Chapter 3 — Accounting for Environmental Obligations
Chapter 3 — Accounting for Environmental Obligations
3.1 Introduction
The primary objective of ASC 410-30 is to provide accounting guidance on
environmental remediation liabilities arising from pollution or contamination caused by
some past act or event. The recognition and disclosure guidance in ASC 410-30 is
generally based on the framework outlined in ASC 450-20, which requires the recognition
of a loss when (1) it is probable that a loss has been incurred and (2) the amount of
the loss can be reasonably estimated. However, ASC 410-30 provides incremental and
interpretive guidance on how to apply these recognition criteria specifically to
environmental obligations in the context of the legal framework established in the
United States. That is, while ASC 450-20 broadly addresses the accounting for all loss
contingencies, ASC 410-30 provides additional guidance on accounting for a subset of
loss contingencies (specifically, environmental remediation liabilities), as illustrated
below.
ASC 410-30 provides guidance on measuring an estimated environmental
remediation liability, including which costs to include in the estimate, how to consider
the effects of future developments, and how to allocate the liability among PRPs. In
addition, ASC 410-30 addresses the accounting for potential recoveries of environmental
losses from insurance providers or other third parties. However, as discussed in
Chapter 2, CERCLA imposes a liability scheme that differs from
traditional common law and statutory liability schemes. Specifically, a liability under
CERCLA is joint and several; therefore, each PRP is potentially liable for the entire
cost of cleanup. This liability scheme poses challenges to the application of ASC 410-30
when measuring a PRP’s allocable share of an environmental remediation liability once
the recognition criteria have been met.
Several years can elapse from the time a reporting entity is named as a
PRP to when the environmental remediation process is completed. Because of the amount of
time required to remediate a site, the complexity of the legal framework, and the number
of parties that may be responsible for paying the costs related to a site, it can be
difficult to determine when to recognize and how to measure an environmental remediation
liability.
The remainder of this chapter provides an in-depth discussion of the
recognition and measurement guidance in ASC 410-30, as well as examples that illustrate
how the concepts discussed are commonly applied in practice.
3.2 Scope of ASC 410-30
ASC 410-30
Entities
15-1 The provisions of this Subtopic apply to all entities. This Subtopic provides guidance on accounting for
environmental remediation liabilities and is written in the context of operations taking place in the United
States; however, the accounting guidance is applicable to all the operations of the reporting entity.
15-2 The recognition and measurement guidance in this Subtopic should be applied on a site-by-site basis.
Transactions
15-3 The guidance in this Subtopic does not apply to the following transactions and activities:
- Environmental contamination incurred in the normal operation of a long-lived asset (see Subtopic 410-20 for guidance that will apply if the entity is legally obligated to treat the contamination). Paragraph 410-20-15-3(b) explains that the obligation to clean up the spillage resulting from the normal operation of the fuel storage facility is within the scope of Subtopic 410-20. Additionally, that Subtopic applies if a legal obligation to treat environmental contamination is incurred or assumed as a result of the acquisition, construction, or development of a long-lived asset.
- Pollution control costs with respect to current operations or on accounting for costs of future site restoration or closure that are required upon the cessation of operations or sale of facilities, as such current and future costs and obligations represent a class of accounting issues different from environmental remediation liabilities.
- Environmental remediation actions that are undertaken at the sole discretion of management and that are not induced by the threat, by governments or other parties, of litigation or of assertion of a claim or an assessment.
- Recognizing liabilities of insurance entities for unpaid claims.
- Natural resource damages and toxic torts (see paragraphs 450-20-55-10 through 55-21).
- Asset impairment issues.
While ASC 410-30 is written specifically in the context of U.S. environmental laws, the Codification
excerpt above specifies that the subtopic applies to all entities that comply with U.S. GAAP regardless
of location. In addition, the excerpt clarifies that the “unit of account” for recognizing and measuring
environmental remediation liabilities is the individual site. Therefore, a reporting entity with foreign
operations must understand the relevant laws and regulations governing environmental remediation
obligations in the foreign jurisdictions in which it operates so that it can properly apply the guidance
in ASC 410-30. Further, with respect to environmental remediation obligations in the United States, a
reporting entity must also consider state laws and regulations, if applicable.
Connecting the Dots
As noted in ASC 410-30-15-3(c), the guidance in ASC 410-30 does not apply to “[e]nvironmental
remediation actions that are undertaken at the sole discretion of management and that are not
induced by the threat . . . of litigation or of assertion of a claim or an assessment.” Therefore,
ASC 410-30 does not require the recognition of a liability for environmental remediation activities
voluntarily undertaken by a reporting entity. The decision to incur the costs of performing such
environmental remediation activities in the future does not give rise to a present liability since
the entity has considerable discretion in changing its plans and avoiding the expenditure. The
determination of whether an environmental remediation action is voluntary or induced by the
threat of litigation involves considerable judgment and should be based on all relevant facts
and circumstances.
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
We believe that 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
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, we believe that 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, we generally believe that an
entity will 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.
We have observed that 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. | We generally believe that when a feasibility study or another proposed course of
action contains several remediation alternatives,
a range of the total remediation costs has 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
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.
We have observed in practice that the EPA is not legally required to follow the steps in the order described in ASC 410-30 and that therefore, 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.
We believe that 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, we believe that 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
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, we believe that 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.
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:
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.
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.
3.7 Disclosure Considerations
3.7.1 Interaction of ASC 410-30 With ASC 450-20 and ASC 275
ASC 410-30-50-5 states that ASC 450-20 provides the primary disclosure requirements for environmental
remediation loss contingencies. In addition, ASC 410-30-50-6 states that the incremental disclosure
requirements of ASC 275 also apply to environmental remediation liabilities. The table below summarizes
the application of the disclosure requirements of ASC 450-20 and ASC 275 to environmental liabilities.
Disclosures Related to Loss Contingencies | ||
---|---|---|
Possibility That a
Loss Has Been Incurred
|
Ability to Estimate
a Loss
|
Disclosure
Requirements of ASC 450-20 and ASC 275
|
Reasonably
possible | May or may not
be reasonably
estimable | Disclose all of the following:
|
Probable | Not reasonably
estimable | Disclose both of the following:
|
Probable | Reasonably
estimable | Disclose all of the following:
|
In addition, an entity should evaluate disclosure requirements related to losses
arising after the date of the financial statements. ASC 855-10-50-2 requires an
entity to disclose a nonrecognized subsequent event if it is “of such a nature
that [it] must be disclosed to keep the financial statements from being
misleading.” Although an entity must use judgment to determine whether its
financial statements would be misleading without disclosure of a given
nonrecognized subsequent event, it would seem prudent for an entity to disclose
any reasonably possible nonrecognized loss contingency that could materially
affect its financial position, results of operations, or trend of operations. If
such disclosure is necessary, it should include both of the following:
- The nature of the contingency (i.e., a description of the environmental remediation obligation). See ASC 450-20-50-9(a).
- An estimate of the possible loss exposure or a statement that such an estimate cannot be made. See ASC 450-20-50-9(b).
For further discussion of disclosure considerations under ASC
450-20 and ASC 275, see Section 2.8.1 of Deloitte’s Roadmap Contingencies, Loss Recoveries, and
Guarantees.
3.7.2 Other Required Disclosures Under ASC 410-30
ASC 410-30 requires certain disclosures in addition to the applicable disclosures prescribed by ASC
450-20 and ASC 275. Those additional required disclosures are summarized in the table below.
Topic | Other Required Disclosures Under ASC 410-30 |
---|---|
Unasserted claims | “Whether notification by regulatory authorities . . . constitutes the assertion of a claim
is a matter of legal determination. If an entity concludes that it has no current legal
obligation to remediate a situation of probable or possible environmental impact,
then . . . no disclosure is required. However, if an entity is required by existing laws
and regulations to report the release of hazardous substances and to begin a
remediation study or if assertion of a claim is deemed probable, the matter would
represent a loss contingency subject to the disclosure provisions of paragraphs 450-20-50-3 through 50-4, regardless of a lack of involvement by a regulatory agency.” See ASC
410-30-50-13. |
Discounted or
undiscounted liabilities | Disclose all of the following:
|
SEC Considerations
The requirements of ASC 410-30-50-7 to disclose the undiscounted amount of an
environmental remediation liability and the discount rate used are consistent with the SEC staff’s
interpretive response to Question 1 of SAB Topic 5.Y (codified in ASC 450-20-S99-1). However, that interpretive response also
requires disclosure of both of the following:
- “[E]xpected payments for each of the five succeeding years and the aggregate amount thereafter.”
- A “reconciliation of the expected aggregate undiscounted amount to amounts recognized in the statements of financial position.”
In addition, the interpretive response to Question 1 of SAB Topic 5.Y states that “[m]aterial
changes in the expected aggregate amount since the prior balance sheet date, other than those
resulting from pay-down of the obligation, should be explained.”
See Section 3.7.4 for a
discussion of additional SEC disclosure requirements related to
environmental obligations.
Connecting the Dots
ASC 410-30-50-14 acknowledges that in certain situations, the estimated total unrecognized
exposure to environmental remediation loss contingencies may not have a material adverse
effect on the consolidated financial statements. In such situations, it may be appropriate for a
reporting entity to provide a disclosure that addresses this exposure in total. ASC 410-30-50-14
provides the following example of such a disclosure:
[M]anagement believes that the outcome of these uncertainties should not have [or “may have”] a
material adverse effect on the financial condition, cash flows, or operating results of the entity.
However, as noted in ASC 410-30-50-15, this type of disclosure should not be considered a
substitute for any of the required disclosures discussed above.
3.7.3 Disclosures That Are Encouraged but Not Required
Because of the pervasive uncertainty associated with many environmental remediation obligations and
the significant judgment required in accounting for such obligations, certain additional disclosures are
encouraged, but not required, under ASC 410-30-50. Those encouraged disclosures are summarized in
the table below.
Topic | Disclosures Encouraged, but Not Required, Under ASC 410-30-50 |
---|---|
Environmental
liabilities — general |
|
Environmental
liabilities —
site-specific | If information related to an individual site is relevant to the assessment of the reporting
entity’s statement of financial position, the following disclosures under ASC 410-30-50-10(d)
are encouraged with respect to the site:
|
Cost recoveries |
|
3.7.4 SEC Disclosure Requirements
While the guidance in ASC 410-30-50 only encourages disclosure of the
items described in the previous section, the interpretive response to Question 2
of SAB Topic 5.Y indicates that the SEC staff typically requires
disclosure of these items to “prevent the financial statements from being
misleading and to inform readers fully regarding the range of reasonably
possible outcomes that could have a material effect on the registrant’s
financial condition, results of operations, or liquidity.”
That interpretive response also states that in addition to the disclosures required under ASC 410-30 and
ASC 450-20, other disclosures may be necessary, including the following:
- “Circumstances affecting the reliability and precision of loss estimates.”
- “The extent to which unasserted claims are reflected in any accrual or may affect the magnitude of the contingency.”
- “Uncertainties with respect to joint and several liability that may affect the magnitude of the contingency, including disclosure of the aggregate expected cost to remediate particular sites that are individually material if the likelihood of contribution by the other significant parties has not been established.”
- “Disclosure of the nature and terms of cost-sharing arrangements with other [PRPs].”
- “The extent to which disclosed but unrecognized contingent losses are expected to be recoverable through insurance, indemnification arrangements, or other sources, with disclosure of any material limitations of that recovery.”
- “Uncertainties regarding the legal sufficiency of insurance claims or solvency of insurance carriers.”
- “The time frame over which the accrued or presently unrecognized amounts may be paid out.”
- “Material components of the accruals and significant assumptions underlying estimates.”
Further, the interpretive response to Question 2 of SAB Topic 5.Y cautions
registrants that a disclosure that “the contingency is not expected to be
material does not satisfy the requirements of FASB ASC Topic 450 if there is at
least a reasonable possibility that a loss exceeding amounts already recognized
may have been incurred and the amount of that additional loss would be material
to a decision to buy or sell the registrant’s securities. In that case, the
registrant must either (a) disclose the estimated additional loss, or range of
loss, that is reasonably possible, or (b) state that such an estimate cannot be
made.”
In its interpretive response to Question 3 of SAB Topic 5.Y, the SEC staff addresses disclosures that may
be required outside the financial statements and states, in part:
Registrants should consider the requirements of Items 101 (Description of Business), 103 (Legal Proceedings),
and 303 (MD&A) of Regulation S-K. The Commission has issued interpretive releases that provide additional
guidance with respect to these items. In a 1989 interpretive release, the Commission noted that the availability
of insurance, indemnification, or contribution may be relevant in determining whether the criteria for disclosure
have been met with respect to a contingency. The registrant’s assessment in this regard should include
consideration of facts such as the periods in which claims for recovery may be realized, the likelihood that the
claims may be contested, and the financial condition of third parties from which recovery is expected.
Disclosures made pursuant to the guidance identified in the preceding paragraph should be sufficiently
specific to enable a reader to understand the scope of the contingencies affecting the registrant. For
example, a registrant’s discussion of historical and anticipated environmental expenditures should, to the
extent material, describe separately (a) recurring costs associated with managing hazardous substances
and pollution in on-going operations, (b) capital expenditures to limit or monitor hazardous substances or
pollutants, (c) mandated expenditures to remediate previously contaminated sites, and (d) other infrequent
or non-recurring clean-up expenditures that can be anticipated but which are not required in the present
circumstances. Disaggregated disclosure that describes accrued and reasonably likely losses with respect to
particular environmental sites that are individually material may be necessary for a full understanding of these
contingencies. Also, if management’s investigation of potential liability and remediation cost is at different
stages with respect to individual sites, the consequences of this with respect to amounts accrued and disclosed
should be discussed. [Footnotes omitted]
SEC Regulation S-K, Item 103, requires disclosure of any material pending legal
proceedings, including “the name of the court or agency in which the proceedings
are pending, the date instituted, the principal parties thereto, a description
of the factual basis alleged to underlie the proceeding and the relief sought.”
Similar information is to be included for “any such proceedings known to be
contemplated by governmental authorities.”
Connecting the Dots
On August 26, 2020, the SEC issued a final
rule amending Item 103. The final rule, which became
effective on November 9, 2020, permits the use of hyperlinks or
cross-references to disclosures about legal proceedings that were
included elsewhere in the document provided that the hyperlink or
cross-reference does not make reference from such financial
statements to other areas outside of the financial statements (e.g.,
Item 103). The final rule also updates the disclosure threshold for
environmental proceedings. Before the amendment, Instruction 5.C to Item
103 required disclosure of an environmental proceeding to which the
government was a party if the proceeding was expected to result in
sanctions of $100,000 or more. The final rule increases the quantitative
threshold to $300,000 but also permits the registrant to elect an
alternative higher threshold if the registrant determines that such
threshold is more reasonably designed to result in the disclosure of
material environmental proceedings. If so, the alternative higher
threshold is limited to the lesser of $1 million or 1 percent of the
current assets of the registrant and its subsidiaries on a consolidated
basis. A registrant must disclose this alternative threshold in each
annual and quarterly report.
On September 22, 2021, the SEC’s Division of Corporation Finance
publicly released a sample letter that highlights the types of
comments it may issue to public companies regarding climate-related disclosures,
primarily focusing on disclosures in the business, risk factors, and MD&A
sections of filings. The sample comments, which the SEC published before
publicly releasing any company-specific comments, serve as an early warning to
registrants that have not received any company-specific comments to date. For
more information about SEC communications regarding climate-related matters and
other environmental, social, and governance (ESG) disclosures, see Deloitte’s
September 27, 2021, Heads
Up.
On March 21, 2022, the SEC issued a proposed rule that would enhance and standardize the
climate-related disclosures provided by public companies. In the proposing
release, the SEC noted that certain aspects of the disclosures registrants would
be required to provide are similar to those that some companies provide under
existing disclosure frameworks and standards, such as those recommended by the
Financial Stability Board’s Task Force on Climate-Related Financial
Disclosures and the Greenhouse Gas
Protocol. For more information about the SEC’s proposed rule
on climate-related disclosures, see Deloitte’s March 21, 2022 (updated March 29, 2022);
March 29, 2022; and May 26, 2022, Heads
Up newsletters.