Statement 49 — Pollution Remediation Obligations

Statement 49 —
Pollution Remediation
Obligations
Wes Galloway, GASB Staff
Smitty – MTSU
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Disclaimers
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.
However, Smitty can say whatever he dang
well pleases about any topic, and usually
does!
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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
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If it’s s toxic,
corrosive,
reactive or explosive,
the waste that you have is a hazard.
If it’s s toxic,
corrosive,
reactive or explosive,
then you have hazardous waste.
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A Survey – how many of you
Prepare your own journal entries?
Prepare your own adjusting entries?
Prepare your own financial statements?
Do your own actuarial calculations?
So, why the heck do you think you are
going to be implementing this standard
on your own?
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Impact of Pollution on
State and Local
Governments
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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
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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
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4

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
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Example
County road
department properly
disposed of paint
stripping chemicals
But recycler did not
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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
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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.
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Scope of Pollution
Remediation
Obligations ED
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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
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7

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)
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Expected Impact
Does not require any additional
remediation efforts
Governments typically don’t do
remediation without expert advice, so no
additional consultants needed
No major impact on most brownfields
redevelopment efforts
• Often capitalizable
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Accounting for
Pollution Remediation
Obligations
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Types of Remediation
Obligations
Pre-cleanup activities: site assessment,
feasibility study, design
Cleanup activities: neutralization,
containment, disposal activities
Oversight and enforcement costs
Operation and maintenance of the
remedy and monitoring
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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
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SOP 96-1 Vs. Obligating Events
SOP 96-1 interprets FAS 5
Presumes negative outcome (liability) when
a) “Litigation has commenced or a claim or an
assessment has been asserted or . . . is
probable”
AND
b) “Entity is associated with the site”
Disposed of or transported waste, owned or
operated site
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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)
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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
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Recognition Overview
Component recognition approach
Cost accumulation, not fair value
Current value, not present value
Expected cash flow technique
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Component Recognition
Recognize COMPONENTS of a liability
only when they become reasonably
estimable
Recognition benchmarks
• For determining when components are
reasonably estimable
• Apply only to more complex/uncommon
sites
• Borrowed from SOP 96-1
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Recognition Benchmarks:
Reevaluate estimated liability
Receipt of administrative order compelling
government to take response action
Participation in site assessment or investigation
Completion of corrective measures feasibility
study
Issuance of authorization to proceed in cleanup
Remediation design and implementation,
through and including operation, maintenance,
and postremediation monitoring
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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
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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
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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
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Expected Cash Flow
Simplified Decision Tree Example
Key Uncertainties for this example
• Cleanup level to be achieved
General residential use
Commercial use
• Depth of soil contamination
1 yard depth
2 yards depth
• Remediation technology to be used
Removal and transport to landfill
Gas sparging
Pump & treat
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Simplified Decision Tree Example
.2
Landfill .04 x $250K
.5
1 yard depth
.5
Sparging .10 x $125K
.4
.3
Pump & treat .06 .
Commercial
.2
Landfill .04 .
.5
2 yards depth .5
Sparging .10 .
.3
Pump & treat .06 .
.2
Landfill .06 .
.5
1 yard depth
.5
Sparging .15 .
.3
.6
Pump & treat .09 .
Residential
.2
Landfill .06 .
.5
2 yards depth .5
Sparging .15 .
.3
Pump & treat .09 .
100%
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
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Expense or Capitalize?
What could be capitalized:
• 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
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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
If project not primarily for pollution remediation,
apply above to incremental outlays attributable
to remediation.
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Expected Recoveries
Two types
• Payments expected from other Potential
Responsible Parties (PRPs)
• Expected insurance recoveries
Measurement—based on expected cash
flows and current value
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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)
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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
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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
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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
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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
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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”
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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
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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
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Questions?
Wesley Galloway
Telephone—(203) 847-0700 ext.272
WAGalloway@gasb.org
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