ASTM E2137-22

This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the
Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.
Designation: E2137 − 22
Standard Guide for
Estimating Monetary Costs and Liabilities for Environmental
Matters
This standard is issued under the fixed designation E2137; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
1. Scope E1527PracticeforEnvironmentalSiteAssessments:PhaseI
Environmental Site Assessment Process
1.1 Purpose—The purpose of this document is to provide a
E1739Guide for Risk-Based Corrective Action Applied at
standard guide for good commercial and customary practice in
2 Petroleum Release Sites
estimating costs and liabilities for environmental matters.
E2081Guide for Risk-Based Corrective Action
Many possible uses for estimates of costs and liabilities for
E2091Guide for Use of Activity and Use Limitations,
environmental matters exist, including but not limited to
Including Institutional and Engineering Controls
business decision making and portfolio optimization, due
E2107Practice for Environmental Regulatory Compliance
diligence and communications involving acquisitions and
Audits
divestitures, regulatory requirements, third-party lawsuits, in-
E2150Classification for Life-Cycle Environmental Work
surance premium calculation and claim settlement, change of
Elements—Environmental Cost Element Structure
property use, revitalization, compliance planning, construction
E2173Guide for Disclosure of Environmental Liabilities
and project control, analysis of remedial alternatives,
E2205Guide for Risk-Based Corrective Action for Protec-
budgeting, strategic planning, audit defense, financing, and
tion of Ecological Resources
investment analysis by shareholders. The use of estimated
E2247PracticeforEnvironmentalSiteAssessments:PhaseI
costs and liabilitiesdevelopedinaccordancewiththisstandard
Environmental SiteAssessment Process for Forestland or
may be subject to other standards applicable to the matter
Rural Property
involved.Forexample,itisnotintendedtosupersedeaccount-
E2637Guide for Utilizing the Environmental Cost Element
ing and actuarial standards. This standard does not address the
Structure Presented by Classification
establishment of reserves or disclosure requirements.
E2718GuideforFinancialDisclosuresAttributedtoClimate
1.2 Objectives—The objective of this standard is to provide
Change
guidance on approaches for estimating costs and liabilities for
E3123Guide for Recognition and Derecognition of Envi-
environmental matters.
ronmental Liabilities
1.3 This international standard was developed in accor-
E3228Guide for Environmental Knowledge Management
dance with internationally recognized principles on standard-
ization established in the Decision on Principles for the 3. Terminology
Development of International Standards, Guides and Recom-
3.1 Definitions:
mendations issued by the World Trade Organization Technical
3.1.1 accretion—an increase to the present value of a
Barriers to Trade (TBT) Committee.
liabilitysolelyduetothepassageoftime,normallyayear;also
known as “unwinding the discount.”
3,4
2. Referenced Documents
3.1.2 activity and use limitations (AULs)—legal or physical
2.1 ASTM Standards:
restrictions or limitations on the use of, or access to, a site or
facility to eliminate or minimize potential exposures to chemi-
calsofconcern,ortopreventactivitiesthatcouldinterferewith
ThisguideisunderthejurisdictionofASTMCommitteeE50onEnvironmental
theeffectivenessofaresponseaction,toensuremaintenanceof
Assessment, Risk Management and CorrectiveAction and is the direct responsibil-
a condition of “acceptable risk” or “no significant risk” to
ity of Subcommittee E50.05 on Environmental Risk Management.
Current edition approved Oct. 1, 2022. Published December 2022. Originally
human health and the environment. These legal or physical
approved in 2001. Last previous edition approved in 2017 as E2137–17. DOI:
10.1520/E2137-22.
For the purposes of this standard, costs and values are defined as monetary
estimates. For referenced ASTM standards, visit the ASTM website, www.astm.org, or
Appendix X1 includes citations for additional relevant documents and require- contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
ments from other organizations including FASB, GASB, PCAOB, FASAB, IASB, Standards volume information, refer to the standard’s Document Summary page on
andSEC. the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
E2137 − 22
restrictions are intended to prevent adverse impacts to indi- as constructive obligations (promissory estoppel), and may
viduals or populations that may be exposed to chemicals of also be in the form of commitments, guarantees or contingen-
concern. cies.
3.1.14 obligating event—a past outcome which confirmed a
3.1.3 allocation or allocated share—the portion of cost or
financially recognizable obligation.
liability for which a party is responsible for payment or
reimbursement.
3.1.15 orphan share—liability assigned to a PRP that can-
not be located or that is insolvent, or the liability associated
3.1.4 asset retirement obligation (ARO)—legal or construc-
with pollutants which cannot be attributed to a PRP.
tive obligations associated with the retirement of a tangible
long-lived asset that result from the acquisition, construction,
3.1.16 potentially responsible party (PRP)—any individual,
development, or normal operation of a tangible long-lived
legal entity, or government—including owners, operators,
asset. Activities include (but are not limited to) demolition,
transporters, or generators—potentially responsible for, or
decommissioning, decontamination, reclamation, restoration
contributing to, the environmental impacts at an event.
and abandonment.
3.1.17 recognition benchmark—stages in the assessment
3.1.5 constructive obligation—theconceptthatpastpractice andremediationprocesswhichcreatetheexpectationofamore
creates a valid expectation on the part of a third party. An
comprehensive or robust estimate.
example of this is a company policy to excavate underground
3.1.18 studies—investigations such as regulatory interpreta-
storage tanks once removed from service. Also known as
tions and applicability studies, compliance analysis, environ-
promissory estoppel.
mental regulatory compliance audits, operating scenarios
3.1.6 costs and liabilities—economic expenses, accrued study,engineeringdesignandanalysis,costestimation,process
hazard analysis, modeling, communication plans, preliminary
liabilities, asset retirement obligations, and loss contingencies.
investigation, sampling and analysis, site assessment, site
3.1.7 dutyholder—party responsible for the costs and li-
characterization, Phase I and II studies, remedial action plan,
abilities.
remedial investigation, contamination assessment report, fea-
3.1.8 environmental compliance—operations, permits,
sibility study, risk assessment, treatability study, ecological
equipment, facilities, products, records, documentation,
impact assessment, environmental impact report, work plans,
reports, training, procedures, inspections, certifications,
ASTMRisk-BasedCorrectiveAction(RBCA)analysis,RCRA
monitoring,controls,orotherconditionsoractivitiesthatmust
facility investigation, RCRA facility assessment, report of
conformtoenvironmentalstatutesincluding,butnotlimitedto,
waste discharge, corrective measures study, corrective action
CAA, CWA, OPA, RCRA, CERCLA, TSCA, FIFRA, SDWA,
report,healthandsafetyplan,qualityassuranceplan,andother
and state and local laws, as well as any international jurisdic-
studies.
tional requirements.
3.2 Acronyms:
3.1.9 estimator—an individual or entity that prepares and
3.2.1 AICPA—American Institute of Certified Public Ac-
analyzes costs and liabilities.
countants.
3.1.10 event—a condition or incident which occurred, or
3.2.2 ASC—Accounting Standards Codification
may occur, with respect to an environmental condition and/or
3.2.3 AULs—Activity and Use Limitations.
environmental compliance issue, that affects or leads to poten-
3.2.4 CAA—Clean Air Act.
tial costs and liabilities. Examples of events include: a new
requirement for air emission controls (for example, NO ), a 3.2.5 CERCLA—Comprehensive Environmental Response,
x
hazardous waste site that requires remediation, a claim for
CompensationandLiabilityActof1980(asamended,42USC
personalinjuryrelatedtoanallegedenvironmentalincident,or Section 9601 et seq.).
the need to comply with NPDES standards as a result of a
3.2.6 CWA—Clean Water Act.
process change.
3.2.7 EPA—United States Environmental Protection
3.1.11 fair value measurement—anestimateofthepricethat
Agency.
could be received for an asset or paid to settle a liability in a
3.2.8 EV—expected value; an estimate of the weighted
current transaction between marketplace participants that are
mean value of an unknown quantity that represents a
unrelated, knowledgeable about factors relevant to the liability
probability-weighted average over the range of all possible
and the transaction, able, and willing to transact in the
values.
reference market for the liability.
3.2.9 FAF—Financial Accounting Foundation.
3.1.12 legal obligation—duty to carry out what the law or a
3.2.10 FASAB—Federal Accounting Standards Advisory
contract states.
Board
3.1.13 liability—an actual or potential obligation that may
3.2.11 FASB—FinancialAccountingStandardsBoard,apart
or may not be accrued. This includes legal obligations as well
of FAF.
5 7
See FASB ASC 410-20 and GASB 18 references in Appendix X1. See GASB 49:11 references in Appendix X1.
6 8
See FASB ASC 820, GASB 72, and IFRS 13 references in Appendix X1. See GASB 49:12-13 and ASC 410-30-25-15 references in Appendix X1.
E2137 − 22
3.2.12 FIFRA—Federal Insecticide, Fungicide and Roden- mented and periodically analyzed for the purpose of incorpo-
ticide Act. rating new information. There is a preference for current
information over historical assumptions if the current informa-
3.2.13 GAAP—Generally accepted accounting principles.
tion is comprehensive and comparable. Subsequent improve-
3.2.14 GASB—GovernmentAccounting Standards Board, a
ments in estimates should be made as more information
part of FAF.
becomesavailable,oras recognition benchmarksor obligating
3.2.15 MLV—most likely value.
events occur. For example, for remediation of an individual
3.2.16 NPDES—national pollutant discharge elimination site, such assumptions include changes to the conceptual site
model; contaminant concentration data found in soil,
system.
groundwater, air and sediments; the selection of different
3.2.17 OPA—Oil Pollution Act.
remedial technologies; the indication of a preferred alternative
3.2.18 PCAOB—Public Company Accounting Oversight
by the governing agency; the weighting of alternatives; the
Board.
probability of failure of a remedial technology to achieve the
3.2.19 PRP—potentially responsible party.
desired outcome in the time anticipated; the probability of
accelerated or delayed enforcement; the probability of a
3.2.20 RBCA—Risk-based corrective action.
compressed remedial construction timetable; the explicit or
3.2.21 RCRA—Resource Conservation and Recovery Act
implied value of impacted drinking water, wetlands, and other
(as amended 42 USC Section 6901 et seq.).
natural resources; changes to the default values of fines and
3.2.22 SDWA—Safe Drinking Water Act.
penaltiesandtheirassociatedtaxconsequences;andtheability
3.2.23 SEC—Securities and Exchange Commission.
to pay of PRPs or other counterparties. Changes in available
information such as contaminant data, market prices, regula-
3.2.24 TSCA—Toxic Substances Control Act.
tory requirements, precedential court findings, technology,
counterparty ability to pay, dutyholder ability to pay, property
4. Significance and Use
use, inflation and discount rates, or other issues may affect the
4.1 Use—The standard is intended for use on a voluntary
basis for the estimates, therefore necessitating revisions.
basis by an estimator of costs and liabilities for environmental
4.2.5 Comparison with Subsequent Estimates—Subsequent
matters.Theusermayelecttoapplythisstandardforanyorall
estimates based on additional information should not be
uses outlined in the Purpose. Application of this standard for
construed as indicating the prior estimates of costs and
one use does not compel application of the standard for all or
liabilities for environmental matters were unreasonable at the
any other use.
time they were made. Estimates should be evaluated on the
4.2 Principles—Thefollowingprinciplesareanintegralpart
reasonablenessofanalysesandjudgmentsmadeatthetimeand
of this standard and should be used to resolve ambiguity or
under the circumstances in which they were made. Subsequent
dispute regarding the interpretation of estimated costs and
improved estimates should not be considered valid standards
liabilities for environmental matters.
on which to measure the reasonableness of a prior estimate
4.2.1 Framing the Estimate—It is important to understand
based on hindsight, new information, use of developing ana-
and document/disclose the framework in which the estimate is
lytical techniques, or other factors. However, information on
beingmade,includingidentificationoftherequestor,estimator
trends in estimates over time may be of value to a user of the
and relevant qualifications, purpose of the estimate, audience/
cost and liability estimates.Any comparison should recognize
useroftheestimate,limitations,assumptions,andadescription
the reasons the estimates were performed, whether they were
of what constitutes a reliable estimate.
accomplished under the standard and any differences in tech-
4.2.2 Caution When Repurposing Estimates—The estimator
nique in the application of the standard.
should exercise care when repurposing an estimate generated
4.2.6 Not Exhaustive—Estimationof costs and liabilitiesfor
foroneobjectiveandaudience.Forexample,an estimatormay
environmental matters does not necessarily require an exhaus-
use the expected value approach on a given cost and liability,
tiveevaluationofallpossibleoutcomes.Apointexistsatwhich
and find that the “financial assurance estimate” uses unique
thecostofobtaininginformationorthetimerequiredtogather
financial assumptions (inflation, discount rate, time horizon)
it outweighs improvement in the quality of the estimate.
specified by a state regulator, while a “project controls” or
4.2.7 Assessment of Risk—The actual or potential risk to
“reserve” forecast – for the very same cost and liability -- will
human health and the environment should be considered in
use differing financial factors.
assessing environmental matters. The degree of risk should be
4.2.3 Uncertainty Not Eliminated—Eventhoughanestimate
a factor in developing the cost and liability estimates associ-
of costs and liabilitiesforenvironmentalmattersispreparedin
ated with those matters.
accordance with this standard, uncertainty remains with regard
4.2.8 Estimator Selection—An appropriate estimator or
to, among other things, the resolution of contractual,
group of estimators will consist of those individuals or groups
technological,regulatory,legislative,andjudicialissues,which
who possess sufficient knowledge, training, and experience to
could affect the costs and liabilities. However, inherent uncer-
tainty in estimates should not prevent an estimate from being
made.
See Guide E3228 for examples of environmental knowledge management and
4.2.4 Periodic Review of Assumptions and Estimates—
Guide E2173 for examples of aggregation of portfolio-wide assumptions and
Assumptions underlying estimates should be reviewed, docu- metrics.
E2137 − 22
developappropriateestimatesforthe costs and liabilitiesbeing audit findings, notice of violation, filing of a lawsuit, and
estimated. It is the responsibility of the entity sponsoring the recognition benchmarks and obligating events.
cost and liability estimates to select an estimator with the 5.1.4.2 Number and location of affected operations/
appropriate level of knowledge, training, and experience for facilities,
the parts of the estimation effort for which that estimator is 5.1.4.3 Use of surrounding property, including but not
responsible. The estimator should be free of conflicts of limited to sewer systems, groundwater and surface waters,
interest to provide an objective and reliable estimate. 5.1.4.4 Past, current, and potential future site uses, and
constraintsimposeduponthosefutureusesbyAULs,including
5. Procedures for Estimating Costs and Liabilities for institutional controls and/or engineering controls,
Environmental Matters
5.1.4.5 Findings from environmental and other relevant
studies,
5.1 Determination of Relevant Information and Types of
5.1.4.6 Environmental risks posed by the event,
Costs and Liabilities—There are many types of costs and
5.1.4.7 Bodily injury or other claims related to the event,
liabilities for environmental matters, including, but not limited
5.1.4.8 Relevant federal, state, tribal, local, or other regula-
to:
tory requirements and alternatives,
5.1.1 An entity’s internal costs, paid by the dutyholder
5.1.4.9 Federal, state, tribal, local, or other agency
responsible (see examples in Table 1).
involvement,includingthepreferredalternativesandpreferred
5.1.2 Costs paid to an affected party by the dutyholder
remedies of governing agencies,
responsible (See examples in Table 1).
5.1.4.10 Public involvement,
5.1.3 Costs paid to vendors by the dutyholder responsible
5.1.4.11 Planned or completed remedial activities,
(See examples in Table 1).
5.1.4.12 Decision documents (for example, Records of
5.1.4 After identifying the types of potential costs and
Decision),
liabilitiesforenvironmentalmatters,existingrelevantinforma-
5.1.4.13 Litigation activities related to the event (for
tion should be considered to estimate costs and liabilities
example,claims,suits,actions,demands,requestsforpayment,
identified in 5.1.1, 5.1.2, and 5.1.3, which may include, but is
notices),
not limited to:
5.1.4.14 Resources, tasks, and deadlines,
5.1.4.1 Eventtype(forexample,newairemissioncontrolor
other compliance requirements, leaking landfill, site PRP
notice, worker exposure, site decommissioning, compliance
See Practice E2107.
See Guide E3123.
SeePracticeE1527;GuideE1739;GuideE2081,GuideE2091,GuideE2205,
and Practice E2247.
A
TABLE 1 Examples of Environmental Costs and Liabilities
Entity’s Costs Paid to an Costs Paid to
Internal Costs Affected Party a Vendor
Project management == =
Procurement and contracting = . =
Studies and environmental assessments == =
Response actions (including but not limited to soil, == =
groundwater, surface water, and sediments)
Environmental compliance == =
Plug/abandon pipelines == =
Demolition == =
Permitting and reporting expenses == =
Regulatory oversight reimbursement . = .
Public comment/involvement == =
Fines and penalties . = .
Natural resource damages and ecological damages . = .
Property damages ==
Compensatory restoration . ==
Business interruption == .
Toxic tort, bodily injury, nuisance, negligence, and . = .
other damages claims
Legal defense and litigation == =
Insurance premiums . . =
Parent-subsidiary guarantees = . .
Financial assurance: self-bonding = . .
Financial assurance: third-party bond . . =
Counterparty risk == =
Guarantee to perform response work . = .
Commitment to buy back impacted property . = .
A
Over the life cycle of a cost and liability, multiple types of expenses (for example, internal and external expenses) may occur for the same type of activity. See also
Classification E2150 and Guide E2637.
E2137 − 22
5.1.4.15 Available technologies and designs, 5.1.5.10 The degree to which sustainability/sustainable de-
5.1.4.16 Type and extent of contamination, velopment are considered,
5.1.4.17 Number of operable units (CERCLA) or solid 5.1.5.11 Local environmental management system criteria,
waste management units (RCRA), including trade-off of emissions across environmental media,
5.1.4.18 Involvement of various parties at the event, alternative methods and permitting options, auditability, and
5.1.4.19 Information on prior experience with similar performance oriented metrics,
events, 5.1.5.12 Level of non-governmental organization involve-
5.1.4.20 Experience with and expectations of enforcement ment and scrutiny,
actions by regulatory authorities, 5.1.5.13 The degree of communication with and coopera-
5.1.4.21 Timeline to implementation of a given liability, tion of the public.
through, for example, a remediation program, compliance 5.1.5.14 The risks and impacts associated with climate
program, asset retirement plan, capital expenditure project, change, including but not limited to, material availability and
claim adjudication, toxic tort investigation, arbitration use, energy and water sourcing, waste releases to all media,
proceeding, or litigation, infrastructure security, and the continued credibility of public
5.1.4.22 Impacts to natural resources and ecological assets, commitments.
and the interests of relevant natural resource trustees, 5.1.6 Intheabsenceorinsufficiencyofsuchinformation,an
5.1.4.23 Ecological assets and environmental projects used assessment should be made of the applicable regulatory and
to offset assessment or remediation costs (This may include industrystandardrequirements,andadeterminationmadeasto
supplemental environmental projects.), whether based on these requirements, significant costs and
5.1.4.24 Relevant tax consequences, and liabilities for environmental matters may be incurred that
5.1.4.25 Climate change considerations, some examples of wouldindicatetheneedforfurtherdatacollectionandanalysis
which may be impacts of sea level rise or flood potential on in the future. This assessment should be documented, as
wastewater discharges and related infrastructure, security of discussed in 5.10.
waste sites and/or exterior material and product storage,
5.2 Selection of Estimation Approaches—Adecision frame-
modification of the designation of certain activities as "green,"
work for estimating costs and liabilities for environmental
impacts of reduction of carbon emission allowances on pro-
matters is required. For purposes of naming various estimating
duction capacity.
methods, the following terminology is used, ranked in level of
5.1.5 The organization and application of the foregoing
robustness/comprehensiveness from highest to lowest as
informationmaybefurthersubjecttocorporate,accounting,or
shown in Fig. 1.
regulatory policy decisions. The user will need to determine
Arms-Length Market Price/Fixed Contract Price
what these policy decisions are, and assess their effect on the
Quoted Price
cost estimate. Examples of such policy decisions include, but Expected Value (EV)
Most Likely Value (MLV)
are not limited to:
Range of Values
5.1.5.1 ChangestoUSGAAP,non-USaccountingrulesand
Known Minimum Value
principles, ASTM Standard Practices and Guides and associ-
5.2.1 Selectionoftheestimationapproachisdependentona
ated training,
number of factors, such as the availability of information, the
5.1.5.2 Changes to requirements of external financial
auditors,
5.1.5.3 Changes to entity policies to comply with account-
ing and disclosure standards and auditor requirements,
5.1.5.4 New or modified environmental laws and regula-
tions(forexample,criticalhabitatregulationsmaychangeover
time),
5.1.5.5 Policy decisions or interpretations to be made by
regulatory agencies (for example, changes to maximum allow-
ableconcentrationsofresidualcontaminantsinanenvironmen-
tal medium and consideration of emerging contaminants),
5.1.5.6 Compliance assurance procedures or policies ad-
opted by the dutyholder,
5.1.5.7 Acceptablelevelsofrisk(forexample,businessrisk,
human health risk, ecological risk),
5.1.5.8 The degree to which societal or external costs and
benefits are considered,
5.1.5.9 The duration of the forecast for costs and liabilities,
and whether or not life cycle costs are considered,
Fornaturalresourcesdamages,guidanceonderivingestimatesoflossescanbe FIG. 1 Hierarchy of Approaches for Estimating Costs and Liabili-
found at 43 CFR 11 and 15 CFR 990. ties for Environmental Matters (see descriptions in 5.4)
E2137 − 22
purposeoftheestimate(includingconsiderationofthespecific obligating eventslistedinGuideE3123seealsotheparameters
needs of the user(s) of the estimate), the time and expertise listed in Appendix X5.) Estimators should consider whether it
available, and others.The decision to use one or more of these is useful to employ the same estimation approach for a
approach(es) for a particular purpose is not arbitrary. The portfolio of matters that are similar (for example, similar in
nature or similar in magnitude) to improve comparability.
informational value of the estimate supplied by any one
approachisnotequivalenttotheothers.Whentheuncertainties
5.3 Sources of Uncertainty in Estimation: There are many
are great (for example, when an event is first identified) it may
sources of uncertainty in estimation that may affect the
not be possible to make a highly reliable cost estimate. The
selection of the cost estimation approach and that should be
reliability of estimates should continue to improve as those
considered in preparing estimates. These sources include, but
estimates are periodically updated over the life of a liability
are not limited to:
(see 4.2.4), including through the course of implementing
5.3.1 Decisions: an entity may complete a capital expendi-
response actions to extinguish the liability. In general, the
ture project, increase operating expenses, accelerate or defer
estimator should prepare a robust/comprehensive estimate
site assessment, remediation and monitoring work for reasons
most appropriate to the need or purpose of the estimate.
unrelated to strict compliance with environmental laws and
5.2.2 The robustness and comprehensiveness of an estimate
regulations.Forexample,amineoperatormayelecttoclosean
and the quantification of uncertainty about the estimate, given
operationbeforeitsmineralleaseexpiresbecausetheoperation
adequate information, generally decreases moving from top to
is not expected to be profitable before the lease ends;
bottomofthislistofapproaches,correspondingwiththedepth
consequently, by compressing the delay before eventual recla-
of analysis and use of available information to prepare an
mation work, the asset retirement obligation increases to a
estimate. (See Fig. 1.) Depending on availability of informa-
higher present value.
tion and circumstances, the level of effort required to prepare
5.3.2 Shared decisions/negotiations: a dutyholder may ne-
estimates at the top of the list is typically greater than the
gotiate a compliance program with an environmental regulator
bottom of the list. However, any given event may have
toreduceoreliminateanenvironmentalrisk.Theresultingmix
concurrent approaches and estimates underway simultane-
of operating changes, monitoring, remediation, fines/penalties,
ously. Given the principles cited in Section 4,itisnot
compensatory restoration and/or capital expenditures may be
necessarily true that the “best” estimate for a given set of
lower cost and better aligned with the intent of environmental
circumstances will always be the higher estimation approach
laws and regulations.
on the comprehensiveness/robustness hierarchy depending on
5.3.3 Market pricing: the market for environmental consult-
the purpose of the estimate, availability of information, and
ing and legal expertise, landfill space, trucking services,
levelofrigorappliedtotheestimate.Thequalityofanestimate
demolition explosives, construction equipment and other in-
is determined both by accurate implementation of the estima-
puts are subject to supply and demand. Regional and nation-
tion approach, as discussed below, and by the quality of the
wide price pressure and deflation can occur anywhere, at any
inputstotheestimate.Theusershouldconsidertheseelements
time.
when selecting the estimation approach.
5.3.4 Safety: an unstaffed industrial or commercial property
5.2.3 Itispossiblethatacostestimatemaybecomefixedfor canbeanattractivenuisancewheretrespassersmaybeexposed
a particular purpose at a particular point in time. For example,
not only to chemicals of concern but also to hazards ranging
a judicial court may determine a cost estimate in a litigation from confined spaces and airborne pathogens to waterborne
proceedingorbankruptcyjudgment,aregulatormaydetermine bacteria and criminal activity.
a cost for financial assurance or a consent decree, and a
5.3.5 Media properties: different types of soil, in combina-
contractually-agreed upon fixed price may be set in a merger/
tion with rock, sand, silt and clay, have different “bulking
acquisition or other transaction.Auser of these fixed estimates
factors,” meaning that when excavated and transported, the
shouldcarefullyevaluatetheoriginalpurposeofsuchestimates
soils expand to a predictable and larger volume. In addition,
and any applicability to estimates at other times and/or for
contamination migrates within and between different media at
other purposes. Issues to examine include (but are not limited
differing rates.Also, to prevent slope failure, the angle of side
to) whether the fixed estimate covered all relevant cost
slopes are limited to less-then-vertical angles, meaning that
components and time periods (for example, are there
over-excavation of clean soil to reach contaminated soil is
exclusions, cost caps, limited coverage periods, or penalties),
likely.
whether new information should be included to derive an
5.3.6 Mobility, toxicity and volume: Environmental regula-
updated estimate, and whether other values were incorporated
tions often focus on the mobility, toxicity and volume of
in the fixed estimate (for example, unrelated merger efficien-
contamination to be addressed. Robust and comprehensive
cies and penalties). The estimator should determine whether
estimatesmaydependonanunderstandingofthemovementof
prior fixed estimates are relevant for other purposes, and
these compounds through various media, such as a given site’s
whether prior fixed estimates require updating, adjustments, or
unique soil structure to a fluctuating groundwater table, and
re-evaluations for other purposes.
then laterally toward a surface water body or downward to
5.2.4 The estimator should take into account the number of deeper aquifers. Predicting how multiple chemical compounds
events and quality of the information available or obtainable will interact with each other over time and then respond to
when selecting the cost and liability estimation approach to be different remedial technologies is a complex undertaking. An
used. (These may include the recognition benchmarks and estimatorshouldregularlyassessthevalueofincrementaldata
E2137 − 22
and periodically state a need for additional data to prepare 5.4.1 Arms-Length Market Price/Fixed Contract Price—
more reliable estimates of costs and liabilities, even if existing When possible, market information should be used to deter-
data may be sufficient for regulatory purposes. For example, a mine an arms-length market price and/or fixed contract price
regulator may only require five soil samples to determine the for an identical cost and liability in an active market.
presence or absence of contamination, but an estimator may 5.4.2 Vendor Quoted Price—If a price for an identical cost
need twenty soil samples to determine a more precise volume and liability is not available, quoted vendor prices for similar
of contaminated soil and to rule out some remedial technolo- costs and liabilities in active markets may be used after
gies as technically impractical. adjustment for differences in cash flows or other relevant
factors.
5.3.7 Financial condition of PRPs sharing costs: in multi-
party liability and contractual indemnification situations, one 5.4.3 Expected Value: The expected value is also known as
a weighted arithmetic mean or weighted average. The
party may be invested in the financial survival of another. For
example, bankruptcy or dissolution of one party may transfer approach, whether described through a written event tree or
complex spreadsheet model, involves the following common
costs to the surviving party. These two paths, bankruptcy and
dissolution, represent two forms of non-performance risk (that steps:
5.4.3.1 Identifying the key issues contributing to the
is, counterparty default, or environmental counterparty risk).
magnitude, sequencing and pace of event costs and liabilities.
5.3.8 Availability of timely insurance coverage: while cer-
This may involve identifying which issues are decisions,
tainassessmentandremediationexpensesmaybetheoretically
negotiations, or random outcomes.
recoverable from insurers, the limitations of insurance should
5.4.3.2 Sequencing the decisions, negotiations and random
beunderstoodbyan estimator,includingthecoststopreparea
outcomes, often into an event tree (see example in Appendix
claim, the time for an insurer to process a claim, the ratio of
X2) or a computer simulation.
claims to allowed expenses, and the probability of litigation to
5.4.3.3 Assigning probabilities and cash flows to each node
properly assert an insurance claim.
in the event tree or for each issue in the computer simulation.
5.3.9 Timing: a regulator or property owner may decide to
Assign correlations to issues which have a strong relationship
accelerate or defer future phases of assessment, cleanup or
to one another, such as soil contaminant levels and offsite
decommissioning work, and thereby increase or decrease the
disposalcosts.The estimatorshouldconsiderwhethernodesin
environmental cost or liability (in present value terms); this
the event tree are dependent. For example, if the regulators
uncertain outcome can be caused by such events as environ-
chooseaparticularremedyforoneportionofthesite,thismay
mental assessment findings, negative press attention, commu-
affect the likelihoods of remedies at other portions of the site.
nity complaints, the hiring of additional regulatory staff, a
5.4.3.4 Calculate the expected value, or probability-
change in zoning/property use, or a natural disaster.
weighted value (See example in Appendix X2).
5.3.10 Duration of a series of costs, such as operational,
monitoring, maintenance and compliance costs may be uncer-
NOTE 1—If required under FASB Concepts Statement 8, determine if
tain. Care should be taken to capture realistic expectations for
the results are relevant, sufficient and reliable. If not, repeat most or all
of the preceding steps while using measurements such as rank correlation
the longevity of costs rather than using simplistic default
and sensitivity analysis to determine how to convey information about
assumptions(suchasestimatingcostsforadurationofonly30
uncertainty, as described in 5.8.
years when they are expected to continue after that point; See
5.4.3.5 The estimatorshouldtestandconfirmtherobustness
Note X1.7 in Appendix X1.)
and comprehensiveness of the calculations by reviewing the
5.3.11 Fraud and malfeasance: an entity may intentionally
sensitivity of the expected value to reasonable changes in
avoid any valuation of costs or liabilities, often in order to
underlying probabilities, dependencies, outliers, and other
achieve other results, with the unsustainable outcome of
factors (such as those described in 5.3.)
defrauding investors or creditors.
5.4.3.6 The estimator should be careful to include realistic
5.3.12 Cost engineering deficiencies: an entity may choose
outcomes with statistically significant probabilities to avoid
historical spending, an abbreviated work breakdown structure,
shifting the expected value through the addition of extreme
orvendorswishingtoperformthequotedworkasthesoledata
outcomes with insignificant probabilities of occurrence. Statis-
source for reliable estimates.
ticalsignificancewillvarydependingonthequalityofdata,the
5.3.13 There are software and other cost estimation tools
magnitudes of the outcomes, and the presence of outliers.
available that may be useful in framing and estimating costs
5.4.3.7 An alternative method for performing an expected
and liabilities.The user of these tools should be cautious when
value calculation is to assemble cost data from comparable
employing these tools to make sure they understand the
events.Thisactuarialapproachmaybeusefulwhenthedataare
underlying assumptions in these tools and whether they are
truly sufficient (a sufficient sample size) and comparable
appropriate to the estimation matter.
(similar to the event being estimated). When using this actu-
5.3.14 Other Uncertainties: The user should be aware that
arial approach, care should be taken to screen and confirm that
there may be numerous other uncertainties to be investigated
the sample population is representative of the event(s) being
andevaluatedforinclusionintheestimate(s).Thequalityofan
estimate is determined both by accurate implementation of the
estimation approach, as discussed below, and by the quality of
May meet the definition of fair value measurement “level 2” under GASB 72,
the inputs to the estimate.
IFRS13, and ASC820.
5.4 Detailed Description of Approaches for Estimation FASB Concepts Statement 8.
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evaluated. For example, data from sites with similar nature of probabilities) may be developed instead. This approach may
operations, environmental setting, and regulatory framework also be used in addition to the MLV approach to provide
should be used where available and the variation within the additional information, or instead of the MLV approach if
sample population should be assessed and documented. Care probabilities or rankings for various outcomes cannot be
should also be taken when using historical data to assess the determined.Therangeofvaluesshouldcovercostsfromalow
effects of changes such as technology enhancements, modified cost estimate to a high cost estimate, based on reasonable
laws and/or regulatory policy, the changing application of assumptions. If some outcomes within the range are more
presumptive remedies, and the application of risk-based cor- probable than others, this standard recommends the additional
rective action approaches that could significantly alter current estimation of a most likely value or an expected value, when
and future costs. Adjustments should be made to population possible.
cost data to normalize for regional pricing differences and to 5.4.6 Known Minimum Value—In the unusual event that the
bring costs from different time frames to a consistent dollar outcome and cost uncertainties are so great that it is premature
basis. Where there are a large number of events, statistical to estimate a range of values or a most likely value, then a
approaches to estimating the expected value may be particu- minimum value including component costs (for example,
larly appropriate. It is important to realize statistical ap- contracts entered, initial studies) that are reasonably certain to
proaches can be predictive of aggregate costs and liabilities, be incurred should be estimated.
even if expected values for individual events are at variance 5.4.7 No Estimate—In the improbable event that an estima-
from the actual results. Consideration should be given to the torisunabletodevelopanyestimate,thespecificmattershould
potential loss of relevant information through use of statistical benotedforpromptfollow-up.Giventhenumberofcompleted
means or averages which may not convey information con- environmental projects, the depth of the environmental con-
cerning uncertainty. sulting providers market, statute of limitations on certain
5.4.3.8 These approaches can be used in combination or obligations, financial reporting obligations, and the sophistica-
concurrently, or both, as appropriate. tion of the environmental cost and liability estimation
5.4.3.9 Other approaches to estimating an expected value techniques, any missing estimates should be temporary or
may include Monte Carlo simulation or Markov Chain Monte unintentional.
Carlo simulation, with the possibility of capturing simulation
5.5 Contingencies—Contingencyadjustmentsmaybeadded
complexities such as underlying unit cost distributions or
to correct for costs that are inadequately defined at the time of
complex interdependencies. Care should be taken to appro-
the estimate, but that are expected to be incurred. Therefore
priately select and justify the underlying distributions selected
care should be taken, when adding contingencies to base unit
for such modeling, and these assumptions should be clearly
cost estimates, that the contingencies are reasonable and
documented as discussed in 5.10.
expected to be incurred. Users should consider whether
5.4.4 Most Likely Value (MLV)—When an expected value
contingenciesshouldbesimilarforsimilarenvironmental costs
approach is not practical or appropriate, a Most Likely Value
and liabilities. Contingencies should be documented as dis-
couldbedeveloped.ThisMLVcapturesthecostofthescenario
cussed in 5.10.
believed to be most likely to occur (for example, a stated
5.6 Inflation and Discounting—Inflation and discounting
preferred remedy). Typically, the exercises a priori judgments
assumptions should be clearly documented, including the
(based on experience) about the ranking of likely outcomes,
sources for each and reasoning behind the selection. Inflation
but because of cost or other considerations does not develop a
and discount rates should be appropriate to the cash flows
full range of possible outcomes to support an expected value
being adjusted as well as their expected timing.
estimate. Care should be exercised in preparing an MLV
5.6.1 Dependingonthepurposeoftheestimate(suchasdue
estimate. For example, the MLV is typically not the mid-point
diligence/acquisition, financial assurance, feasibility study, re-
between the high and low cost estimates. The MLV should
serve or provision setting, or budgeting), alternative calcula-
representatechnicalandregulatoryscenariothatismostlikely
tionsmaybeperformedonthesamecashflows.Itisimportant
to occur. The MLV may represent a grouping or cluster of
toconsiderthefollowingwhenapplyinginflationanddiscount-
scenarios where the cost outcomes are close in magnitude and
ing to cash flows:
thecombinedprobabilityofthegroupingorclusterexceedsthe
5.6.1.1 Check regulations, standards, or court rulings that
probability of other possible scenarios. The MLV is not useful
may govern your estimate to determine guidance on required
if no scenario, grouping or cluster of outcomes has a probabil-
inflation/discounting applications. However, do not assume
ity of occurrence that is significantly greater than others. For
that rule-of-thumb or simplified default inflation and discount-
the MLV approach, it is recommended that a Range of Values
ing parameters derived for one specific purpose (such as when
also be developed to convey a minimum level of information
comparing remedial alternatives in a Feasibility Study) are
about uncertainty.
5.4.5 Range of Values—When an expected value approach
is not practical or appropriate, a range of values (without
For additional information on contingencies, see for example F.D. Clark and
A.B.Lorenzoni, Applied Cost Engineering,NY:MarcelDekker,1985,pp.112-120.
For additional information, see for example Reference Manual on Scientific
For additional information, see for example J. Mun, Modeling Risk:Applying Evidence,SecondEdition,FederalJudicialCenter,2000,p.303;R.A.Brealey,S.C.
Monte Carlo Risk Simulation, Strategic Real Options, Stochastic Forecasting, and MyersandF.Allen, Principles of Corporate Finance,Boston:McGraw-Hill,eighth
Portfolio Optimization, 2010 edition, 2006.
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appropriate for other purposes (such as cost estimation for inherentlyuncertainuntilthe eventmaturestoresolutionwhere
budgeting and reserves). (See Note X1.7 in Appen
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