A new proposed Governmental Accounting Standards Board standard on accounting for pollution remediation may not decontaminate America's brownfields, but if adopted, it should make governmental financial statements a little neater.The proposal establishes a consistent way for governments to report certain costs and long-term obligations relating to pollution remediation. Any one of five triggering events would require a government to recognize a liability and apply an expected cash-flow measurement technique to recognize related liabilities, expenses and expenditures.

"This proposed standard would result in more uniform recognition of environmental liabilities that are out there, some of which have not been reported," said GASB project manager Wesley Galloway. "In certain cases, those will be material to financial statements."

The five triggering, or "obligating" events are:

1. Pollution posing an imminent danger to the public or the environment and the government has little or no discretion to avoid fixing the problem;

2. A government has violated a pollution prevention-related permit;

3. A regulator has identified a government as responsible for cleaning up pollution;

4. A government is named in a related lawsuit, and;

5. A government has begun to clean up pollution or conduct related activity.

Once any of the obligating events has occurred, a pollution remediation liability would be recognized as soon as a reasonable estimate can be made of the range of potential outlays to settle the liability. The liability is measured using an expected cash-flow technique, which measures the liability as the probability-weighted average of the range of potential outlays.

The estimate could get nebulous in a lawsuit in which the outcome is uncertain. If the government is seen as having a 10 percent chance of losing the suit, it would record 10 percent of the estimated cost.

The scope of the document excludes pollution prevention or control obligations with respect to current operations, and future pollution remediation activities that are required upon retirement of an asset, such as landfill closure and post-closure care, and nuclear power plant decommissioning.

The exposure draft clarifies a few commonly misunderstood points that were suggested in a preliminary views document that was issued for comment in May of 2005. One clarification noted that when one of the five obligating events occurs, the governmental entity can recognize only the components of the pollution problem that can at that time be reasonably estimated. The entire decontamination project does not need to be estimated at once.

Another change is that restrictions on transferred assets do not include a requirement that the transferred asset be returned to the transferor if the asset is not used as specified. The ED also clarifies the obligating event on imminent danger to reiterate that it includes events that the government must remedy even though it is not the responsible party.

The ED did not vary from the preliminary views document on the most controversial issue: the expected cash-flow techniques, which many comment letters criticized as being too subjective or too susceptible to manipulation.

"The board pointed out in the basis of conclusions in the exposure draft that the ASTM International Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters, which is the standard used by professionals who produce remediation cost estimates, calls for those professionals to base their estimates on statistical data from comparable events," Galloway said. "This is what environmental professionals do, so it makes sense that we not have governments come up with a different estimation technique."

The board also reacted to frequent comments that frivolous lawsuits could result in onerous and ultimately pointless efforts to measure probable costs. A footnote in the ED noted that lawsuits ruled as frivolous by the relevant jurisdiction do not qualify as obligating events.

Legal implications

Eric S. Berman, assistant comptroller of the Commonwealth of Massachusetts, has more concerns about the legal implications of the proposed standard. While acknowledging that he has yet to discuss the details with attorneys, he said that the rules in a standard on pollution remediation may affect the interpretation of rules in other standards.

"If you calculate a particular liability for pollution remediation one way, and then have a similar liability - compensated absences, for example, or slip-and-falls or other claims and judgments - shouldn't you be calculating them the same way?" Berman said.

Noting that he was expressing his own opinion, not that of the Commonwealth of Massachusetts, Berman went on to say that he supported GASB's intent. "At first blush, the ED is an improvement over the PV document," Berman said. "It has a little more flexibility in terms of the obligating events that would cause an accrual."

Berman went on to say, however, that he thought it might be difficult for some professionals to clear away many years of thinking that started in 1975 with the issuance of Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies, which, by default, has served as the only existing guidance on accounting for pollution remediation.

That standard requires recognition only when the liability is considered probable, which is normally interpreted to mean that the probability of the cost occurring is more than 50 percent, and often over 70 percent.

Based on comments received on the PV document, the board changed transition provisions. The PV had suggested retroactive application, but respondents asked how that could be done, since it would require assumptions about what information they would have had available in prior periods. The ED therefore says that if reporting entities have sufficient objective verifiable information to report retroactively, they should do so. If they don't, then implementation should be for financial statements beginning after June 15, 2007. In addition, liabilities should be measured as of the beginning of that period, so they can restate net assets.

"Governments need to be aware that starting around this time next year, they will be needing to look at their pollution remediation obligations to determine if they have liabilities and start measuring them," Galloway said.

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