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Glenn Hegar  ·  Texas Comptroller of Public Accounts

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 5 – Long-Term Liabilities
Pollution Remediation Obligations

GASB 49 established accounting and financial reporting standards for pollution remediation obligations.

GASB 49 does not apply to:

  • Landfill closure and postclosure costs
  • Future pollution remediation activities required upon retirement of an asset during periods preceding the retirement
  • Recognition of asset impairments or liability recognition for unpaid claims by insurance activities
  • Pollution prevention control obligations with respect to current operations (such as obligations to install smokestack scrubbers, treat effluent or use environmentally friendly products)
  • Accounting for nonexchange transactions (such as brownfield redevelopment grants)

Some common examples of pollution:

  • Asbestos removal (voluntary commencement or imminent threat)
  • EPA Superfund sites
  • Brownfield remediation
  • Leaking underground storage tanks
  • Chemical spills
  • Water pollution

Requirements

Agencies are responsible for ensuring proper accounting and reporting of pollution remediation liabilities. When an agency knows or suspects pollution may exist at a site, the agency must take steps to determine whether an obligating event occurred that requires accounting for a pollution remediation obligation.

Agencies should analyze their pollution remediation obligations at least annually and recognize pollution remediation liabilities in their financial statements. Agencies are required to make the identification of obligating events a normal part of their procedures when acquiring, remodeling or cleaning up property.

Agencies are required to submit the GASB 49 – Pollution Remediation Obligations Questionnaire regarding pollution remediation activity. The questionnaire is due on or before Sept. 1, 20CY.

Agencies must also maintain an annual inventory of ongoing pollution remediation projects and their related pollution remediation obligations. This Pollution Remediation Inventory Template (Excel) must be submitted with the AFR package in accordance with the AFR submission deadline.

Pollution Remediation Activities and Outlays

A pollution remediation obligation is an obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities.

Examples of common pollution remediation activities include:

  • Pre-cleanup activities (such as the performance of site assessments, site investigations, the design of remediation plans and corrective measures feasibility studies)
  • Cleanup activities (such as neutralization, containment, removal and disposal of pollutants and site restoration)
  • External government oversight and enforcement-related activities (such as work performed by a state or federal environmental regulatory authority dealing with the site and chargeable to the agency)
  • Operation and maintenance of the remedy (including required post-remediation monitoring)

Pollution remediation outlays are required to include all direct outlays attributable to the pollution remediation activities, such as:

  • Payroll and benefit costs
  • Equipment and facilities
  • Materials
  • Legal and other professional services

Agencies may also include estimated indirect outlays (including general overhead). The following outlays are not part of performing pollution remediation and are not included:

  • Fines
  • Penalties
  • Toxic torts
  • Workplace safety outlays
  • Litigation support involved with potential recoveries
  • Outlays borne by society at large rather than by the government

Obligating Events

GASB 49 defines five obligating events that can result in the recognition of a pollution remediation obligation. When an agency knows or reasonably believes a site is polluted, the agency must determine if any one or more of the following obligating events occurred:

  • The government is compelled to take remediation action because pollution creates an imminent endangerment to public health or welfare or the environment, leaving it little or no discretion to avoid remediation action.
  • The government is in violation of a pollution prevention-related permit or license (such as a Resource Conservation and Recovery Act permit or similar permits under state law).
  • The government is named, or evidence indicates that it will be named, by a regulator as a responsible party or potentially responsible party for remediation, or as a government responsible for sharing costs.
  • The government is named, or evidence indicates that it will be named, in a lawsuit to compel the government to participate in remediation. If the lawsuit is substantially the same as a previous lawsuit determined to be without merit, the new lawsuit can be excluded from consideration as an obligating event.
  • The government commences, or legally obligates itself to commence, cleanup activities or monitoring or operation and maintenance of the remediation effort. If these activities are voluntarily commenced and none of the other obligating events have occurred relative to the entire site, the amount recognized should be based on the portion of the remediation project that the government has initiated and is legally required to complete.

A pollution remediation obligation is only recognized in the financial statements when an obligating event occurred.

Benchmarks for Recognition

Recognize pollution remediation liabilities as the ranges of their components become reasonably estimable. In some cases, the agency may have insufficient information to reasonably estimate the ranges of all components of the liability. In these cases, agencies recognize pollution remediation liabilities as the range of each component becomes reasonably estimable (for example, legal services, site investigation, or required post-remediation monitoring). GASB 49, paragraph 13, provides a set of benchmarks to guide the estimation process.

In other cases, agencies are able to reasonably estimate a range of all components of its liability early in the process because the site situation is common (for example, leaking underground storage tanks). In such cases, recognize the entire estimated liability at this stage.

GASB 49 also requires re-measurement of the liability when new information indicates increases or decreases in estimated outlays. At a minimum, agencies must re-evaluate their liabilities at each fiscal year-end, using the latest available information to estimate the remaining outlays required to complete their remediation projects.

Measurement of the Obligation

Measure pollution remediation obligations based on the pollution remediation outlays expected to be incurred to settle those liabilities. Measure pollution remediation obligations at their current value (such as the cost of purchasing all equipment, services and facilities during the current period). Current value is based on:

  • Reasonable and supportable assumptions about future events that may affect the eventual settlement of the liability.
  • Applicable federal, state or local laws or regulations that are approved (regardless of their effective date).
  • The existing technology expected to be used for the cleanup.

Measure pollution remediation obligations using the expected cash flow technique. This technique measures the liability as the sum of probability-weighted amounts in a range of possible estimated mean amounts – the estimated mean or average.


Illustration of Expected Cash Flow Technique

The agency is responsible for the cleanup of five underground fuel storage tanks. Based on experience with similar sites, engineers believe a reasonable estimate of the range and probabilities of cleanup outlays are:

  • Best case: $150,000, 30 percent likely
  • Most likely: $320,000, 60 percent likely
  • Worst case: $450,000, 10 percent likely

Liability Calculation:

($150,000 x 0.3) + ($320,000 x 0.6) + ($450,000 x 0.1) = $282,000

In certain situations an agency may estimate outlays using statewide averages developed by an environmental regulator. Evaluate and adjust the averages for changes in circumstances to ensure they are applicable to the polluted site.

Accounting for Recoveries

Agencies should reduce their expense for pollution remediation with anticipated recoveries from other responsible parties and insurers. How this offsetting is achieved depends on if the recovery is realized/realizable or unrealizable.

A realized or realizable recovery involves the acknowledgment or recognition by the third party of its responsibility (such as insurance company acknowledges coverage). Without such acknowledgment or recognition, the recovery is considered to be unrealizable.

  • Realized/Realizable – recognize separately as an asset
  • Unrealizable – reduce the reported pollution remediation liability

Capitalization Situations

Most pollution remediation outlays (including outlays for capital assets) are reported as an expense when a liability is recognized. GASB 49, however, identifies four specific situations where all or a portion of pollution remediation outlays are capitalized rather than expensed. Outlays are capitalized in the government-wide reporting fund and proprietary funds when goods and services are acquired under the following situations:

  • To prepare property in anticipation of a sale and only if the outlays take place in a reasonable time before the sale. Total capitalized costs are limited to the estimated fair value of the asset upon completion of the remediation.
  • To prepare property for use when the property was acquired with known or suspected pollution that was expected to be remediated. Costs are capitalized only if the outlays take place within a reasonable time after the purchase. Total capitalized costs are limited to the outlays expected to be necessary to place the asset into its intended location and condition for use (there is no fair value cap). When costs run significantly higher than originally anticipated, the costs in excess of the originally expected outlays are generally not capitalized.
  • To perform remediation to restore a pollution-caused decline in service utility the agency reported as an impairment of one of its capital assets. The amount thus capitalized may need to be limited so the new carrying value does not exceed the fair value of a similar asset.
  • To acquire property, plant and equipment that has a future alternative use. In this circumstance, outlays are capitalized only to the extent of the estimated service utility that will exist after pollution remediation activities uses cease.

Capitalization Example:

On Aug. 1, 2008, the agency purchased a building and land for $100,000 with the expectation of cleaning up the site for resale, at expected outlays of $130,000 to $170,000. No amounts within the range were considered better estimates. The agency has a potential buyer for $245,000. Pollution remediation is measured:

(($130,000 x 0.5) + ($170,000 x 0.5)) = $150,000

The purchase price and expected pollution remediation outlays ($100,000 + $150,000) exceed the fair market value ($245,000) by $5,000.

Reporting

Because amounts exceeding the fair market value cannot be capitalized, the agency records a liability and expense for $5,000. No amount is recorded for the expected pollution remediation that would be capitalized because those outlays would not be recognized until they were incurred.

Note that the capitalization situations allowed by GASB 49 are more restrictive than those found in comparable Financial Accounting Standards Board (FASB) guidance. Unless asset impairment is recognized, voluntary cleanups of polluted sites are required to follow the expense/liability approach detailed in GASB 49.

Accounting for the Obligation

A long-term liability must be established when an agency determines a pollution remediation obligation exists and information is available to make a reasonable and supportable estimation of expected outlays. Record the portion of this liability expected to be paid within one year to the current pollution remediation obligation liability general ledger account.

Pollution remediation obligation general ledger accounts for both governmental and proprietary funds are:

Governmental Funds

  • GL 1532 BC CL Pollution Remediation Obligation
  • GL 1712 BC NC Pollution Remediation Obligation

Proprietary Funds

  • GL 1032 CL Pollution Remediation Obligation
  • GL 1212 NC Pollution Remediation Obligation

The COBJ for both governmental and proprietary funds is 7860 – Net Change in Pollution Remediation Obligation.

The following is an example of a governmental funds entry.

Seq No Batch Type Doc Type Eff Date Fin Agy TC AY PCA COBJ Amount R Fund Input GL
To Establish Long-Term Liability for a Pollution Remediation Obligation
(1) 5 U 0832CY XXX 502 CY 99999 7860 $ XX.XX   XXXX 1712
To Record Portion of Obligation Expected to be Paid Within One Year
(2) 5 U 0832CY XXX 537 CY 99999 NA $ XX.XX   XXXX 1532
To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Paid Within One Year
(3) 5 U 0832CY XXX 537 CY 99999 N/A $ XX.XX R XXXX 1712
To Record an Expected Recovery
(4) 5 U 0832CY XXX 503 CY 99999 7860 $ XX.XX   XXXX 1712

Accounting effect of above entries:

Debit Credit
(1) To Establish Long-term Liability for Pollution Remediation Obligation    
  5650 BC Expenditure Control $ XX.XX  
  1712 BC NC Pollution Remediation Obligation   $ XX.XX
(2) To Record Portion of Obligation Expected to be Paid Within One Year    
  9992 System Clearing $ XX.XX  
  1532 BC CL Pollution Remediation Obligation   $ XX.XX
(3) To Reduce Non-current Obligation by Amount of Current Obligation Expected to be Paid Within One Year    
  1712 BC NC Pollution Remediation Obligation $ XX.XX  
  9992 System Clearing   $ XX.XX
(4) To Record an Expected Recovery    
  1712 BC NC Pollution Remediation Obligation $ XX.XX  
  5650 BC Expenditure Control   $ XX.XX

Use the Working Papers to assist with preparation of journal voucher entries for both proprietary and governmental funds.

Required Note Disclosures

For recognized pollution remediation obligations and recoveries of pollution remediation outlays, agencies must disclose the following in the Note Disclosure field in the LTLN web application.

  • The nature and source of the reported pollution remediation obligations.
  • The amount of the estimated liability (if not apparent from the financial statements), the methods and assumptions used for the estimate and the potential for changes due to (for example, price increases/decreases, technology or applicable laws or regulations).
  • Estimated recoveries from insurance policies and third parties that reduce the liability.

Also disclose a general description of the nature of the pollution remediation activities for liabilities not yet recognized because they cannot be reasonably estimated. Pollution remediation obligations are included in the changes in long-term liabilities table and yearly increases and decreases must be tracked and disclosed.

Glenn Hegar
Texas Comptroller of Public Accounts
Questions? Contact statewide.accounting@cpa.texas.gov
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