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Statement 49 — Pollution Remediation Obligations
The views expressed in this presentation are those of Mr. Galloway. Official positions of the GASB are determined only after extensive due process and deliberation.
GASB’s Pollution Project
Project added to research agenda in 2001 for issues not covered in GASB 18
Preliminary Views issued March 2005 39 respondents Public hearing
Exposure Draft issued January 2006 45 respondents
Statement—November 2006
Impact of Pollution on State and Local Governments
History of Pollution Laws
60’s—Growing societal concern 70’s—Pollution PREVENTION Laws
Clean Air Act of 1970 Resource Conservation and Recovery Act
of 1976 Clean Water Act of 1977 Similar state laws
80’s—Pollution REMEDIATION Laws
Legal Liability Standards
Varies by state and law Many are similar to Superfund
Liable under Superfund— Current and previous site owners and
operators Disposers Transporters
Legal Liability Standards
Liability under Superfund— Strict—responsible without regard to fault Joint and several—can be held responsible
for entire cleanup effort States share costs at National Priorities
List sites Orphaned Private sites—10% of remedy
and 100% of operation and maintenance Public facilities—50% of all response costs
Legal Liability Standards
Safe harbor (under Superfund Amendments and Reauthorization Act of 1986), but not in all states Foreclosure Innocent buyer who exercised due
professional care in acquisition Site inspection Site history Neighboring polluters
Map Features Water dischargers Superfund Hazardous waste Toxic releases Air emissions BRS Multi-activities Schools Hospitals Churches Populated Places Streets Streams Water Bodies Zipcodes Counties
2.0 mi across. Tips: Click on the map or choose another option.
Scope of Pollution Remediation Obligations ED
Pollution REMEDIATION
Obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities Site assessments Cleanup, contain, or neutralize hazardous
wastes or hazardous substances oil, asbestos, lead, and hundreds more
Regulatory oversight charges O&M and monitoring sites
Issues Excluded From Scope
Pollution prevention or control obligations
Asset retirement obligations—including landfills (Statement 18)
Fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4)
Accounting for Pollution Remediation Obligations
Recognition Threshold
Determine whether one of more components of a pollution remediation obligation are recognizable as a liability when . . .
1. Government knows or reasonably believes that a site is polluted, and
2. Obligating event occurs
Obligating Events
a. Compelled to take remediation action because of pollution-caused imminent endangerment
b. Violate pollution-prevention permit—for example, RCRA permit
c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)
Obligating Events (continued)
d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation Excludes lawsuits having no merit
e. Govt. commences, or legally obligates self to commence Limited to portion legally required to
complete
Recognition Overview
Component approach Recognize components of liability as they
become reasonably estimable Recognition benchmarks
Cost accumulation, not fair value Current value, not present value Expected cash flow technique
Cost Accumulation Approach
Measured based on pollution remediation outlays expected to be incurred to settle those liabilities
Profits and risk premium should be included only when the government expects to use another party to perform remediation work
Current Value
What it would cost to do all work now Based on reasonable and supportable
assumptions about future events Approved laws and regulations Existing technology expected to be used
Expected Cash Flow
FASB introduced this approach in Statement 143 in 2001 (Con. 7)
Also applied in: Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, including indirect Guarantees of Indebtedness of Others
Interpretation No. 46 (R), Consolidation of Variable Interest Entities
Others
Two Contingencies—FAS 5 Recognition
Potential Payment Probability (a) x (b)
$0 60% $0
$200 40% $80
$0
Potential Payment Probability (a) x (b)
$0 60% $0
$200 40% $80
$0
$1
Now it’s 100% probable. But how much do you
record?
Two Contingencies—Expected Cash Flow
Permutations of Potential Payments
Joint Probabilities
Contingency 1
Contingency 2
Total
$0 $0 $0 36%
$0 $200 $200 24%
$200 $0 $200 24%
$200 $200 $400 16%
100%
Two Contingencies—Expected Cash Flow
Permutation math
$200 X .48 = $96
$400 X .16 = $64
$160
Shortcut math
$200 X .4 = $80
$200 X .4 = $80
$160
OR
Which Outlays?
All direct outlays attributable to remediation All outlays—not just incremental costs Consistent with Statement 18 Includes payroll, pension, and OPEB
May include indirect outlays General overhead A matter of professional judgment
Expense or Capitalize?
For: All outlays when primary purpose of project
is remediation Incremental outlays when primary purpose
is not remediation Generally an expense Capitalize in certain situations
Do NOT record liabilities for capitalizable costs
Take into account expected recoveries
Capitalization Permitted When:
a. Cleanup to prepare property for sale (limited to fair value)
b. Polluted property bought and cleaned for use (limited)
c. Asset impaired and cleanup restores lost service utility (limited)
d. Acquire PP&E that have future alternative use, e.g., land (limited to future service utility)
For a. & b.—capitalize only if incurred within reasonable period
Expected Recoveries from PRPs and Insurance
Reduce expense (and expenditure, if available) and . . .
If not realized or realizable— Net against remediation liabilities
When realized or realizable Accrete liability and report separate
recovery assets (cash or receivable)
Recoveries example
Expected outlays $10,000
Expected recoveries 3,000
Net remediation expense $7,000
If recovery not realized or realizable:• Pollution remediation liability = $7,000
If recovery realized or realizable:• Recovery asset (receivable) = $3,000• Pollution remediation liability = $10,000
Annual Adjustment
Adjust liability annually for changes Inflation or deflation Price increases/decreases for specific cost
elements Changes in technology Changes in laws or regulations
Same approach used in Statement 18
Financial Reporting Display
Government-wide Program cost, or Special item, or Extraordinary item No separate display of liability required
Governmental funds Expenditures recognized when liquidated
with expendable available resources No pollution liability, only payables for
goods and services used
Disclosures
For recognized liabilities and recoveries Nature and source of the pollution
remediation obligation—for example, federal or state law
Liability, if not apparent on statement Methods and assumptions Potential for change in estimate Estimated recoveries reducing the liability
Disclosures
For liabilities (or portions thereof) not yet recognized because not reasonably estimable General description of nature of the
pollution remediation obligation Supersedes FAS 5 disclosure of
“reasonably possible”
Effective Date & Transition
Period beginning after December 15, 2007
Measure liabilities at beginning of that period so beginning net assets can be restated
Apply retroactively if you have sufficient objective verifiable information to apply to prior periods
Early application encouraged
Implementation Ideas
No need to inventory all polluted sites Send year-end inquiry to departments
Similar to contingent liability inquiries, but for obligating events
Use average costs developed by state regulators Modify to fit site if situation different
