove the lead pipes and install copper pipes may be capitalized under the first criterion. The book value of the lead pipes should be charged to expense when removed.

Environmental Contamination, Treatments

Evaluation of Criteria

Lead Pipes in Office Building Contaminate Drinking Water:

A. Remove lead pipes and replace with copper pipes

Removing the lead pipes has improved the safety of the building’s water system compared with its condition when the water system was built or acquired.
By removing the lead pipes, the building’s owner eliminated an existing environmental problem and prevented any further contamination from that lead. However, by removing the existing pipes, the building’s owner has not mitigated or prevented environmental problems yet to occur, if any, from future operation of the building.
Conclusion: Costs to remove the lead pipes and install copper pipes may be capitalized under the first criterion. The book value of the lead pipes should be charged to expense when removed.

Case E: Soil Contamination Caused by an Operating Garbage Dump

55-23 The following table provides a summary for determining whether costs to treat environmental contamination should be capitalized or charged to expense.

Environmental Contamination, Treatments	Evaluation of Criteria
Soil Contamination Caused by an Operating Garbage Dump: A. Refine soil on dump property	The life of a garbage dump is not extended by refining its soil. Further, the condition of the soil after refining will not be improved over its condition when the garbage dump was constructed or acquired. Removal of the toxic waste restores the soil to its original uncontaminated condition. Removal of toxic waste from the soil addresses an existing environmental concern. It also prevents that waste from leaching in the future. However, removing the waste does not mitigate or prevent future operations from creating future toxic waste. The risk will continue regardless of how much of the existing soil is refined. Conclusion: Soil refinement costs should be charged to expense unless the garbage dump is currently held for sale and the costs were incurred to prepare the garbage dump for sale.
B. Install liner	The liner does not extend the useful life or improve the efficiency or capacity of the garbage dump. However, the liner has improved the garbage dump’s safety compared to when the dump was constructed or acquired. The liner addresses an existing and potential future problem. In this example, the garbage dump contains toxic waste from past operations and will likely generate toxic waste during future operations. The liner partly addresses the existing environmental problem by preventing future leaching of existing toxic waste into the soil. The liner also mitigates or prevents leaching of toxic waste that may result from garbage dumping in future periods and has improved the garbage dump’s safety compared to when the dump was constructed or acquired. Conclusion: The liner may be capitalized under either the first or second criterion.

Environmental Contamination, Treatments

Evaluation of Criteria

Soil Contamination Caused by an Operating Garbage Dump:

A. Refine soil on dump property

The life of a garbage dump is not extended by refining its soil. Further, the condition of the soil after refining will not be improved over its condition when the garbage dump was constructed or acquired. Removal of the toxic waste restores the soil to its original uncontaminated condition.
Removal of toxic waste from the soil addresses an existing environmental concern. It also prevents that waste from leaching in the future. However, removing the waste does not mitigate or prevent future operations from creating future toxic waste. The risk will continue regardless of how much of the existing soil is refined.
Conclusion: Soil refinement costs should be charged to expense unless the garbage dump is currently held for sale and the costs were incurred to prepare the garbage dump for sale.

B. Install liner

The liner does not extend the useful life or improve the efficiency or capacity of the garbage dump. However, the liner has improved the garbage dump’s safety compared to when the dump was constructed or acquired.
The liner addresses an existing and potential future problem. In this example, the garbage dump contains toxic waste from past operations and will likely generate toxic waste during future operations. The liner partly addresses the existing environmental problem by preventing future leaching of existing toxic waste into the soil. The liner also mitigates or prevents leaching of toxic waste that may result from garbage dumping in future periods and has improved the garbage dump’s safety compared to when the dump was constructed or acquired.
Conclusion: The liner may be capitalized under either the first or second criterion.

Case F: Water Well Contamination

55-24 The following table provides a summary for determining whether costs to treat environmental contamination should be capitalized or charged to expense.

Environmental Contamination, Treatments	Evaluation of Criteria
Water Well Contamination Caused by Chemicals That Leaked Into Wells Containing Water That Will Be Used in Future Beer Production: A. Neutralize water in wells	The treatment does not extend the life of the wells, increase their capacity, or improve efficiency. The condition of the water is not safer after the treatment compared to when the wells were initially acquired. By neutralizing the water, the possibility of future contamination of the wells from future operations has not been mitigated or prevented. Conclusion: Costs incurred to neutralize well water should be charged to expense unless the wells were held for sale and the costs were incurred to prepare the wells for sale.
B. Install water filters	The water filters improve the safety of the wells compared with their uncontaminated state when built or acquired. The water filters address future problems that may result from future operations. Since the water filters are effective in filtering environmental contamination, they mitigate the effect of spilling new contaminants into the wells during future operations. In addition, the water filters represent an improvement compared with the wells’ original condition without water filters. Conclusion: The water filtering system may be capitalized under either the first or the second criterion.

Environmental Contamination, Treatments

Evaluation of Criteria

Water Well Contamination Caused by Chemicals That Leaked Into Wells Containing Water That Will Be Used in Future Beer Production:

A. Neutralize water in wells

The treatment does not extend the life of the wells, increase their capacity, or improve efficiency. The condition of the water is not safer after the treatment compared to when the wells were initially acquired.
By neutralizing the water, the possibility of future contamination of the wells from future operations has not been mitigated or prevented.
Conclusion: Costs incurred to neutralize well water should be charged to expense unless the wells were held for sale and the costs were incurred to prepare the wells for sale.

B. Install water filters

The water filters improve the safety of the wells compared with their uncontaminated state when built or acquired.
The water filters address future problems that may result from future operations. Since the water filters are effective in filtering environmental contamination, they mitigate the effect of spilling new contaminants into the wells during future operations. In addition, the water filters represent an improvement compared with the wells’ original condition without water filters.
Conclusion: The water filtering system may be capitalized under either the first or the second criterion.

Case G: Underground Gasoline Storage Tank Leak

55-25 The following table provides a summary for determining whether costs to treat environmental contamination should be capitalized or charged to expense.

Environmental Contamination, Treatments	Evaluation of Criteria
Underground Gasoline Storage Tanks Leak and Contaminate the Company’s Property: A. Refine soil	Soil refinement does not extend the useful life, increase the capacity, or improve the efficiency or safety of the land relative to its unpolluted state when acquired. By refining the contaminated soil, the oil company has addressed an existing problem. However, the company has not mitigated or prevented future leaks during future operations. Conclusion: Soil refining costs should be charged to expense unless the property is currently held for sale and the costs were incurred to prepare the property for sale.
B. Encase tanks so as to prevent future leaks from contaminating surrounding soil	In some cases, encasement may increase the life of the tanks because of their increased resistance to corrosion, leaking, etc. In other situations, the treatment may not increase the life of the tanks. However, the encasement has improved the tanks’ safety compared with their condition when built or acquired. Encasement has mitigated or prevented future leakage and soil contamination that might otherwise result from future operations. In addition, the encasement has improved the tanks’ safety compared with their condition when built or acquired. Conclusion: The cost of encasement may be capitalized under either the first or the second criterion.

Environmental Contamination, Treatments

Evaluation of Criteria

Underground Gasoline Storage Tanks Leak and Contaminate the Company’s Property:

A. Refine soil

Soil refinement does not extend the useful life, increase the capacity, or improve the efficiency or safety of the land relative to its unpolluted state when acquired.
By refining the contaminated soil, the oil company has addressed an existing problem. However, the company has not mitigated or prevented future leaks during future operations.
Conclusion: Soil refining costs should be charged to expense unless the property is currently held for sale and the costs were incurred to prepare the property for sale.

B. Encase tanks so as to prevent future leaks from contaminating surrounding soil

In some cases, encasement may increase the life of the tanks because of their increased resistance to corrosion, leaking, etc. In other situations, the treatment may not increase the life of the tanks. However, the encasement has improved the tanks’ safety compared with their condition when built or acquired.
Encasement has mitigated or prevented future leakage and soil contamination that might otherwise result from future operations. In addition, the encasement has improved the tanks’ safety compared with their condition when built or acquired.
Conclusion: The cost of encasement may be capitalized under either the first or the second criterion.

Case H: Air in Office Building Contaminated With Asbestos Fibers

55-26 The following table provides a summary for determining whether costs to treat environmental contamination should be capitalized or charged to expense.

Environmental Contamination, Treatments	Evaluation of Criteria
Air in Office Building Contaminated With Asbestos Fibers: A. Remove asbestos	Removal of the asbestos improves the building’s safety over its original condition since the environmental contamination (asbestos) existed when the building was constructed or acquired. By removing the asbestos, the building’s owner has eliminated an existing problem and has prevented any further contamination from that asbestos. However, by removing the existing asbestos, the building’s owner has not mitigated or prevented new environmental problems, if any, that might result from future operation of the building. Conclusion: Asbestos removal costs may be capitalized as a betterment under the first criterion.

Environmental Contamination, Treatments

Evaluation of Criteria

Air in Office Building Contaminated With Asbestos Fibers:

A. Remove asbestos

Removal of the asbestos improves the building’s safety over its original condition since the environmental contamination (asbestos) existed when the building was constructed or acquired.
By removing the asbestos, the building’s owner has eliminated an existing problem and has prevented any further contamination from that asbestos. However, by removing the existing asbestos, the building’s owner has not mitigated or prevented new environmental problems, if any, that might result from future operation of the building.
Conclusion: Asbestos removal costs may be capitalized as a betterment under the first criterion.

Conversely, there is limited guidance illustrating the application of criterion (c) in ASC 410-30-25-18, which indicates that environmental costs should be capitalized if the “costs are incurred in preparing for sale that property currently held for sale.” Environmental costs incurred to prepare a property for sale (1) provide a probable future economic benefit to the reporting entity in the form of improved salability and (2) should be capitalized to the extent that they are recoverable.

When determining whether environmental costs associated with property held for sale should be capitalized, an entity must identify the timing of recognition and underlying cause of the costs incurred. For example, the entity would first assess whether the recognition criteria for an environmental remediation liability are met before the property is classified as held for sale. It would generally be inappropriate to capitalize environmental costs while the property is held for sale if such costs should have been recognized before the property was held for sale.

Similarly, costs associated with legal obligations to remediate property are typically not incurred in “preparing for sale” since such obligations exist regardless of whether the property is sold. This concept is supported by the example in ASC 410-30-55-21, which states, in part:

Fines paid in connection with violations of the Clean Air Act should be charged to expense. Even if the plant is currently held for sale, the fines should be charged to expense because the costs would not have been incurred to prepare the plant for sale.

Therefore, we believe that the following types of costs typically qualify for capitalization under ASC 410-30-25-18(c):

Costs that the reporting entity voluntarily incurred to improve the salability of an asset currently held for sale.
Costs incurred at the request of a buyer that would otherwise not be a liability of the reporting entity.

The two examples below illustrate the differences between environmental remediation costs that may qualify for capitalization and those that cannot be capitalized.

Example 3-4

Capitalizable Remediation Costs

Company A has property held for sale. To improve the salability of the property, A incurs costs to remediate environmental concerns that it is not legally obligated to address.

In this scenario, the costs are incurred voluntarily and are directly associated with preparing the property for sale (i.e., the costs would be avoided if the property were not for sale). Therefore, the remediation costs incurred may qualify for capitalization under ASC 410-30-25-18(c), subject to the held-for-sale measurement guidance in ASC 360-10-35-43. Note that in this instance, the costs of performing voluntary environmental remediation activities would ordinarily not give rise to a present liability before they are incurred.

Example 3-5

Remediation Costs Not Capitalized

Company A has property held for sale. The due diligence efforts of a prospective buyer reveal land contamination associated with an accidental chemical spill that occurred in a prior period. Because site contamination has been identified, A is legally obligated under local environmental law to perform remediation activities.

In this scenario, ASC 410-30-25-18(c) is not applicable even though an ASC 410-30 environmental obligation is initially identified while the property is classified as held for sale. While the prospective buyer may require A to perform remediation work related to the identified environmental obligation, the obligation in itself is unrelated to the preparation for sale. That is, remediation is required because of a legal obligation that (1) will be settled irrespective of a potential transfer of the property to a new owner and (2) may have qualified for recognition before the property was held for sale. Therefore, an environmental liability should be recorded and charged to expense when remediation costs are reasonably estimable.

Alternatively, if the prospective buyer required A to address certain environmental matters as a condition to closing on the sale and A was not under a preexisting ASC 410-30 legal obligation to address those matters, an agreement with the prospective buyer to perform certain remediation activities may be within the scope of ASC 410-30-25-18(c). In that instance, an environmental liability should be recorded and capitalized when remediation costs are reasonably estimable.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.