Chapter 3 — Accounting for Environmental Obligations

3.5 Subsequent Measurement of Environmental Remediation Liabilities

3.5.1 Changes in Estimates

Determining the amount of an environmental remediation liability depends on a wide range of variables that constantly change as new information becomes available. Circumstances that may result in changes to the recorded amount of an environmental remediation liability include the following:

Changes in a reporting entity’s allocable share of the liability because of:
- The EPA’s identification of additional PRPs.
- Movement of PRPs between categories (e.g., from recalcitrant to participating or vice versa).
- The ability of other PRPs to pay their full allocable share.
- Different allocation percentages agreed to by the PRPs (or assigned by a consultant or the EPA).
Additional phases of the remediation process that become reasonably estimable as progress is made.
Changes in underlying cost estimates for completion of each phase of the cleanup (e.g., the cost of compensation and employee benefits).
Changes in laws and regulations.
Changes in the method approved by the EPA.
Changes in technology used for applying the approved method.

Since the estimated costs of remediation change on the basis of new information, they are considered changes in estimates under ASC 250 and should be recognized in the period in which they occur.

3.5.2 Consideration of Future Events

ASC 410-30

35-2 Additional complexities arise if other potentially responsible parties are involved in an identified site. The costs associated with remediation of a site ultimately will be assigned and allocated among the various potentially responsible parties. The final allocation of costs may not be known, however, until the remediation effort is substantially complete, and it may or may not be based on an entity’s relative direct responsibility at a site. An entity’s final obligation depends, among other things, on the willingness of the entity and other potentially responsible parties to negotiate a cost allocation, the results of the entity’s negotiation efforts, and the ability of other potentially responsible parties associated with the particular site to fund the remediation effort.

35-3 The time period necessary to remediate a particular site may extend several years, and the laws governing the remediation process and the technology available to complete the remedial action may change before the remedial action is complete. Additionally, the impact of inflation and productivity improvements can change the estimates of costs to be incurred.

35-4 The impact of changes in laws, regulations, and policies shall be recognized when such changes are enacted or adopted.

The typical environmental remediation process spans many years because of the complexity associated with treating the site and monitoring it on a go-forward basis. During this time, environmental laws may change and, as a result, affect the estimated cost of the remediation effort. ASC 410-30 indicates that the measurement of an environmental remediation liability should be based on currently enacted laws and adopted regulations and policies (i.e., future changes in environmental laws should not be anticipated).

In addition, the technology that is used to remediate an environmental site constantly changes throughout the life cycle of the cleanup effort. Changes in available technology often result in lower-than-expected costs to clean up the site. However, ASC 410-30-35-5 states that “[o]nce 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” (emphasis added). Therefore, when measuring an environmental remediation liability, a reporting entity should consider only the technology that is currently available to perform the actions required for the approved remediation method. If and when it becomes probable that a revised method will be approved, the reporting entity should update its cost estimate on the basis of the technology that is currently available for applying that revised method.

3.5.3 Discounting Environmental Liabilities

ASC 410-30-35-12 indicates that reporting entities are permitted, but not required, to discount environmental liabilities if both of the following criteria are met:

The “aggregate amount of the liability or component” is “fixed or reliably determinable.”
The “amount and timing of cash payments for the liability or component are fixed or reliably determinable.”

With respect to the determination of whether both criteria are met, ASC 410-30-35-12 defines the “amount of the liability or component” as “the reporting entity’s allocable share of the undiscounted joint and several liability.” The guidance also clarifies that the “unit of account” for assessing whether the criteria for discounting are met could be a component of the liability that is reasonably estimable. Accordingly, it is possible for an entity to measure certain components of the liability on a discounted basis and measure other components of the liability on an undiscounted basis.

Because of the nature of environmental liabilities, as well as the long periods over which remediation costs are typically incurred, we generally would not expect the second criterion to be met. That is, it would generally be difficult for reporting entities to reliably determine the amount and timing of cash payments in future periods. Such an assessment should be based on objective and verifiable information.

With respect to the postremediation component of the environmental remediation liability, the costs incurred during this phase generally span a long period, which may or may not be specified by the EPA. Although the absence of a definitive required postremediation monitoring term makes it challenging to determine whether discounting is appropriate, we do not believe that such an absence would preclude discounting. Similarly, the need to estimate any inflation or productivity improvements does not, in itself, result in a conclusion that the cash flows are not reliably determinable. We believe that the AICPA Accounting Standards Executive Committee (the original developer of the guidance codified in ASC 410-30) contemplated situations in which discounting would be acceptable even though the amount or timing of cash payments is not known with certainty or precision. In that regard, on a continuum of probability, the “reliably determinable” standard is something less than “known with certainty or precision” but more than “reasonably estimable.”

SEC Considerations

It is important to note that ASC 410-30 does not prescribe the particular discount rate to be used when a reporting entity determines that it is allowable and appropriate to discount an environmental remediation liability. However, ASC 410-30 refers to the SEC staff’s interpretive guidance in Question 1 of SAB Topic 5.Y (codified in ASC 450-20-S99-1) on the discount rate to be used for measuring product or environmental remediation liabilities. That guidance states, in part:

Question 1: Assuming that the registrant’s estimate of an environmental remediation or product liability meets the conditions set forth in FASB ASC paragraph 410-30-35-12 (Asset Retirement and Environmental Obligations Topic) for recognition on a discounted basis, what discount rate should be applied and what, if any, special disclosures are required in the notes to the financial statements?

Interpretive Response: The rate used to discount the cash payments should be the rate that will produce an amount at which the environmental or product liability could be settled in an arm’s-length transaction with a third party. Further, the discount rate used to discount the cash payments should not exceed the interest rate on monetary assets that are essentially risk free and have maturities comparable to that of the environmental or product liability. [Footnote omitted]

While the guidance above is applicable to SEC registrants, we believe that entities that are not SEC registrants should also consider this guidance.

3.5.4 Accounting for Potential Cost Recoveries

Under ASC 410-30-35-8, potential recoveries of environmental remediation costs may be claimed from various parties or sources, including insurers, other PRPs, and governmental or third-party entities. With respect to the impact of potential recoveries, ASC 410-30-35-8 states, in part:

The amount of an environmental remediation liability should be determined independently from any potential claim for recovery, and an asset relating to the recovery shall be recognized only when realization of the claim for recovery is deemed probable. The term probable is used in [ASC 410-30] with the specific technical meaning in paragraph 450-20-25-1.

The determination that a potential recovery is probable involves significant judgment and should be based on all relevant facts and circumstances. Paragraph C-28 of AICPA Statement of Position 96-1 (the guidance that was codified in ASC 410-30) states, in part:

To evaluate whether the recovery of a potential claim is probable, correspondence or communication with others such as the insurer, PRPs other than participating PRPs, or legal counsel generally is necessary.

3.5.4.1 Potential Cost Recoveries From Insurance Carriers

With respect to potential cost recoveries from insurance carriers, management should consider both internal and external evidence regarding an insurance claim, including:

Direct confirmation from the insurance carrier that it would agree with the claim.
In the absence of direct evidence from the insurance carrier, an opinion from legal counsel that it is “probable,” as that term is used in ASC 450, that:
- The insurance policy is enforceable.
- Any loss events are covered.
- The insurance carrier will pay the claim.
The insurance carrier’s financial ability to pay the claim.

However, ASC 410-30-35-9 indicates that “[i]f the claim is the subject of litigation, a rebuttable presumption exists that realization of the claim is not probable.”

SEC Considerations

The guidance in ASC 410-30-35-9 is consistent with the SEC staff’s interpretive guidance in Question 2 of SAB Topic 5.Y (codified in ASC 450-20-S99-1). Specifically, footnote 49 of that guidance, which addresses disclosures of uncertainties regarding the legal sufficiency of insurance claims or solvency of insurance carriers, states:

The [SEC] staff believes there is a rebuttable presumption that no asset should be recognized for a claim for recovery from a party that is asserting that it is not liable to indemnify the registrant. Registrants that overcome that presumption should disclose the amount of recorded recoveries that are being contested and discuss the reasons for concluding that the amounts are probable of recovery.

3.5.4.2 Potential Cost Recoveries From Other Entities

Generally, claims made against entities other than insurance carriers for potential cost recoveries will be subject to litigation; therefore, there may be a presumption that recovery is not probable. Such a presumption may be difficult to overcome and would generally require, at a minimum, the opinion of competent legal counsel that recovery is probable.

If a reporting entity determines that a potential recovery is probable, it should record an asset for the expected recovery separately from the environmental remediation liability unless the criteria in ASC 210-20 for offsetting have been met. ASC 410-30-45-2 states, in part, that “[i]t would be rare, if ever, that the facts and circumstances surrounding environmental remediation liabilities and related receivables and potential recoveries would meet all of these conditions.”

The recorded asset may be measured on a discounted or undiscounted basis depending on whether certain conditions are met, as illustrated in the decision tree below.

Regardless of whether the asset is measured at its discounted or undiscounted amount, it must be measured net of any transaction costs (e.g., legal fees) related to the receipt of the recovery.

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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.