Chapter 3 — Accounting for Environmental Obligations

3.4 Initial Measurement of Environmental Remediation Liabilities

Once a reporting entity has determined that it is probable that an environmental remediation liability has been incurred, the entity should estimate the amount of the liability on the basis of available information. As illustrated below, the initial measurement guidance in ASC 410-30 involves a two-step process.

3.4.1 Estimating Environmental Remediation Costs

The first step in the measurement of an environmental remediation liability is to develop an estimate of the total cost of completing a remediation effort. The estimation process should include each site for which a reporting entity has concluded that the recognition criteria have been met (i.e., estimates should be prepared on a site-by-site basis). If the total cost of completing the entire remediation effort is not reasonably estimable, the reporting entity should develop its estimate for the individual components of the remediation process that are reasonably estimable. For example, at the onset of the remediation effort, the reporting entity may not be able to estimate the total cost of completing the entire remediation effort; however, it may be able to estimate the cost of performing the remedial investigation and feasibility study.

Regardless of whether the reporting entity develops a cost estimate for completing the entire remediation effort or just a component, the estimate should encompass the total cost of completing such effort or component thereof (i.e., the cost that will ultimately be allocated to all PRPs, as opposed to only the reporting entity’s estimated allocable portion of the cost). As discussed in Section 3.4.2, the reporting entity would then record its allocable share of the environmental remediation liability.

Estimating the costs of completing the total environmental remediation effort or a component thereof involves significant judgment and depends on key assumptions, including:

The types of costs that should be included in the measurement of the liability.
The remediation method that is expected to be approved to complete the remediation effort.
The effects of expected future events and developments.

These assumptions are discussed below.

3.4.1.1 Types of Costs to Be Included in the Measurement of an Environmental Remediation Liability

ASC 410-30

30-10 Costs to be included in the measurement are the following:

Incremental direct costs of the remediation effort (see paragraph 410-30-55-1)
Costs of compensation and benefits for those employees who are expected to devote a significant amount of time directly to the remediation effort, to the extent of the time expected to be spent directly on the remediation effort.

30-11 The remediation effort is considered on a site-by-site basis; it includes the following:

Precleanup activities, such as the performance of a remedial investigation, risk assessment, or feasibility study and the preparation of a remedial action plan and remedial designs for a Superfund site, or the performance of a Resource Conservation and Recovery Act of 1976 facility assessment, facility investigation, or corrective measures studies
Performance of remedial actions under Superfund, corrective actions under the Resource Conservation and Recovery Act of 1976, and analogous actions under state and non-U.S. laws
Government oversight and enforcement-related activities
Operation and maintenance of the remedy, including required postremediation monitoring.

30-12 Determining any of the following is part of the remediation effort:

The extent of remedial actions that are required
The type of remedial actions to be used
The allocation of costs among potentially responsible parties.

The costs of making such determinations, including legal costs, shall be included in the measurement of the remediation liability.

30-13 The costs of services related to routine environmental compliance matters and litigation costs involved with potential recoveries are not part of the remediation effort.

30-14 Litigation costs involved with potential recoveries shall be charged to expense as incurred until realization of the claim for recovery is considered probable and an asset relating to the recovery is recognized, at which time any remaining such legal costs shall be considered in the measurement of the recovery.

30-15 The determination of what legal costs are for potential recoveries rather than for determining the allocation of costs among potentially responsible parties will depend on the specific facts and circumstances of each situation. For purposes of measuring environmental remediation liabilities, the measurement shall be based on enacted laws and adopted regulations and policies. No changes should be anticipated. The remedial action plan that is used to develop the estimate of the liability shall be based on the methodology that is expected to be approved to complete the remediation effort.

30-16 Costs to defend against assertions of liability in the context of environmental remediation liabilities involve determining whether an entity is responsible for participating in a remediation process.

30-17 The measurement of environmental remediation liabilities shall be based on the reporting entity’s estimate of what it will cost to perform each of the elements of the remediation effort (determined in accordance with paragraphs 410-30-30-11 through 30-15) when those elements are expected to be performed. Although this approach is sometimes referred to as considering inflation, it does not simply rely on an inflation index (cost estimates submitted to the Environmental Protection Agency usually include a prescribed inflation factor) and should take into account factors such as productivity improvements due to learning from experience with similar sites and similar remedial action plans. In situations in which it is not practicable to estimate inflation and such other factors because of uncertainty about the timing of expenditures, a current-cost estimate would be the minimum in the range of the liability to be recorded until such time as these cost effects can be reasonably estimated.

30-18 When an overall liability is estimated by combining estimates of various components of the liability, additional possible losses present in the component estimates must be considered in determining an overall additional possible loss.

The table below summarizes the types of costs that are included in and excluded from the measurement of an environmental remediation liability in accordance with ASC 410-30-30-10 through 30-17 and ASC 410-30-55-1 through 55-3.

Types of Costs	Included	Excluded
Legal costs related to:
Determining the extent of remedial actions that are required
Determining the type of remedial actions to be used
Determining the allocation of costs among PRPs
Potential recoveries
Routine environmental compliance matters
Costs related to completing a remedial investigation and feasibility study
Fees to outside engineering and consulting firms for site investigations and the development of remedial action plans and remedial designs
Fees to contractors for performing remedial actions
Governmental oversight costs and past costs (e.g., costs incurred by the EPA or any other governmental authority dealing with a site)
The cost of machinery and equipment that are dedicated to the remedial actions and do not have an alternative use
Assessments by a PRP group covering costs incurred by the group in dealing with a site
Costs of operation and maintenance of the remedial action, including the costs of postremediation monitoring required by the remedial action plan
Costs of compensation and benefits for employees who are expected to devote a significant amount of time directly to the remediation effort (to the extent of the time expected to be spent directly on the remediation effort)
The following costs, to the extent that such items can be reasonably estimated:
Inflation
Productivity improvements (as a result of learning from experience with similar sites or remediation actions)

As discussed in Section 2.3.6, the EPA may sometimes require PRPs to indefinitely perform OM&M for remedies that contain wastes on-site or include institutional controls. Accordingly, questions have arisen about how a PRP should estimate the costs of OM&M when the period over which such activities will be performed is indefinite. We have observed that while it is common practice for entities to accrue OM&M costs over a 30-year period on a rolling basis, there is no basis under U.S. GAAP for arbitrarily truncating the forecasting period. Instead, the reporting entity should develop its best estimate of what it will cost to perform OM&M for the site (which may be a range).

Further, while legal costs related to potential recoveries are specifically excluded from the measurement of an environmental remediation liability, we believe that estimated costs that an entity expects to incur to defend itself against assertions of liability related to an environmental site may be included in the measurement of an environmental remediation liability as an accounting policy election that should be consistently applied. The EITF Agenda Committee discussed a similar issue with respect to accruing future legal costs for loss contingencies but did not reach a recommendation for the Task Force. ASC 450-20-S99-2 includes the following related to this issue:

The Task Force discussed a potential new issue relating to the accounting for legal costs expected to be incurred in connection with a FASB Statement No. 5, Accounting for Contingencies [codified as ASC 450-20], loss contingency. Some Task Force members observed that they believe practice typically has expensed such costs as incurred; however, other Task Force members suggested that practice may not be consistent in this area. The Task Force declined to add this potential new issue to its agenda.

The SEC Observer noted that the SEC staff would expect a registrant’s accounting policy to be applied consistently and that APB Opinion No. 22, Disclosure of Accounting Policies [codified as ASC 235], requires disclosure of material accounting policies and the methods of applying those policies.

In the absence of further guidance from the FASB or the SEC staff, entities should apply the SEC staff guidance noted at the EITF Agenda Committee meeting referenced above, which requires disclosure and consistent application of an entity’s accounting policy.

3.4.1.2 Remediation Method That Is Expected to Be Approved

ASC 410-30-30-15 states, in part:

The remedial action plan that is used to develop the estimate of the liability shall be based on the methodology that is expected to be approved to complete the remediation effort.

Further, ASC 410-30-35-5 states:

Once a methodology has been approved, that methodology and the technology available shall be the basis for estimating the liability until it is probable that there will be formal acceptance of a revised methodology.

As discussed in Chapter 2, the interested parties (i.e., the EPA and PRPs) will often consider several alternative remediation methods when determining the best course of action for remediating a particular environmental site. The choice of an alternative method is generally affected by (1) the nature, location, and volume of contaminants; (2) the number of different toxins; (3) the existing remediation standards; and (4) the disruption to wildlife or the local community. For example, remediation alternatives may take into account the effects of different options for removing contaminants from the site (e.g., on-site or off-site disposal) or the advantages and disadvantages of targeting specific key areas (“hotspots”) of the site rather than conducting a complete remediation (i.e., bank-to-bank dredging). Each alternative is typically accompanied by cost estimates, which can vary significantly. Ultimately, the EPA will consider the cost estimates of each alternative method when determining which method to approve. However, making this determination can be very time-consuming because the EPA considers input from a number of affected constituents, such as local community members and advocacy groups, as well as from other regulatory departments, if applicable.

While there may be uncertainty about which method will ultimately be approved, we believe that a range of remediation costs is established once cost estimates for the various remediation alternatives have been developed. Therefore, the reporting entity would need to measure its environmental remediation liability by using either the most likely point within the range or, if no single point estimate is better than the others, the minimum amount within the range.

Connecting the Dots

In developing cost estimates for alternative remediation methods, the EPA commonly includes a “no action” alternative, which is generally represented by a cost estimate of zero. While this could be interpreted to mean that the range of cost estimates starts with zero as the low end of the range, the “no action” alternative is included for the sole purpose of providing a baseline for comparison with other alternatives and is not provided as a viable alternative with respect to remediating an environmental site. Therefore, when an entity evaluates the low end of a range of costs of possible remediation alternatives, we do not believe that the “no action” alternative should be considered as part of the range.

In addition, as described in Section 3.3.3, it is possible that both the EPA and a PRP group will conduct a feasibility study for a particular site. In such situations, the EPA and PRP group may (1) consider different remediation alternatives or (2) develop different cost estimates for the same remediation alternative. In those instances, the various alternatives and cost estimates prepared by the EPA and the PRP group would establish a range. The reporting entity would then be required to measure its environmental remediation liability by using the most likely point within the range of cost estimates developed by the EPA and PRP group or, if no single point estimate within the range provides an estimate that is better than the others, the minimum amount within the range.

Connecting the Dots

When the EPA conducts its own feasibility study at a site, it commonly specifies its “preferred remedy” among the alternative remediation methods it considered. Historically, the ultimate ROD issued by the EPA in such situations has generally been consistent with the preferred remedy specified in the feasibility study. Therefore, we believe that there is a rebuttable presumption that the preferred remedy specified in an EPA-conducted feasibility study represents the “methodology that is expected to be approved to complete the remediation effort,” as contemplated in ASC 410-30-30-15. Thus, if a reporting entity does not demonstrate sufficient evidence to overcome the rebuttable presumption, the entity should develop its cost estimates by using the EPA’s preferred remedy “until it is probable that there will be formal acceptance of a revised methodology,” as noted in ASC 410-30-35-5.

However, there may be instances in which a PRP group has developed cost estimates for the preferred remedy that differ from those published by the EPA. Accordingly, it is possible that two sets of cost estimates will exist for the same remediation method (i.e., the EPA’s cost estimates and the PRP group’s cost estimates). In our experience, the cost estimates included in the ROD issued by the EPA are generally not less than those that were included in the EPA’s preferred remedy. Therefore, we generally believe that there is strong evidence that the environmental remediation liability measured on the basis of the cost estimates developed by the EPA for the EPA’s preferred remedy represents the best estimate within the range of possible outcomes.

In accordance with the recognition guidance in ASC 410-30-25, the use of cost estimates associated with a remediation method other than the preferred remedy to measure an environmental remediation liability requires a determination that the other remediation methods and associated cost estimates provide either a better estimate or an equally good estimate.

During the remediation process, additional contaminants are sometimes discovered. Upon such a discovery, different remediation methods and a longer remediation period may be necessary, ultimately increasing the total remediation cost. In situations in which additional contaminants are discovered, the environmental remediation liability is adjusted as a change in accounting estimate and accounted for in accordance with ASC 250-10-45-17 through 45-20. See also Section 3.5.1.

3.4.2 Allocating Environmental Remediation Costs to Other PRPs

When more than one PRP has been identified for a particular site, the total costs associated with remediating the site may be allocated among the various PRPs. In this instance, ASC 410-30-30-1 specifies that the amount recorded by a reporting entity should be its allocable share of the total environmental remediation liability (or a component of the environmental remediation liability). However, when an environmental remediation liability is joint and several, each PRP may be held responsible for the entire cost of the remediation effort regardless of the amount of waste the PRP actually contributed to the site. Therefore, estimating the reporting entity’s allocable share of a joint and several liability requires significant judgment, particularly in the early stages of remediation. However, uncertainty about a reporting entity’s share of a joint and several liability does not preclude liability recognition.

Generally, a reporting entity’s allocable share is a function of (1) its ability to negotiate allocation percentages with the other PRPs and (2) the ability of the other PRPs to pay their allocable share. We believe that the following three-step process should be used for estimating a reporting entity’s allocable share of an environmental obligation:

As a result of the three-step process, the reporting entity’s allocable share of a joint and several liability is equal to (1) the total joint and several environmental remediation liability, less the amount allocable to other PRPs, plus (2) the reporting entity’s share of any amounts that other PRPs are unable to pay.

3.4.2.1 Step 1 — Identify the Other PRPs

Generally, the EPA or another governmental authority overseeing the remediation of the environmental site performs this step. See Section 2.3.1 for a discussion of how the EPA identifies PRPs.

3.4.2.2 Step 2 — Determine the Portion of the Joint and Several Liability Allocable to the Other PRPs

To make this determination, the reporting entity must first classify the population of PRPs into the following categories, as defined in ASC 410-30-20:

Participating PRP — “A party to a Superfund site that has acknowledged potential involvement with respect to the site. Active [PRPs] may participate in the various administrative, negotiation, monitoring, and remediation activities related to the site. Others may adopt a passive stance and simply monitor the activities and decisions of the more involved [PRPs]. This passive stance could result from a variety of factors such as the entity’s lack of experience, limited internal resources, or relative involvement at a site. This category of potentially responsible parties (both active and passive) is also referred to as players.”
Recalcitrant PRP — “A party whose liability with respect to a Superfund site is substantiated by evidence, but that refuses to acknowledge potential involvement with respect to the site. Recalcitrant [PRPs] adopt a recalcitrant attitude toward the entire remediation effort even though evidence exists that points to their involvement at a site. Some may adopt this attitude out of ignorance of the law; others may do so in the hope that they will be considered a nuisance and therefore ignored. Typically, parties in this category must be sued in order to collect their allocable share of the remediation liability; however, it may be that it is not economical to bring such suits because the parties’ assets are limited. This category of [PRPs] is also referred to as nonparticipating [PRPs].”
Unproven PRP — “A party that has been identified as a [PRP] for a Superfund site by the [EPA] or by an analogous state agency, but that does not acknowledge potential involvement with respect to the site because no evidence has been presented linking the party to the site. Also referred to as a hiding-in-the-weeds [PRP].”
Unknown PRP — “A party that has liability with respect to a Superfund site, but that has not yet been identified as a [PRP] by the [EPA] or by an analogous state agency.”
Orphan share PRP — “An identified [PRP] that cannot be located or that is insolvent. Some of these parties may be identified by the [EPA]; others may be identified as the site is investigated or as the remediation is performed. However, no contributions will ever be made by these parties.”

ASC 410-30-30-4 establishes a rebuttable presumption that the joint and several liability should be allocated to only participating PRPs. That is, no portion of the liability should be allocated to the other four types of PRPs described above. Thus, the classification of PRPs can significantly affect the determination of the reporting entity’s allocable share and, therefore, the amount recorded as an environmental remediation liability.

The example below illustrates the determination of a PRP’s classification as a participating PRP.

Example 3-6

In 20X6, 100 companies, including Transport Co., were named PRPs at a Superfund site. The PRP group was held responsible for the remediation of a five-mile section of a river that had been contaminated by hazardous waste.

In 20X7, the PRP group entered into an allocation agreement to fund the cost of completing a remedial investigation and feasibility study. Under the agreement, Transport Co. and PRPs 2 through 99 each received an allocation percentage of 0.5 percent, while PRP 100 received an allocation percentage of 50.5 percent. The allocation percentages were based on an initial study of the quantity and types of hazardous waste contributed by each PRP.

In 20X9, the EPA issued an AOC requesting the PRP group’s participation in a time-critical removal action to address an imminent human health hazard identified at a specific location on the river. Transport Co. and PRPs 2 through 99 signed the AOC. However, PRP 100 disagreed with its allocable share of cleanup costs for the specified section of the river; therefore, it declined to execute the AOC and withdrew from the PRP group under protest, subject to a reservation of rights.

The EPA then issued a unilateral administrative order (UAO) requiring PRP 100 to perform removal-response activities related to the identified section of the river. Upon receiving notice of the UAO, PRP 100 notified both the PRP group and the EPA of its intention to comply with the UAO. PRP 100 continues to consult with the EPA on how it can comply with the UAO.

In this scenario, we believe that it is appropriate for Transport Co. to classify PRP 100 as a participating PRP (as opposed to a recalcitrant or other type of PRP) when estimating PRP 100’s allocable share of the environmental remediation costs. This conclusion is based on the following factors:

PRP 100 was a member of the PRP group from 20X7 to 20X9 and agreed to fund a portion of the costs of the 20X7 remedial investigation and feasibility study during its membership in the group.
Despite its withdrawal from the PRP group as a result of a disagreement over its allocable share of cleanup costs, PRP 100 subsequently agreed to comply with the EPA’s UAO.

As more information becomes available during the remediation process, PRPs may “move” from one PRP category to another. For example, as the EPA learns more about the contamination at a site, it may identify additional PRPs. Such identification may result in the reclassification of certain entities from unknown PRPs to participating PRPs. Further, if a participating PRP subsequently becomes insolvent or otherwise unable to pay its allocable share because its financial condition changes, the PRP may move to the orphan share category. The reporting entity should update its assessment of which PRPs it considers participating and, therefore, update its estimate of its allocable share of the liability on the basis of the facts and circumstances in existence as of the financial statement issuance date.

While there are numerous ways to allocate a joint and several liability, allocation of environmental liabilities is generally based on one or more of the following factors, as described in ASC 410-30-55-4:

ASC 410-30

55-4 There are numerous ways to allocate liabilities among potentially responsible parties. The four principal factors considered in a typical allocation process are the following:

Elements of fair share. Examples are the amount of waste based on volume; the amount of waste based on mass, type of waste, toxicity of waste; the length of time the site was used.
Classification of potentially responsible party. Examples are site owner, site operator, transporter of waste, generator of waste.
Limitations on payments. This characteristic includes any statutory or regulatory limitations on contributions that may be applicable to a potentially responsible party. For example, in the reauthorization of the Comprehensive Environmental Response, Compensation, and Liability Act, it has been proposed that the statute limit the contribution of a municipality to 10 percent of the total remediation liability, irrespective of the municipality’s allocable share.
Degree of care. This refers to the degree of care exercised in selecting the site or in selecting a transporter.

As noted in ASC 410-30-55-5, PRPs may agree among themselves to certain allocation percentages on the basis of one or more of the above factors, or they may engage an external consultant to perform the allocation. In addition, although we would expect PRPs to make this request only in rare circumstances, they may ask the EPA to assign allocation percentages, which are generally nonbinding.

ASC 410-30-30-5 states that the primary sources of evidence for the reporting entity’s estimate of its allocable share of the joint and several liability are the allocation method and percentages that (1) the PRPs have agreed to regardless of whether the PRPs’ agreement applies to the entire remediation effort or to the costs incurred in the current phase of the remediation process, (2) have been assigned by a consultant, or (3) have been determined by the EPA. However, this guidance also states that the reporting entity should estimate its allocable share on the basis of “the allocation method and percentage that ultimately will be used for the entire remediation effort.” Therefore, in certain situations, the allocation method and percentage resulting from one of the primary sources discussed above may differ from the allocation method and percentage that the reporting entity expects will ultimately be used to allocate the cost of the remediation effort. Under ASC 410-30-30-6, “[i]f the entity’s estimate of the ultimate allocation method and percentage differs significantly from the method or percentage from these primary sources, the entity’s estimate should be based on objective, verifiable information.” ASC 410-30-30-6 provides the following examples of such objective, verifiable information:

“Existing data about the kinds and quantities of waste at the site.”
“Experience with allocation approaches in comparable situations.”
“Reports of environmental specialists (internal or external).”
“Internal data refuting [EPA] allegations about the entity’s contribution of waste (kind, volume, and so forth) to the site.”

Connecting the Dots

A PRP group will often agree to certain allocation percentages at an early stage of the remediation effort (e.g., at the remedial investigation stage), before each party’s share of the ultimate remediation effort is known. Since the costs associated with an early stage are generally insignificant in relation to the total site remediation cost, the PRPs may agree to these percentages as a practical matter to comply with EPA requirements even if the percentages are not expected to reflect each PRP’s ultimate share of the entire remediation effort. For example, before completing a remedial investigation, the PRP group may not have enough information to determine which contaminants each PRP contributed. Therefore, the PRPs may each agree to fund equal shares of the cost of completing the remedial investigation even if they do not expect to equally fund the entire site remediation cost.

As discussed above, ASC 410-30-30-5 states that the allocation percentages agreed to by the PRPs for the cost of the remedial investigation are a primary source of evidence for determining the reporting entity’s allocable share. Accordingly, a conflict may arise between the overall objective of determining the reporting entity’s allocable share based on the method and percentage “that ultimately will be used for the entire remediation effort” and the method and percentage that the PRP group agreed to for the current phase of such remediation effort (i.e., a primary source of evidence).

We generally believe that the percentages agreed to by the PRP group represent a primary source of evidence as described in ASC 410-30-30-5 and therefore serve as data points for estimating the reporting entity’s allocable share of the total environmental remediation liability. Consequently, if the cost of the entire remediation effort becomes reasonably estimable before the PRP group has agreed to updated allocation methods or percentages, the reporting entity should generally consider allocation percentages that were previously agreed to when determining its allocable share of the additional environmental remediation liability since, in accordance with ASC 410-30-30-5(a), these allocation methods or percentages were agreed to for a phase of the remediation process. If the reporting entity believes that a different allocation method and percentage should be used, it should apply the guidance in ASC 410-30-30-6, which (1) indicates that the estimate “should be based on objective, verifiable information” and (2) provides examples of such information.

3.4.2.3 Step 3 — Assess the Ability of Each PRP to Pay Its Allocable Share of the Joint and Several Liability

After determining the portion of the environmental remediation liability that is allocable to the other PRPs, the reporting entity must assess the likelihood that they will pay that amount. This assessment involves significant judgment and is often difficult to perform. As part of the assessment, the reporting entity should learn about the financial condition of the other participating PRPs as of each reporting period. If the reporting entity determines that a participating PRP will not be able to pay its allocable share, the reporting entity’s share of that PRP’s allocable amount should be included in the measurement of the reporting entity’s liability.

Example 3-7

Operator Co. has been identified as one of 10 parties potentially responsible for remediation of a Superfund site. The PRPs enter into an allocation agreement immediately before commencing the remediation effort. At this point, Operator Co. concludes that because the other PRPs are included in the allocation agreement, they are considered participating PRPs. Operator Co. also determines that the PRPs each have the financial wherewithal to fund their respective allocable shares of the remediation cost. Under the allocation agreement, Operator Co. and the other PRPs agree to the following allocation percentages:

However, Operator Co. is concerned about PRP 10’s ability to pay its allocable share on the basis of unfavorable operating results in recent periods. Thus, Operator Co. decides to monitor PRP 10’s quarterly filings so that it can determine whether its initial conclusion that PRP 10 was a participating PRP is still appropriate. Two years into the remediation process, PRP 10 files for bankruptcy as a result of its continued financial decline. Accordingly, Operator Co. determines that PRP 10 should be reclassified as an orphan share PRP. Thus, Operator Co. updates its estimate of its allocation percentage by calculating its allocable portion of PRP 10’s share as follows:

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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.