3.6 Financial Statement Presentation
3.6.1 Balance Sheet Presentation
ASC 410-30
45-1 An entity’s balance sheet may include several assets that relate to an environmental remediation
obligation. Among them are the following:
- Receivables from other potentially responsible parties that are not providing initial funding
- Anticipated recoveries from insurers
- Anticipated recoveries from prior owners as a result of indemnification agreements.
45-2 A debtor that has a right of setoff that meets all of the conditions in paragraph 210-20-45-1 may offset the
related asset and liability and report the net amount. It 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.
With respect to the balance sheet, a reporting entity should present a liability
for its allocable share of the environmental remediation costs (see Sections 3.4 through 3.4.2.3
for a discussion of how those costs should be measured and allocated). If the
reporting entity prepares a classified balance sheet, the environmental
remediation liability should be bifurcated into current and noncurrent portions
on the basis of the expected timing of settlement.
In addition, as discussed in the guidance above, several assets related to an environmental remediation
obligation may be presented in a reporting entity’s balance sheet. These assets should be presented
separately from the liability (i.e., they should not be netted against the liability) unless the criteria in ASC
210-20-45-1 (reproduced below) are met.
ASC 210-20
45-1 A right of setoff exists when all of the following conditions are met:
- Each of two parties owes the other determinable amounts.
- The reporting party has the right to set off the amount owed with the amount owed by the other party.
- The reporting party intends to set off.
- The right of setoff is enforceable at law.
We believe that with respect to environmental obligations, it would be rare for a reporting entity to
conclude that all of the above conditions are met. Specifically, the first criterion contemplates that
the asset and liability are with the same counterparty. In the context of environmental obligations,
the reporting entity’s liability is typically to the EPA or another state or federal governmental agency,
while its assets are recoverable from another entity, such as another PRP or an insurance company.
Therefore, it would generally not be appropriate for an entity to offset assets and liabilities related to an
environmental remediation obligation in the balance sheet.
3.6.2 Income Statement Presentation
ASC 410-30
45-4 Furthermore, it is particularly difficult to substantiate the classification of environmental remediation costs
as a component of nonoperating expenses. Because the events underlying the incurrence of the obligation
relate to an entity’s operations, remediation costs shall be charged against operations. Although charging the
costs of remediating past environmental impacts against current operations may appear debatable because
of the time between the contribution or transportation of waste materials containing hazardous substances
to a site and the subsequent incurrence of remediation costs, environmental remediation-related expenses
have become a regular cost of conducting economic activity. Accordingly, environmental remediation-related
expenses shall be reported as a component of operating income in income statements that classify items as
operating or nonoperating. Credits arising from recoveries of environmental losses from other parties shall be
reflected in the same income statement line. Any earnings on assets that are reflected on the entity’s financial
statements and are earmarked for funding its environmental liabilities shall be reported as investment income.
45-5 Environmental
remediation-related expenses and related recoveries
attributable to discontinued operations that were
accounted for as such in accordance with Subtopic 205-20
shall be classified as discontinued operations.
With respect to income statement presentation, ASC 410-30-45-4 states that environmental costs
should be presented as operating expenses because “the events underlying the incurrence of the
obligation relate to an entity’s operations.” In addition, ASC 410-30-45-4 indicates that any credits
recorded as a result of probable recoveries should be presented in the same line item as the
environmental costs. We believe that when a reporting entity discounts its environmental remediation
liability, the expense resulting from accretion of the liability to its undiscounted value should be classified
as an additional operating cost of the remediation effort rather than as interest expense. Similarly, we
believe that when a reporting entity discounts an asset for probable recoveries, the income resulting
from accretion of the asset to its undiscounted value should be classified as operating income rather
than interest income.