Search within this section
Select a section below and enter your search term, or to search all click Financial statement presentation
Favorited Content
11.5 Environmental accruals
Publication date: 30 Apr 2022
us Financial statement presentation guide
ASC 410-30, Environmental Obligations, provides accounting considerations related to the recognition, measurement, presentation, and disclosure of environmental remediation liabilities. ASC 410-30-55 provides illustrations and examples of the disclosure requirements related to environmental remediation liabilities, environmental remediation costs, loss contingencies, and liabilities with numerous potential outcomes. The following section provides a discussion of the presentation and disclosure considerations for environmental obligations. Additionally, see FSP 24 for presentation and disclosure considerations related to risks and uncertainties and FSP 23.4.3 for discussion of insurance recoveries related to environmental obligations.
ASC 410-30-10-1 discusses when a reporting entity should recognize a liability relating to environmental remediation.
This Subtopic requires that an entity recognize a liability for obligations associated with environmental remediation liabilities that relate to pollution arising from some past act, generally as a result of the provisions of Superfund, the corrective-action provisions of the Resource Conservation and Recovery Act, or analogous state and non-U.S. laws and regulations.
As discussed in ASC 410-30-25-16, environmental contamination costs are generally expensed. ASC 410-30-25-18 allows for the capitalization of environmental remediation costs if certain criteria are achieved. For example, if a reporting entity is involved in an oil spill and decides to reinforce the hulls of oil tankers to improve the safety of the ships and prevent future oil spills, those costs may be capitalized. In addition, if a reporting entity acquires fixed assets to clean up an oil spill, it may capitalize the costs unless the assets do not have a future use. These assets should be classified on the balance sheet as current or noncurrent based on the ASC Master Glossary definitions. Presentation of the remediation liabilities and these related assets is discussed in the following section.
11.5.1 Presentation considerations-environmental remediation obligations
ASC 410-30-45-1 through ASC 410-30-45-6 details other presentation matters related to accrued liabilities and assets related to environmental remediation obligations. The guidance details the following points:
- Balance sheet classification
Where a classified balance sheet is presented, a reporting entity should present separately the current and noncurrent portions of the environmental remediation liability recorded, based on the expected timing of settlement. - Right of setoff
If all conditions in ASC 210, Balance Sheet, are met, assets and liabilities related to environmental remediation activities may be reported net. However, as discussed in ASC 410-30-45-2, the FASB observed that it would be rare, if ever, that all of the conditions would be met for environmental remediation liabilities, the related insurance, and potential third-party recoveries. - Operating expense classification
As discussed in ASC 410-30-45-4, environmental remediation costs are required to be charged against operations since the events underlying the incurrence of the obligation relate to the reporting entity's operations. Any recoveries should be reflected in the same income statement line as the original expense. To the extent a reporting entity has earmarked assets for funding its environmental liabilities, the earnings on those assets should be reported as investment income. - Discontinued operations
A reporting entity should classify environmental remediation expenses and recoveries as discontinued operations if they meet the requirements in ASC 205-20, Discontinued Operations.
11.5.2 Required disclosures
ASC 410-30-50-4 through ASC 410-30-50-7 outlines the specific disclosure requirements with respect to environmental remediation obligations. They include:
- The undiscounted amount and the discount rate used in the present-value determinations (if a reporting entity utilizes a present value measurement technique).
- The disclosures required by ASC 275-10, Risks and Uncertainties, related to environmental remediation liabilities. See FSP 24 for disclosures related to risks and uncertainties.
- The disclosures required by ASC 450-20, Contingencies, related to environmental remediation loss contingencies. See FSP 23 for information about disclosure requirements for contingencies.
ASC 410-30-50-13 through ASC 410-30-50-17 provides additional guidance related to the disclosure of contingencies. It specifically reminds reporting entities that if there are existing laws and regulations to report the release of hazardous substances and begin a remediation study, those requirements would represent a loss contingency subject to the disclosure considerations within ASC 450-20.
11.5.3 Additional disclosure recommendations
ASC 410-30-50-8 through ASC 410-30-50-12 outlines the following disclosures that a reporting entity should consider, but that are not required.
- The event, situation, or circumstances that might trigger recognition of a loss contingency related to a reporting entity’s remediation-related obligations (e.g., upon completion of a feasibility study)
- Policy concerning the timing of recognition of recoveries
- Additional specific disclosures related to the environmental remediation loss contingencies that would be useful to further a user’s understanding of the reporting entity’s financial statements
- Period over which disbursements for recorded amounts will occur
- Expected period for realization of recognized probable recoveries
- Estimated time frame for resolution of the uncertainty
- Reason why an estimate of a probable or reasonably possible loss or range of loss cannot be made, if applicable
- Specific considerations related to a specific site, including the total amount accrued for the site, the nature of any reasonably possible loss contingency, whether any other parties are involved and share in the obligation, status of regulatory proceedings, or estimated time frame for resolution of the remediation loss contingency
- Details related to the amount of environmental remediation costs recognized in the income statements (e.g., amount recognized in each period, recoveries credited to environmental remediation costs in each period, where costs are captured in financial statements, etc.)
11.5.4 SEC reporting considerations
For SEC registrants, important interpretative guidance with respect to product and environmental remediation liabilities is included in SAB Topic 5.Y, Accounting and Disclosures Relating to Loss Contingencies (codified in ASC 450-20-S99-1), and SAB Topic 10.F, Presentation of Liabilities for Environmental Costs (codified in ASC 980-410-S99-1). ASC 450-20-S99-1 indicates that product and environmental remediation liabilities are typically of such significance that specific disclosures regarding the judgments and assumptions underlying the recognition and measurement of the liabilities are necessary to prevent the financial statements from being misleading. The SEC staff has indicated that, in addition to the disclosures required by ASC 450 and ASC 410-30, it may be necessary to disclose the following information to prevent the financial statements from being misleading:
Excerpt from ASC 450-20-S99-1
- Circumstances affecting the reliability and precision of loss estimates.
- The extent to which unasserted claims are reflected in any accrual or may affect the magnitude of the contingency.
- Uncertainties with respect to joint and several liability that may affect the magnitude of the contingency, including disclosure of the aggregate expected cost to remediate particular sites that are individually material if the likelihood of contribution by the other significant parties has not been established.
- Disclosure of the nature and terms of cost-sharing arrangements with other potentially responsible parties.
- The extent to which disclosed but unrecognized losses are expected to be recoverable through insurance or other sources, with disclosure of any material limitation of that recovery.
- Uncertainties regarding the legal sufficiency of insurance claims or solvency of insurance carriers.
- The time frame over which the accrued or presently unrecognized amounts may be paid out.
- Material components of the accruals and significant assumptions underlying estimates.
ASC 450-20-S99-1 further states that reporting entities should disclose in the footnotes material liabilities that may occur upon the sale, disposal, or abandonment of a property related to site restoration, monitoring commitments, or other exit costs as a result of unanticipated contamination of assets. These disclosures would generally include the nature of the costs, total anticipated costs, total costs accrued to date, balance sheet classification of the accrued amounts (i.e., current versus noncurrent), and the amount of reasonably possible additional losses.
The SAB topic also states that if an asset held for sale will require remediation prior to the sale, or as a condition of sale, a footnote should describe how these future expenditures are considered in the assessment of the asset’s value. Additionally, a reporting entity should disclose if it may be liable (unless the likelihood of a material unfavorable outcome is remote) for remediation of environmental damage relating to assets or businesses previously disposed. The SEC registrant’s accounting policy with respect to such costs should be disclosed.
The SAB topic is not intended to impose an affirmative obligation to determine potential closure costs for an operating manufacturing plant that the reporting entity has no plans to sell or abandon and for which no ASC 450 obligation exists.
In addition to the specific topics discussed by the SEC staff within the SAB topic, reporting entities should be aware of the following with respect to environmental reporting.
- Compliance costs
The SEC has historically viewed the cost of compliance with all specific federal, state, local, and foreign laws relating to the environment as part of the total environmental expenditures. The SEC staff has suggested that the future estimated cost of compliance be disclosed in accordance with the guidance in ASC 450-20-S99-1. - Accrued costs
There is no requirement to disclose amounts accrued for specific contingencies unless failure to disclose such amounts would omit information material to an investor. In past comment letters, and as implied in ASC 450-20-S99-1, the SEC staff has requested information on the total amounts accrued for environmental remediation liabilities, such as breakdowns by type of accrual or by type of site. In some instances, the SEC staff may request this supplemental information. - Uncertainties
Reporting entities should ensure that disclosures related to environmental accruals include discussion of any uncertainties. Disclosures related to environmental liabilities should include details about the uncertainties related to the estimate and the range of reasonably possible losses in excess of the amount recorded as a liability, or state that such an estimate cannot be made.
The SEC staff has indicated that it generally expects SEC registrants to record an estimated liability for environmental exposures. See FSP 23.4 for additional discussion of SEC reporting considerations regarding contingencies.
11.5.5 Separate environmental costs footnote
Many reporting entities with significant environmental expenditures include an environmental costs footnote, outlining both their policies regarding the classification of expenditures between capital and operating expense, and their processes for determining the amount of environmental remediation obligations to accrue. ASC 235-10-50-3 requires disclosure when environmental matters are material.
Figure FSP 11-3 includes an example disclosure of an environmental remediation costs footnote.
Figure FSP 11-3
Sample disclosure — environmental remediation costs
Sample disclosure — environmental remediation costs
Environmental remediation costs
FSP Corp accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Consolidated provisions made in 20X3 for environmental liabilities were $10 million ($11 million and $13 million in 20X2 and 20X1, respectively), and the balance sheet reflects accumulated liabilities of $70 million and $75 million as of December 31, 20X3, and 20X2, respectively.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
