Here's a wrinkle to consider when preparing financial statements next year: Effective Dec. 15, 2007, a new accounting standard requires the disclosure of liabilities associated with contaminated properties. At minimum, this requirement may cause additional work and, at worst, it may burden some government entities with crippling liabilities.
In November 2006, the Governmental Accounting Standards Board (GASB) issued “Statement 49 for Accounting and Financial Reporting for Pollution Remediation Obligations.” It provides guidance—and sets standards—for the accounting and reporting of obligations and costs related to pollution cleanup. GASB began working on the statement in 2002 after research indicated vast discrepancies in how governments report pollution remediation obligations; and a survey conducted by GASB's technical advisory council indicated members were concerned about environmental liabilities.
The statement requires non-federal government entities to disclose liabilities associated with contaminated properties, including environmental assessment and cleanup, post-remediation monitoring, agency oversight fees, and legal expenses.
At first read, Statement 49 does not appear overly cumbersome. Governments won't have to look for environmental liabilities within their jurisdiction. Instead, there are five specific situations ("obligating events") that require a government to report a pollution remediation-related liability:
- Remediation due to an imminent danger to the public or environment. Example: A tanker truck overturns, spilling gasoline on a road, and emergency responders are dispatched to clean it.
- Violation of a pollution-prevention-related permit or license. Example: Many permits contain provisions that require the permittee to take certain actions in case of spills.
- A government is named, or evidence indicates it will be named, by a regulatory agency as a responsible or potentially responsible party for remediation or for paying a portion of remediation costs. Example: A redevelopment agency takes ownership of a piece of land where a release is discovered during its ownership and is named as the responsible party.
- A government is named in a lawsuit, or evidence indicates that it will be named, to compel participation in pollution remediation. Example: An adjacent property owner discovers petroleum contamination on his property and sues the government that owns an adjacent property where an underground storage tank system is present.
- A government commences or legally obligates itself to commence pollution remediation. Example: In a disposition and development agreement, a redevelopment agency might agree to conduct site remediation.
How It Works
Once an obligating event occurs, governments must estimate the components of expected remediation outlays, and determine whether the outlays are accrued as a liability or capitalized when goods and services are acquired. Governments can record liabilities on a component basis, as they become reasonably estimable. Often, it is neither practical nor required to state the entire cleanup cost upfront; however, the cost of the next phase of assessment or cleanup would be recorded as a liability. Pollution remediation outlays usually will not qualify for capitalization and will be accrued as a liability.
Liabilities are estimated using the "expected cash flow" technique, which measures liability as the sum of probability-weighted ranges of potential estimates. Expected recoveries also are taken into account.
Statement 49 also requires governments to disclose: 1) the nature and source of the liability; 2) the methods and assumptions used for the liability estimate; 3) the potential for changes in the estimate; and 4) a general description of the remediation activities, or components, that are not yet reasonably estimable.