Microsoft PowerPoint - Accounting for Environmental Liabilities

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					          Accounting for Environmental Liabilities

             An Overview of Requirements and
                Under FAS 5 and FAS 143

This talk

• Will:
    – Review the implications of FAS 5 and 143
    – Discuss issues around these regulations
    – Outline approaches used to address these requirements

• Will Not:
    – Analyze FAS 5 and FAS 143 in detail
    – Offer accounting, financial or legal advice
    – Present a “silver bullet” for compliance

Progressive Impact
 • Remediation
            Significant cost outlays that were not previously reported
            Cleanup requirements spread to other areas

 • Liabilities
            Third party actions – private citizen suits, whistleblowers
            Asset value depressed by “stigma”

 • Operations
            Potentially significant capital for controls
            Permit excursions lead to fines or limit production

 • Risk
            New regulations can affect product lines
            Costs of operating older facilities

 • Accounting scandals

Disclosure Rules
• SEC rules and FAS 5 require disclosure when matters are:
    • “Probable”
    • “Estimable”
    • “Material”
    • Subject to fines
• AICPA issues Statement of Position 96-01 as guidance for:
    • recognizing a contingent environmental remediation liability
    • categories of costs to be considered
    • handling uncertainty within cost ranges, can use “low end”

Under Reporting
• Probable
    • Companies say “more likely than not”
    • Regulators disagree but still no hard definition
• Estimable
    • Companies say uncertainty allows “zero” reporting
    • Regulators consider new methods ASTM E2137-01/E2173-01
• Material
    • Companies use “rule of thumb” – 10% of combined assets
    • Regulators disagree with “combined asset test”
• Fines
    • Not reporting fines
    • USEPA and SEC cooperate to create database

Getting Tough
• Accounting scandals add “fuel to the fire” and regulators “get tough”
• Congress passes Sarbanes Oxley
    • Requires systems and controls over liability estimates
    • CEO/CFO must certify that these are in place and effective
    • Environmental remediation liabilities covered
    • Operations are NOT included but may be (see COSO Model)
• The push for more transparency
    • Stockholders referendums increase
    • Carbon Disclosure project request GHG reporting or divest
    • Global Reporting Initiative (GRI) gains momentum
    • MD&A under review

New Rule
• FASB passed FAS 143 accounting for costs on asset retirement
• FIN 47 included guidance on coverage and requirements
• Comparison of interpretations shows BIG differences and overlap
    • FAS 5 – no ACM cost reporting if contained
    • FAS 143 – must include ACM removal cost reporting
• FAS 143 affects asset life cycle
    • FAS 5 – no reserve for clean RCRA closure
    • FAS 143 – RCRA unit closure cost should be evaluated
• FAS 143 affects capital spending
    • FAS 5 – no reserve to replace control units
    • FAS 143 – replacement costs should be evaluated

Bottom Lines (so far)

#1 – Environmental issues concern investors, so SEC, FASB and accountants
are now in your domain
#2 – There are only “interpretations” of terms
#3 - There must be a systematic, reproducible method for environmental
liability reporting
#4 – There must be oversight and controls on that methodology
#5 – Establish communications with Senior Management
#6 – Engage the organization for decisions – include legal, finance, accounting

System Elements

Basic system elements

 Recognition        Assessment       Evaluation     Booking         Improvement


  • Document liability recognition criteria
  • FAS 5 and FAS 143 can have different “probability” criteria
  • Determine how this affects your
      • EMS objectives and performance reporting
      • Compliance audits and Legal Privilege
      • Capital planning and control asset management
      • Current and planned remediation projects
  • Due Diligence
      • Evaluate seller’s disclosures and processes
      • Purchase price discounts should be disclosed
      • Other liability sharing may also trigger reporting

  • Assess if all or which criteria are meet
  • Determine coverage by FAS 5, FAS 143 or both
      • Decide how to handle overlap
      • Is there enough information to assess probability or contingency
  • Estimate if potential “range of impact” sufficient for materiality
      • Should probability weighting be used in next step
      • Aligned these with company risk appetite
  • Document decisions and seek consensus
      • Engage legal, finance, accounting, risk management, etc.
      • Document concurrence in minutes

  • Select method for valuing liability based on information
      • Quality
      • Quantity
  • Document selection of methodology
  • Determine whom should generate the valuation
      • Multiple parties – competitive bidding process
      • Internal – competence to evaluate
      • Consider the independence of that party/parties
  • Establish format for reporting valuation
      • Present one number or range
      • How to select “best estimate”
      • How probability was applied


  • “I can’t estimate the cost” is NOT acceptable for a zero reserve
  • The “lowest cost” is not always the “most likely cost”
  • Project life cycles may have different probabilities
  • Quantification does not mean abandoning your professional judgment
       • Look to past projects for indications
       • Draw on others as well
  • Plan to take some time in preparing the evaluation
  • Using outside parties can reduce time, but be wary
  • Document the process as “proof” of independence and assurance
  • Be ready to revise the valuation


              • Not as simply as just handing the estimate over to finance.

              • Possible different treatments of some money - e.g., attorney
              fees – especially in light of potential overlap between FAS 5 and
              FAS 143 coverage

              • Decision process for setting the amount (100% of EH&S
              estimate, discounted cash flow basis, etc) – should be clearly
              laid out and how differences are resolved

              • Indications of when and the magnitude of potential
              adjustments might also be included.

 • Under Sarbanes Oxley Act (SOX) companies must show systems and controls
 are in place for assuring reporting reliability.
 • Also, CEO and CFO must have knowledge of them, that they are in place and
 • At each step of the process there should be:
     • Independent oversight
     • Documentation of decision and assumptions
     • Independence from those involved with the estimate
 • Like other systems, there should be assessments to show:
     • Systems and controls are effective
     • Corrective actions and schedules

   Michael Radcliffe

            Practice Leader
Strategic Environmental Management

       Brown and Caldwell
       150 E. Wisconsin Ave
       Milwaukee, WI 53202
          (414) 203-2903