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Pollution Remediation Obligations—
the GASB Approach
Wesley Galloway, GASB April 22, 2005
APPA Business & Financial Spring Meeting
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.
History
• 60’s—Growing Societal Concern• 70’s—Pollution Prevention Laws
• Clean Water Act of 1970• Resource Conservation & Recovery
Act of 1976• Clean Water Act of 1977• Analogous state laws
History
• 80’s—Pollution Remediation Laws• Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (Superfund)
• Superfund Amendments and Reauthorization Act of 1986
• Analogous state laws
Liability Standards
• Varies by state & law• Liable under Superfund—
• Current & previous site owners & operators
• Disposers• Transporters
Liability Standards
• Liability under Superfund—• Strict• Joint and several
• States share costs at orphaned NPL sites • Private sites—10% of remedy and
100% of O&M• Public facilities—50% of all response
costs
Example
• County road dept. properly disposed of paint stripping chemicals
• But recycler did not
Liability Standards
• Safe harbor (under SARA)• Innocent buyer who exercised due
professional care in purchase
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.
Sites Needing Attention
0
5000
10000
15000
20000
25000
30000
35000
40000
1993 1995 1998 2000
Source: 50 States Studies, ELI.org
Extant Guidance
• FAS 5, Contingencies• SOP 96-1, Environmental
Remediation Liabilities• GASB 18, Landfills & FAS
143, AROs• UN ISAR Position Paper in 1998• IPSAS 19 (IAS 37), Provision &
Contingencies
Scope
• Pollution Remediation Obligations• Except GASB 18 (landfills)
• No asset retirement obligations
Pollution Remediation
• Pre-cleanup site assessment, feasibility study, design, etc.
• Cleanup, neutralization, containment, disposal activities
• Oversight and enforcement costs• Operation and maintenance of the
remedy and monitoring
What/When is a Liability?
• GASB looked at 7 definitions• 5 of 7 include notion of expected
or probable sacrifice
What/When is a Liability?
• Report pollution “if” you find it• Drilling in many cities finds pollution• Dry cleaner double-standard• No known cleanup technology• Brownfield redevelopment• Asbestos removal• Orphaned gas wells—state liable?• (Educating children)
Obligating Events
Determine if recognizable when:• Imminent threat compels action• Violate pollution prevention permit• Named as responsible party• Named in lawsuit to enforce action• Remediation commenced
Recognition
• Recognize components of liability as they become reasonably estimable
• Recognition benchmarks• Administrative order benchmark• Site assessment/investigation
benchmark • etc.
• Using expected cash flow technique
Two ContingenciesSeparately, Neither is ProbablePotential payment Probability (a) x (b)
$0 60% $0$200 40% $80
$80.00
Potential payment Probability (a) x (b)$0 60% $0
$200 40% $80$80.00
Two ContingenciesTogether They Are Probable
Permutations of Potential Payments JointContingency 1 Contingency 2 Total Probabilities
$0 $0 $0 36.0%$0 $200 $200 24.0%
$200 $0 $200 24.0%$200 $200 $400 16.0%
100.0%
Even “Remote” Contingencies Can Be Probable In the Aggregate
Rolls of a 20 sided dieJoint Joint
Probability of Probability Probability Roll # not rolling 20 of not rolling 20 of rolling 20
1 0.95 0.95 0.052 0.95 0.9025 0.09753 0.95 0.857375 0.142625
19 0.95 0.377353603 0.62264639720 0.95 0.358485922 0.641514078
Measurement
• Cost accumulation, not fair value• Expected cash flow, not best
estimate• Current value, not present value
Current Value
• Based on reasonable and supportable assumptions about future events • Approved laws and reg.s• Extant technology expected to be
used
Which Costs?
• All direct costs attributable to remediation
• Entity must decide whether to include indirect and non-incremental costs
Debit Entry
• Generally Expense• Can defer expense under FAS
71• Capitalize in certain situations
• Do NOT record liabilities for capitalizable costs!
Capitalization
• Capitalize ifa. Cleanup to prepare property for sale
(limited to fair value)b. Polluted property bought and
cleaned for service (cap)c. Asset impaired and cleanup restores
lost service utility (cap)
• For a. & b., capitalize only if incurred within reasonable period
Expected Recoveries
• Two types covered• Payments from other PRPs• Insurance recoveries
• Net against remediation expense/expenditures
Expected Recoveries
• If not realized or realizable—• Offset against remediation liabilities
• Realized or Realizable• Report separate recovery assets
Annual Accretion
• Adjust liability annually for changes• Inflation or deflation• Price increases/decreases for specific
cost elements• Changes in technology• Changes in laws or regulations
• Same as Statement 18
Disclosures
• For recognized losses and recoveries• if necessary to keep FS from being
misleading, disclose:• Nature & source of PRO• Liability, if not apparent• Methods and assumptions• Potential for change in estimate• Recoveries offsetting the liability
Disclosures
• For amounts not yet reasonably estimable• General description of nature of PRO
Timetable
• Preliminary Views – March 2005• Exposure Draft – Dec. 2005• Statement – 3RD quarter 2006