On the Radar
Environmental Obligations and
Asset Retirement Obligations
Environmental obligations can arise from (1) the improper operation,
retirement, or closing of a facility and (2) the current or former ownership of a
facility at or near a contaminated site. Entities that have incurred a legal
obligation to remove or remediate pollution or contaminants from environmental media
such as soil, sediment, groundwater, and surface water are generally required to
recognize an environmental remediation liability in their financial statements when
certain conditions are met.
An asset retirement obligation (ARO) is a legal or contractual
obligation associated with the retirement of a tangible long-lived asset that
results from the acquisition, construction, development, and normal operation of
that long-lived asset.
The FASB has established specific guidance on accounting for environmental
obligations and AROs in ASC 410.
Environmental Remediation Liabilities
The FASB’s guidance on accounting for environmental remediation
liabilities is codified in ASC 410-30, and the recognition and disclosure
guidance is principally based on a framework outlined by the guidance on loss
contingencies in ASC 450-20. Environmental remediation liabilities are a
specific type of contingent liability that arises from federal, state, and local
environmental regulations — or, in some instances, international treaties —
related to contamination in soil, sediment, groundwater, and surface water.
In the United States, the U.S. Environmental Protection Agency
(EPA) is the primary, though not the only, environmental regulator. Other
federal, tribal, state, or local agencies may also have authority to regulate
environmental programs. The guidance on accounting for environmental liabilities
classifies laws into two categories: (1) environmental remediation liability
laws and (2) laws intended to control or prevent pollution. The following are
some of the main federal regulations that serve as drivers of environmental
liabilities:
- The Clean Air Act of 1970 (CAA).
- The Clean Water Act of 1972 (CWA).
- The Toxic Substances Control Act of 1976 (TSCA).
- The Resource Conservation and Recovery Act of 1976 (RCRA).
- The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or the “Superfund”).
As with other contingent
liabilities, an environmental remediation liability is recognized when it is
probable that such a liability has been incurred and the amount of the liability
can be reasonably estimated. There is often uncertainty about whether and, if
so, when a legal obligation for environmental remediation has been incurred. The
existence and amount of an environmental remediation liability often become
determinable over a continuum of events and activities. A typical environmental
remediation process consists of the following steps:
ASC 410-30 provides specific benchmarks for an entity
to consider when evaluating the probability of a
loss and the extent to which any loss is reasonably
estimable. One such benchmark requires recognition
of an environmental liability once a feasibility
study is substantially complete, which is no later
than when PRPs recommend a proposed course of action
to the EPA. Sometimes the EPA performs and completes
its own feasibility study in lieu of, or in addition
to, a PRP-conducted feasibility study. Thus, a
PRP-recommended course of action may not always take
place, or it may occur after the EPA’s completion of
a feasibility study and related recommended course
of action.
If the EPA completes
a feasibility study for a particular site before
PRPs have recommended their proposed course of
action, the ASC 410-30 recognition benchmark is met
and a liability must therefore be recognized at the
time the EPA completes the feasibility
study.
When the recognition criteria are met, entities initially
measure environmental remediation liabilities at the estimated cost of
remediating the site; generally, environmental remediation liabilities are not
discounted unless certain conditions are met. Estimated remediation costs are
continually updated, and the recorded liability is adjusted prospectively until
the obligation is settled.
In a manner consistent with the guidance in ASC 450-20 and ASC 275 on other loss
contingencies and uncertainties, entities are required to disclose the existence
of environmental remediation loss contingencies when it is at least reasonably
possible that a loss has been incurred regardless of whether the loss is
reasonably estimable. Additional disclosure requirements exist for recognized
environmental remediation loss contingencies.
Asset Retirement Obligations
Unlike an environmental liability, which results from the
improper use of a long-lived asset, an ARO exists when an entity has an
unconditional obligation associated with the retirement of a tangible long-lived
asset used under normal operations. Like environmental obligations, AROs can
arise from an existing or enacted law. However, unlike many environmental
obligations, AROs can also arise (1) from statute, ordinance, or written or oral
contract or (2) by legal construction of a contract under the doctrine of
promissory estoppel.
Entities should evaluate the existence of legal
obligations on the basis of current laws,
regulations, contractual obligations, and related
interpretations and facts and circumstances and
should not forecast changes in laws or
interpretations of such laws and regulations. The
impacts of changes in laws or regulations should be
considered in the period in which such laws or
regulations are enacted.
An ARO is recognized at fair value when incurred or when a
reasonable estimate of its fair value can be made. An asset retirement cost
(ARC) is recorded by increasing the associated long-lived asset’s carrying
value. The ARC is depreciated over the useful life of the long-lived asset. An
ARO liability is discounted and recorded at present value, and accretion of an
ARO liability due to the passage of time is recognized as a component of
operating expense. Revisions to the estimated timing or amount of cash flows
associated with the retirement activities are recognized as an increase or
decrease in the carrying amount of the ARO and the related ARC.
Entities often
incorporate the use of internal resources into their
remediation plans. The guidance in ASC 410-20
requires the amounts included in the ARO cash flow
estimate to reflect costs that a third party would
incur to conduct retirement activities. Therefore,
in addition to internal resources, entities need to
consider incremental costs (e.g., overhead,
equipment charges, profit margin) to ensure that the
amounts included in the ARO cash flow estimate
reflect costs that a third party would incur.
Accordingly, if an entity settles the ARO by using
its own internal resources, the incorporation of
third-party and marketplace assumptions into the
estimate of ARO cash flows and the initial
measurement of the ARO will most likely result in
the recognition of gains upon the settlement of the
ARO.
Application of the guidance in ASC 410-20 can be complex and requires significant
management estimates and judgment. For example, determining whether a legal
obligation to retire a long-lived asset has been incurred may not always be
clear and unambiguous. If an entity makes a promise to a third party, including
the public at large, about its intentions to undertake asset retirement
activities, significant judgment may be required in the determination of whether
the entity has created a legal obligation under the legal doctrine of promissory
estoppel, which is defined in ASC 410-20-20 (citing Black’s Law
Dictionary, seventh edition) as the “principle that a promise made
without consideration may nonetheless be enforced to prevent injustice if the
promisor should have reasonably expected the promisee to rely on the promise and
if the promisee did actually rely on the promise to his or her detriment.”
Regulatory Landscape
Driven by investor demand, stakeholder pressures, and, more recently, regulatory
attention, companies are increasingly focused on climate-related and
environmental matters. In addition, climate change has been a central topic of
U.S. policy discussions in many government departments and agencies. In the
current and forthcoming regulatory environment, it will be essential for
companies to closely monitor their environmental obligations under new or
changing laws and regulations.
EPA’s Final Rule on Legacy CCR Surface Impoundments and CCR Management Units
On May 8, 2024, the EPA’s final rule on legacy coal combustion residuals (CCR)
surface impoundments and CCR management units (CCRMUs) was published in the
Federal Register. The three main elements of the final rule are
as follows:
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Legacy CCR surface impoundments — The final rule introduces a definition for legacy CCR surface impoundments, which are inactive surface impoundments at inactive power plants. These impoundments must adhere to the same regulations as inactive CCR impoundments at active power plants, barring location restrictions and liner design criteria, with customized compliance deadlines.
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CCRMUs — The final rule stipulates groundwater monitoring, corrective action, closure, and postclosure care requirements for CCRMUs, which are at active and inactive power plants with a legacy CCR surface impoundment. CCRMUs include CCR surface impoundments and landfills closed before October 19, 2015, and inactive CCR landfills.
-
Facility evaluation reports (FERs) — The final rule mandates new reporting requirements. The owners and operators of legacy CCR surface impoundments must prepare FERs that identify and describe the CCRMUs. In a manner consistent with existing CCR rules, facilities must publish FERs on their CCR Web sites in two parts, within 15 months (Part 1) and 27 months (Part 2) of the final rule’s effective date.
Climate and Sustainability Matters
On March 6, 2024, the SEC issued a final rule that requires registrants to
provide climate-related disclosures in their annual reports and registration
statements. Specifically, registrants must disclose certain climate
information in the notes to the financial statements and outside the
financial statements. For example, in the footnotes to the financial
statements, a registrant must disclose (1) financial statement impacts due
to severe weather events and other natural conditions, including the
aggregate expenditures incurred, losses recognized, and capitalized costs
and charges, subject to certain thresholds; (2) a rollforward of carbon
offsets or renewable energy certificates (RECs) if the registrant’s use of
carbon offsets and RECs is a material component of its plan to achieve its
disclosed climate-related targets or goals; and (3) whether and, if so, how
severe weather events and other natural conditions and disclosed
climate-related targets or transition plans materially affected estimates
and assumptions reflected in the financial statements. Large accelerated
filers and accelerated filers must provide disclosures outside the financial
statements about their material Scope 1 and Scope 2 greenhouse gas (GHG)
emissions, subject to assurance requirements that will be phased in. In
addition, all registrants, regardless of filer status, are required to
disclose outside the financial statements (1) governance and oversight
related to material climate-related risks; (2) the material impact of
climate-related risks on the company’s strategy, business model, and
outlook, including material expenditures and impacts related to targets,
goals, and related activities or mitigation; (3) the risk management
processes for material climate-related risks; and (4) material climate
targets and goals.
On April 4, 2024, the SEC voluntarily stayed the effective date of the final rule pending
judicial review of petitions challenging it, which have been consolidated
for review by the U.S. Court of Appeals for the Eighth Circuit. For more
information about the final rule, see Deloitte’s March 6, 2024 (updated April 8, 2024), and March 15, 2024 (updated April 8, 2024),
Heads Up newsletters.
Concurrently with the SEC’s rulemaking activities related to climate
disclosures, its Division of Corporation Finance (the “Division”) has
continued to issue comment letters to registrants in various industries
regarding climate-change disclosures. The Division has publicly released
such comment letters and registrants’ responses to them.
Many companies
are publicly committing to achieve environmental
goals related to climate change and
sustainability. Public commitments about
intentions to undertake a certain course of action
with respect to asset retirement activities can
result in an entity’s incurrence of an ARO that
must be recognized in the financial statements
under the doctrine of promissory estoppel.
Companies should carefully monitor and evaluate
their public commitments and work closely with
legal counsel to evaluate their own specific
circumstances in determining whether legal
obligations have been incurred.
Deloitte’s Roadmap Environmental Obligations and Asset Retirement
Obligations comprehensively
discusses the recognition, measurement,
presentation, and disclosure guidance in ASC 410-20
and ASC 410-30.
Contacts
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Ashley Carpenter
Audit &
Assurance Partner
Deloitte &
Touche LLP
+1 203 761
3197
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For information about Deloitte’s environmental
obligation and ARO service offerings, please contact:
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Jamie Davis
Audit &
Assurance Partner
Deloitte &
Touche LLP
+1 312 486
0303
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Jamie Varkey
Advisory Senior
Manager
Deloitte Transactions and Business
Analytics LLP
+1 214 840 7944
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