Project Pages

Pollution Remediation Obligations—Project Plan

Project Description: The objective of the project is to provide accounting guidance regarding display and disclosure of certain pollution remediation obligations and setting forth the methods for measuring and reporting pollution remediation liabilities.

The scope of the project is limited to pollution (including contamination) remediation obligations and their related costs. It excludes pollution abatement or prevention obligations. It also excludes accounting for future pollution events during the periods leading to the future cleanups (for example, nuclear plant decommissioning or other pollution related to the normal operation of a facility).

Background: This project is needed to address the financial reporting of pollution remediation obligations for which no specific guidance exists for governments. Based on initial research, it was found that governments took different approaches to reporting pollution remediation obligations. This project is intended to provide preparers with specific guidance on how to report pollution remediation obligations, which should result in more consistent reporting, benefiting users of financial statements. A survey of GASAC members conducted in 2001 indicated that a project on environmental liabilities was important and should be added to a list of potential agenda topics.

Accounting Issues: The Pollution Remediation Obligations project includes, among others, the following issues:

1. What constitutes an environmental liability?
   • What types of environmental events are included in the project?

   • What laws or regulations exist regarding environmental liabilities?

2. Are such liabilities measurable or reasonably estimable?

3. To what degree and how are environmental liabilities reported currently?

4. What should be the architecture for reporting environmental liabilities?
   • How measured?
     • Cost accumulation versus fair value

     • Discounting versus current cost
       • Expected present value versus expected cash flow

   • When reported?
     • What events trigger commencement of recognition?

   • How reported?
     • Restatement of prior periods versus reporting in current period

     • Where reported?
       • Display, disclosure, RSI, SI

   • Capitalizing costs versus expensing

   • Effect of insurance recoverability and reimbursements

Project History:

The project came onto the Board’s active agenda in June 2002. In a series of meetings from June to November 2002, the Board discussed research on the state of reporting for environmental liabilities by state and local governments. Based on the results of the research, the Board decided to provide accounting and reporting guidance and to limit the scope of the project to pollution remediation obligations.

The project originally contemplated issuing an Exposure Draft of a proposed Statement of Governmental Accounting and Reporting Standards. However, due to concerns about the proposed use of the expected cash flow technique and the impact that technique could have on other aspects of governmental accounting, the Board approved a change in the project technical plan calling for the issuance of a Preliminary Views (PV) document, rather than an Exposure Draft, in the fourth quarter of 2004.

In arriving at its tentative conclusions, the GASB considered its own standards and those of others, including the FASB, the AICPA, the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting, the Canadian Institute of Chartered Accountants, and the SEC.

Current Developments: In the December 2004 through February 2005 meetings, the Board discussed, and tentatively adopted, draft language for a proposed Preliminary Views (PV) document on Pollution Remediation Obligations. On March 25, 2005 the GASB issued a Preliminary Views document, Accounting and Financial Reporting for Pollution Remediation Obligations. The document summarizes the major preliminary views of the Board.

Work Plan

Pollution Remediation Obligations—Recent Developments

Minutes of Meeting, August 9-11, 2005

The Board reviewed a summation of respondent comments on the Preliminary Views (PV) document for pollution remediation obligations and approved a project schedule calling for issuance of an Exposure Draft (ED) in January 2006. The Board commenced redeliberation of the provisions in the PV by reviewing respondent comments covering miscellaneous issues and tentatively made the following decisions:

• Footnote 5 will be amended to clarify that “governments that retain risk for pollution remediation liability contingencies should apply the provisions of the Statement for recognition of such liabilities.”

• The ED will include a glossary providing descriptions of terms.

• The final sentence in paragraph 34 of the PV, which currently discusses reporting increases in estimates of pollution remediation liabilities, will be amended to also discuss reporting of decreases.

• The flowchart will be amended to provide a description of liability recognition in governmental funds.

The Board also discussed respondent comments on transition provisions and considered an effective date. Staff recommended retroactive application but noted that FASB Statement No. 154, Accounting Changes and Error Corrections, states that retroactive application is impracticable if it “requires assumptions about management’s intent in a prior period that cannot be independently substantiated” or “requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that . . . existed [and] . . . would have been available” in the earlier period. These provisions potentially impact application of the expected cash flow technique to measurements in prior periods. Accordingly, the Board tentatively agreed that governments that have sufficient objective and verifiable information to apply the expected cash flow technique to measurements in prior periods would apply the provisions of the proposed Statement retroactively for all such prior periods. Governments that do not have that information would apply the provisions of the proposed Statement as of the effective date. The Board also tentatively agreed that the effective date would be for periods beginning after June 15, 2007, with a clarification that pollution remediation liabilities would be measured (using the expected cash flow technique) at the beginning of that period to ensure that beginning net assets can be restated.

Minutes of Meetings, March 15 and April 5–7, 2005

Teleconference

The Board reviewed and unanimously approved the ballot draft of the Preliminary Views document with minor editorial changes for clarification. The document is scheduled to be posted to the GASB website on March 25.

Minutes of Meetings, January 31 and February 22–24, 2005

Teleconference

The Board reviewed a revised draft of a proposed Statement on accounting for pollution remediation obligations that will appear as an appendix to a Preliminary Views document on that topic. The Board tentatively approved the draft and requested staff to make certain editorial changes for clarification.

Board Meeting

The Board reviewed a preballot draft of a Preliminary Views (PV) document covering accounting for pollution remediation obligations. The Board tentatively approved the drafts with certain editorial changes for clarification. The Board instructed staff to prepare a ballot draft for review at the Board’s teleconference meeting on March 15. The PV document is expected to be posted to the GASB website later in March.

Minutes of Meeting, January 11–13, 2005

The Board reviewed a draft of a Preliminary Views (PV) document covering accounting for pollution remediation obligations, including the latest draft of a proposed Statement that appears as an appendix to the PV. The Board tentatively approved the provisions presented in drafts and requested staff to make certain editorial changes for clarification.

Pollution Remediation Obligations—Major Tentative Decisions to Date

Pollution remediation: Includes precleanup activities (such as the performance of a site assessment, a corrective measures feasibility study, etc.), cleanup activities (such as containment, or removal and disposal, of pollutants, and site restoration), oversight costs of a regulator and enforcement-related activities chargeable to the government, and operation and maintenance of the remedy, including required monitoring of the remediation effort.

Obligating Events: When a government knows or reasonably believes that a site is polluted, accrual of a liability would be required when certain obligating events occur.  (In certain circumstances costs would be capitalized when incurred rather than accrued as a liability.)  The obligating events reflect that, in situations where the government has not yet been named as a responsible party, governments should commence accrual if they will be compelled to participate in pollution remediation.

Recognition Benchmarks: After an obligating event triggers recognition, governments would be required to accrue components of liabilities as the ranges of their costs become reasonably estimable.  Accrual of additional components and refining (remeasurement) of recognized amounts would be required no later than when certain benchmarks in the assessment-remediation process are reached (similar to, but more generic than, the recognition benchmarks in AICPA Statement of Position 96-1, Environmental Remediation Liabilities).

Measurement Technique: The expected cash flow technique (a probability-weighted amount) would be used for both measurement of pollution remediation liabilities and recognition, based on the ability to reasonably estimate an amount.  For pollution remediation obligations this approach would supercede the guidance in FASB Statement No. 5, Accounting for Contingencies.

Measurement Attribute: The measurement attribute for pollution remediation liabilities would be cost-accumulation (the costs the government estimates it will actually incur), rather than fair value (what the market would charge to do the cleanup).

Measurement at Current Cost: Pollution remediation liabilities would be measured using a current cost approach (similar to GASB Statement 18) rather than present value.  The current cost of a pollution remediation liability would be based on reasonable and supportable assumptions about future events that may affect the eventual settlement of the liability.  Under the expected cash flow technique, the probabilities of these various expectations would affect the probability-weighted measurement of the liability.

Remeasurement: Annual remeasurement or inflation of pollution remediation liabilities would be required, as under GASB Statement 18.

Accounting for Payments Expected from Other Responsible Parties and Insurers: A government’s pollution remediation liability should include remediation work that the government expects to perform for other responsible parties, whether or not the government is required to do that work.  However, any payments expected from those other parties or insurers would reduce the government’s remediation expense and liability if the payments are not yet realized or realizable.  When recoveries become realized or realizable, an asset (cash or a receivable) would be reported and the liability would be increased by the same amount to reflect the government’s obligation to perform that portion of the work for which it has been paid.  Payments expected from other parties would be recognized and measured consistently with the remediation liability (using the expected cash flows technique).

Capitalization:  Pollution remediation costs generally would be expensed.  (For example, a pump and treat system installed for pollution remediation generally would be expensed.)  However, an obligation to acquire or construct a capital asset as part of a pollution remediation effort does not have the characteristics of a liability and would be reported as a capital asset when costs are incurred if Incurred to prepare property for sale in anticipation of a sale, Incurred to prepare property for use when the property was acquired at a lowered price because of pollution, or Incurred to restore a decline in service utility that was recognized as an asset impairment.

Also, proprietary activities that exercise the currently available option to apply FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, would continue to be allowed to defer pollution remediation expenses as provided for in that Statement.

Display in Financial Statements:  Display similar to that in Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, would be required, which is that pollution remediation activities should be reported, “if appropriate,” as program expense (or, in certain circumstances, revenue), as special items, or as extraordinary items.  Governmental funds would report remediation outlays as expenditures under the modified accrual basis of accounting.

Disclosures: For recognized losses and recoveries of losses, the following disclosures would be required if necessary for the financial statements not to be misleading:

• The nature and source of pollution remediation obligations (for example, federal, state, or local laws or regulations)

• The amount of the estimated liability (if not apparent from the financial statements), the methods and assumptions used for the estimate, and the potential for changes due to inflation or deflation, technology, or applicable laws or regulations

• Estimated recoveries offsetting the liability.

For amounts that are not reasonably estimable, governments would disclose a general description of the nature of the pollution remediation activities.

Pollution Remediation—Relevant Links