CSOP 34.0 Pollution Remediation Obligation

SUBJECT:

Pollution Remediation Obligation

SOURCE:

Capital Asset Management

ORIGINAL DATE

OF ISSUE:

February 2010

DATE OF

LAST REVISION:

April 2015

CSOP NO:

34.0

RATIONALE:

To provide accounting guidance for when a liability needs to be reported for pollution remediation obligations.  A pollution remediation obligation is an obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities.  For example, obligations to clean up spills of hazardous wastes and obligations to remove asbestos are pollution remediation obligations.

CSOP:

Pollution Remediation Activities

Criteria Necessary to Establish a Liability

Recording a Pollution Remediation Obligation

Capitalization of Pollution Remediation Costs

Disclosure Requirements

 

Pollution Remediation Activities

Pollution remediation activities include:

  • Pre-cleanup activities, such as site assessments/investigations, feasibility studies, and remediation plans
  • Cleanup activities, such as neutralization, containment, removal of pollutants, and site restoration
  • External government oversight and enforcement-related activities, such as work performed by an environmental regulatory agency
  • Operation and maintenance of the remedy including required monitoring of the remediation

 

The following expenses are not part of the pollution remediation effort and should not be included:

  • Penalties
  • Toxic torts
  • Safety costs
  • Litigation support costs
  • Costs borne by society at large
  • Prevention obligations with respect to current operations



Criteria Necessary to Establish a Liability
In order to establish a liability for pollution remediation, the following three criteria must be met:

  • An obligating event must occur,
  • costs are anticipated to be more than one million dollars ($1,000,000), and
  • work will not be completed within the current fiscal year.

Obligating Event

When the university knows or reasonably believes a site is polluted, the university will need to determine whether any one or more of the following apply:

  • The pollution creates an imminent endangerment to public health, public welfare or the environment.
  • The university is in violation of a pollution prevention-related permit or license.
  • The university is named, or will be named, by a regulator as a responsible party or potentially responsible party for cleaning up pollution or for paying all or some of the costs of the clean-up.
  • The university is named, or will be named, in a lawsuit to compel it to address the pollution.
  • The university commences or legally obligates itself to clean-up activities.  If these activities are voluntary, and none of
    the other obligating events have occurred, the amount recognized should be based on the portion of clean-up costs that the university has initiated and is legally required to complete.

 

If any one of the above apply AND costs are anticipated to be one million dollars ($1,000,000) or more and not completed within the current fiscal year, fill out the Pollution Remediation Obligation Events Acknowledgement form and forward to the Capital Asset Manager. The Capital Asset Manager will work with the department and Financial Management Services to establish the appropriate liability to be recorded.

 

If a pollution remediation obligation cannot be estimated it should be disclosed in the notes to the financial statements with the following:

  • The obligating event to clean-up the pollution.
  • A general description of the nature of the pollution remediation activities to clean-up the pollutant.

Recording a Pollution Remediation Obligation
The pollution remediation obligation should be recorded prior to the start of clean-up and as soon as the clean-up costs can be reasonably estimated. If a bid is requested and awarded, the contractor's bid can be used as the obligation estimate. The obligation should be recorded net of any insurance recoveries. The pollution remediation obligation should be evaluated quarterly and adjusted as needed.

Example

In June 2009, Indiana University decided to remodel an academic building and remove any asbestos. The remodel project would commence in January 2010 and was expected to take two years. The remodeling contract was let for bid and the winning bid included an itemized amount for asbestos remediation of $1,200,000.

Recording of Pollution Remediation Obligation:

Pollution Remediation Expense 1,200,000  
Pollution Remediation Obligation   1,200,000


Reduction of Liability as Work is Completed:

 

Pollution Remediation Obligation 50,000  
Cash   50,000


 Capitalization of Pollution Remediation Costs

In certain circumstances pollution remediation costs may be capitalized. If any of the following criteria apply, Capital Asset Management will review and determine if the costs will be capitalized:

  • To prepare property in anticipation of a sale. Not to exceed the estimated fair market value of the property when the remediation is complete.
  • To prepare property for use when the property was acquired with known or suspected pollution and is expected to be cleaned up. Only the costs necessary to place the asset into service for its intended purpose will be capitalized.
  • To perform pollution remediation that restores a pollution-caused decline in service utility that was recognized as an asset impairment.  Only the costs necessary to put the asset back into service for its intended purpose will be capitalized.
  • To acquire property, plant, and equipment that has a future alternative use. The purchase of any property, plant, and equipment should be capitalized if the asset will provide a service after the pollution remediation is completed.
Disclosure Requirements
Reported pollution remediation obligations should disclose the following in the notes to the financial statements:

  • The obligating event to clean-up the pollution.
  • The amount of the estimated liability in the financial statements.
  • The methods and assumptions employed to estimate the liability.
  • The potential for changes in the estimate due to changes in prices, technology, laws and regulations, and other factors.
  • An estimate of the amount the university expects from insurance or other parties, thereby reducing its liability.

DEFINITIONS:

Pollution remediation obligation- An obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities.
Penalties-
Sanction imposed by a court of law.
Toxic torts-
Special type of personal injury lawsuit in which the plaintiff claims exposure to a chemical caused the plaintiff's injury.
Safety costs-
Costs associated with measures taken to prevent injury.

CROSS

REFERENCES:

CSOP 22.0 Accounting for the Impairment of Capital Assets 

GASB Statement No. 49 Accounting and Financial Reporting for Pollution Remediation Obligations

RESPONSIBLE

ORGANIZATION:

Organizations that purchase capital assets.