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