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
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
Evaluation of Probability Criterion
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, 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, an entity will generally 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.
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. | When a feasibility study or another proposed course of action contains several
remediation alternatives, a range of the total
remediation costs has generally 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
Evaluation of Estimable Criterion
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.
Because the EPA, in practice, may not follow the steps in the order described in
ASC 410-30, 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.
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, 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
Application of Recognition
Benchmarks
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 |
|
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 |
|
B. Install liner
|
|
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 |
|
B. Install water filters |
|
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 |
|
B. Encase tanks so as to prevent
future leaks from contaminating
surrounding soil |
|
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 |
|
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, 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.