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. 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,
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, 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, the “no action” alternative should not 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, 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, 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.
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
Classification of PRP as Participating
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, 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).
The percentages agreed to by the PRP group generally 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
Assessment of Joint and Several Liability
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: