Final guidance on pollution remediation.
GASB Statement No. 49 focuses exclusively on a government's obligation to incur outlays for the remediation (rather than the avoidance) of existing (rather than future) pollution. The liability thus calculated must include direct outlays; it also may include indirect outlays (e.g., general overhead). If equipment or facilities will have to be purchased or constructed as part of the remediation effort, the anticipated outlays should be incorporated into the calculation of the liability. (Later, when the equipment is actually acquired, the related outlay would be treated as a reduction of the liability rather than as an asset).
One of five obligating events must occur before a liability for pollution remediation can be recognized:
* The government faces a situation of imminent endangerment that leaves it little or no choice but to remediate;
* The government is in violation of a pollution-related permit or license;
* The government has been named (or there is evidence that it will be named) as a responsible party or as a potential responsible party (or an equivalent situation);
* The government is the object of a lawsuit (or there is evidence that it will be the object of a lawsuit) compelling remediation (and experience does not indicate that the suit will be deemed without merit); or
* The government voluntarily commences or obligates itself to commence remediation.
GASB Statement No. 49 directs that the liability be reported at current cost. For some of the more common types of pollution remediation efforts, a government should have all of the information needed to estimate its liability when an obligating event first occurs, or soon thereafter. In other, less familiar situations, much more time may be needed to arrive at a meaningful estimate of many or most of the components of the liability. GASB Statement No. 49 provides a set of benchmarks (i.e., milestones) to guide the estimation process. Whenever one of these milestones is reached, a government must 1) determine whether it has become possible to measure components of the liability previously considered to be unmeasurable and 2) refine estimates already made, as necessary, in the light of any new information that has since become available.
GASB Statement No. 49 prescribes a unique approach for calculating the liability:
* The liability should be recognized as soon as it is considered to be even remotely possible. However, the amount reported should be discounted to reflect the probability of occurrence. Thus, a $100 potential liability with only a 5 percent chance of occurrence would be reported at $5 rather than $100.
* If the amount of the liability can be estimated within a range, the amount reported should reflect the relative likelihood of occurrence of different amounts within the range. Thus, if there was an equal chance of the liability being either $80 or $100, the amount reported would be $90 (i.e., $80 + $100 = $180; $180/2 = $90).
* If a portion of the cost of pollution remediation is expected to be recovered from other (potentially) responsible parties, that recovery should be taken into account, using the same probability-weighted technique. Thus, if a government anticipates that it has a 20 percent chance of recovering half of its estimated liability of $90 from other responsible parties, it would recognize a $9 offset (i.e., $90 x 50 percent = $45; $45 x 20 percent = $9).
Note how the approach just described differs from the traditional approach that would be taken under Financial Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies:
* Under FASB Statement No. 5, no liability would be recognized until it was considered to be probable. Thus, a $100 potential liability with only a 5 percent chance of occurrence would not be reported.
* Under FASB Statement No. 5 (per FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss), if the amount of the liability could be estimated within a range and no single amount within the range was considered to be more likely than any other, the amount reported would be the amount at the low end of the range. Thus, if there was an equal chance of the liability being either $80 or $100, the amount reported would be $80.
* FASB Statement No. 5 prohibits the recognition of gain contingencies. Thus, if a portion of the cost of pollution remediation was expected to be recovered from other (potentially) responsible parties, that recovery would not be taken into account until it actually occurred. Accordingly, if a government anticipated that it had a 20 percent chance of recovering half of its estimated liability of $90 from other responsible parties, it would recognize no offset.
In financial statements prepared using the accrual basis of accounting (e.g., government-wide financial statements), the recognition of a liability normally would be matched by an expense. GASB Statement No. 49, however, has identified four specific situations where all or a portion of pollution remediation outlays would be capitalized rather than expensed (i.e., property being prepared for resale, property acquired at a discount because of known pollution, restoration of the service utility of an impaired asset, and property with an alternative use following remediation).
Funds that use the modified accrual basis of accounting recognize expenditures in connection with salary and vendor payables as soon as goods and services are provided. Therefore, GASB Statement No. 49 directs that expenditures be recognized for pollution remediation outlays upon the receipt of related goods and services. Likewise, recoveries are to be treated as a reduction of expenditures as soon as they are considered to be both measurable and available.
STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center.
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|Title Annotation:||The Accounting Angle|
|Author:||Gauthier, Stephen J.|
|Publication:||Government Finance Review|
|Date:||Jun 1, 2007|
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