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

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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
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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
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Many are similar to Superfund
 Liable under Superfund—
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Current and previous site owners and
operators
Disposers
Transporters
Legal Liability Standards
 Liability under Superfund—
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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
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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.
2.
Government knows or reasonably
believes that a site is polluted, and
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

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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:
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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
$200
60%
40%
$0
$80
$0
Potential Payment Probability (a) x (b)
$0 $1
60%
$0
$200
40%
$80
Now it’s 100% probable.
But how much do you record?
$0
Two Contingencies—
Expected Cash Flow
Permutations of Potential Payments
Contingency
1
$0
Contingency
2
$0
Total
Joint
Probabilities
$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
Shortcut math
OR
$200 X .4 = $80
$400 X .16 = $64
$200 X .4 = $80
$160
$160
Which Outlays?
 All direct outlays attributable to
remediation
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All outlays—not just incremental costs
Consistent with Statement 18
Includes payroll, pension, and OPEB
 May include indirect outlays
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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
Expected recoveries
Net remediation expense
$10,000
3,000
$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
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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
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Program cost, or
Special item, or
Extraordinary item
No separate display of liability required
 Governmental funds
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Expenditures recognized when liquidated
with expendable available resources
No pollution liability, only payables for
goods and services used
Disclosures
 For recognized liabilities and recoveries
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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
Questions?
Wesley Galloway
Telephone—(203) 847-0700 ext.272
[email protected]