Search within this section
Select a section below and enter your search term, or to search all click Property, plant, equipment and other assets
Favorited Content
9.5 Subsequent measurement (environmental obligations)
Publication date: 31 May 2023
us PP&E and other assets guide
Given the nature of environmental remediation liabilities, a reporting entity’s estimated liability will often evolve over time, as additional information relating to the liability becomes known. If the changes to estimated amounts are the results of new information, they should be considered changes in accounting estimates under ASC 250, and should be recognized in the period in which they occur. Errors in a reporting entity’s previously recorded environmental remediation liabilities are not changes in estimates and should be evaluated under the framework of ASC 250. Refer to FSP 30 for presentation and disclosure guidance surrounding accounting changes, including evaluation of changes in accounting estimates and correction of errors.
9.5.1 Ongoing operations costs (environmental obligations)
Many companies incur significant costs in connection with the environmental aspects of ongoing operations. Examples of these costs and the related accounting considerations include:
- Closure or abandonment of facilities - ASC 410-20 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement obligations (AROs). See PPE 3 for information surrounding the accounting for AROs.
- General and administrative costs - Costs incurred in connection with compliance and monitoring compliance with existing environmental regulations (e.g., costs of permits, emissions/effluent monitoring, inspections, legal and consulting fees) should generally be expensed as incurred. ASC 450-20-S99-2 indicates that the SEC staff would expect disclosure of a registrant’s accounting policy for such costs.
- Fines and penalties - Federal, state, and local regulatory agencies are empowered to impose fines and penalties on companies not in compliance with environmental regulations. Regulatory agencies often levy heavy fines as a means of forcing compliance. Often when companies reach a settlement with regulators in which they agree to rectify the problem, undertake environmentally related capital expenditures, or modify operating practices to reduce environmental impact, the regulators agree to reduce or abate the fines. Thus, the amount of fines ultimately paid may be substantially less than the amount originally assessed. Monetary fines and penalties meet the definition of a loss contingency and should be accrued and expensed following the guidance of ASC 450. However, determining the amount of the loss can be difficult given the potential for reduction or abatement.
- Third-party lawsuits or litigation - Companies are often subject to legal action in connection with environmental releases, property value diminution, and other issues related to ongoing operations. Losses related to litigation meet the definition of a loss contingency and should be accrued following the guidance of ASC 450.
- Disposal of hazardous waste products - Hazardous waste products produced through ongoing operations can be disposed of in a variety of methods. Provided waste is disposed of in accordance with relevant regulations, the disposal costs should be expensed as incurred and classified as operating expense. Costs to build on-site disposal facilities may be capitalized in accordance with the guidance in ASC 410-30-25-16 through ASC 410-30-25-19. ASC 410-20 requires that an existing legal obligation associated with the retirement of a tangible long-lived asset (e.g., costs associated with the closure and post-closure costs of landfills and certain hazardous-waste storage facilities) be recognized in the period incurred. See PPE 3 for information surrounding accounting for AROs.
- Accidents during ongoing operations - Accidents may occur during ongoing operations, such as tank or pipeline ruptures, inadvertent emissions, spills, leaks or other contamination, or discovery of other non-compliance with environmental regulations. Clean-up costs related to such incidents should be recognized as discussed in PPE 9.4.
- Acquisition of property and equipment designed to reduce or eliminate environmental effects - Costs to acquire and install such property and equipment should be accounted for in accordance with ASC 410-30-25-16 through ASC 410-30-25-19. See PPE 9.4.5.3 for information surrounding the capitalization of property and equipment associated with environmental obligations.
- Redesign of products and process - Companies may incur costs to redesign products and processes to reduce reliance on hazardous materials, minimize waste, and migrate to more environmentally acceptable products. Such costs should be treated in the same fashion as other redesign or similar costs not specifically associated with environmental concerns.
- Indemnification of environmental risks in connection with a lease (prior to adoption of ASC 842) - ASC 840, Leases, addresses certain issues associated with the indemnification of environmental risks in connection with a lease. Under ASC 840-10-25-12, lessee indemnification of the lessor for environmental contamination caused by a lessee during the term of the lease would not affect the classification of the lease by the lessee. Parties to the lease agreement would consider the impact of ASC 460, Guarantees, for any lease-related indemnifications. However, indemnifications by a lessee for preexisting environmental contamination could affect the classification of the lease by the lessee, based upon the outcome of the lessee’s assessment of the likelihood of loss (pursuant to the indemnification clause) at inception of the lease.
- Indemnification of environmental risks in connection with a lease (after adoption of ASC 842) – Under ASC 842-10-55-15, provisions that require lessee indemnification for environmental contamination, whether caused by the lessee during its use of the underlying asset over the lease term or for preexisting environmental contamination, would not affect the classification of the lease. However, parties to the lease agreement would consider the impact of ASC 460, Guarantees, for any lease-related indemnifications.
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
