ASTM E3123-24

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: E3123 − 24
Standard Guide for
Recognition and Derecognition of Environmental Liabilities
This standard is issued under the fixed designation E3123; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision. A number in parentheses indicates the year of last reapproval. A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
1. Scope 2.2 FASB – Financial Accounting Standards Board
Statement of Accounting Concepts No. 6 Elements of Finan-
1.1 Purpose—The purpose of this guide is to provide a
cial Statements
series of options or instructions consistent with good commer-
Statement of Accounting Concepts No. 8 Conceptual Frame-
cial and customary practice for recognition and derecognition
work for Financial Reporting
of environmental liabilities. This guide is consistent with
ASC Topic 410-20 – asset retirement obligations
Generally Accepted Accounting Principles (GAAP). Recogni-
ASC Topic 410-30 – other environmental obligations
tion of environmental liabilities is essential to determining the
ASC Topic 420 – exit/disposal costs
current book value of an entity. An entity may have future
ASC Topic 440 – commitments
spending to extinguish risk and liabilities triggered in the past.
ASC Topic 450 – contingencies
Serious consequences, ranging from failed audits and poor
ASC Topic 460 – guarantees
capital stewardship to financial fraud and bankruptcy, exist for
ASC Topic 805 – business combinations
entities omitting material information from financial state-
ASC Topic 820 – fair value measurement
ments.
2.3 GASB – Government Accounting Standards Board:
1.2 Objective—This guide enables users to reliably deter-
Section A10: Certain Asset Retirement Obligations (origi-
mine if a given type of environmental liability exists and nally Statement 83)
subsequently has been settled, consistent with the accounting
Section F30 : Financial Guarantees
definitions in place. Section P40 : Pollution Remediation Obligations (originally
Statement 49)
1.3 This international standard was developed in accor-
Section L10 : Landfill Closure and Postclosure Care Costs
dance with internationally recognized principles on standard-
(originally Statement 18)
ization established in the Decision on Principles for the
Section 1500 : Reporting Liabilities
Development of International Standards, Guides and Recom-
Section 2250 : Additional Financial Reporting Consider-
mendations issued by the World Trade Organization Technical
ations
Barriers to Trade (TBT) Committee.
Section 3100 : Fair Value Measurement (originally GASB
72)
2. Referenced Documents
2.4 IASB–International Accounting Standards Board:
2.1 ASTM Standards:
IAS 37 – provisions, contingent liabilities and contingent
E2137 Guide for Estimating Monetary Costs and Liabilities
assets
for Environmental Matters
IFRS 3 –business combinations
E2173 Guide for Disclosure of Environmental Liabilities
IFRS 13 –fair value measurement
E3033 Guide for Beneficial Use of Landfills and Chemically
3. Terminology
Impacted Sites
Generally Accepted Accounting Principles:
3.1 Definitions: (italicization identifies defined terms.)
3.1.1 acceptable use—an environmental professional’s de-
scription of a proposed beneficial use, characterized by the
1 nature and duration of activities involved, for a property that is
This test method is under the jurisdiction of ASTM Committee E50 on
Environmental Assessment, Risk Management and Corrective Action and is the evaluated and determined to be protective of human health,
direct responsibility of Subcommittee E50.05 on Environmental Risk Management.
Current edition approved March 1, 2024. Published April 2024. Originally
approved in 2017. last previous edition approved in 2018 as E3123–18. DOI: Available from Financial Accounting Standards Board 401 Merritt 7 P.O. Box
10.1520/E3123-24 5116 Norwalk, Connecticut 06856-5116, http://www.fasb.org
2 4
For referenced ASTM standards, visit the ASTM website, www.astm.org, or Available from Governmental Accounting Standards Board, 401 Merritt 7 P.O.
contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM Box 5116 Norwalk, Connecticut 06856-5116 http://www.gasb.org/
Standards volume information, refer to the standard’s Document Summary page on Available from International Accounting Standards Board, 30 Cannon Street
the ASTM website. London, EC4M 6XH United Kingdom http://www.ifrs.org
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
E3123 − 24
public safety, and welfare with, if necessary, specified engi- third party. An example of this is a company policy to excavate
neering and institutional controls and established signage. underground storage tanks once removed from service. Also
known as promissory estoppel.
3.1.2 accounting framework—the accounting standards and
principles relevant to an entity’s function. As many issuers of
3.1.13 costs and liabilities—economic expenses, accrued
accounting standards and principles exist worldwide, it is
liabilities, asset retirement obligations, impairments, and loss
common for entities to observe the standards of several issuers
contingencies.
concurrently.
3.1.14 derecognize—remove previously recognized assets
3.1.3 accrual—a value placed on a recognized environmen-
or liabilities from the statement of financial position.
tal liability. Accruals are adjusting entries to accounting re-
3.1.15 dutyholder—entity responsible for the costs and li-
cords so that the financial statements report these amounts.
abilities.
This forms the basis of “accrual accounting” methods.
3.1.16 environmental liabilities—a set of liabilities consist-
3.1.4 accretion—an increase to the present value of a
ing of five types: asset retirement obligations, other environ-
liability solely due to the passage of time, normally a year; also
mental obligations, commitments, contingencies and guaran-
known as “unwinding the discount.”
tees. Outside of a transaction, the ordinary value of these
3.1.5 activity and use limitations, or AUL—legal or physical
liabilities are their provisions (consisting of long-term and
restrictions or limitations on the use of, or access to, a site or
short-term portions). Within an actual or proposed transaction,
facility to eliminate or minimize potential exposures to chemi-
environmental liabilities have “fair value measurement” (also
cals of concern, or to prevent activities that could interfere with
“due diligence”) values.
the effectiveness of a response action, to ensure maintenance of
3.1.17 equitable—a type of obligation based on moral or
a condition of “acceptable risk” or “no significant risk” to
social expectations, which is typically not enforceable.
human health and the environment. These legal or physical
However, it is uncommon for an equitable obligation to lack a
restrictions are intended to prevent adverse impacts to indi-
concurrent contractual, regulatory and/or constructive obliga-
viduals or populations or environmental receptors that may be
tion(s).
exposed to chemicals of concern.
3.1.18 estimator—an individual or entity that prepares and
3.1.6 allocation or allocated share—the portion of cost or
analyzes costs and liabilities.
liability for which a party is responsible for payment or
reimbursement.
3.1.19 event—a condition or incident which occurred, or
3.1.7 asset retirement obligation, ARO—legal or construc- may occur, with respect to an environmental condition and/or
tive obligations associated with the retirement of a tangible environmental compliance issue, that causes exposure to risks,
long-lived asset that result from the acquisition, construction, and may result in liabilities.
development, or normal operation of a tangible long-lived
3.1.20 extinguishment—settlement of environmental
asset. Activities include (but are not limited to) demolition,
liabilities, normally through the performance of services or
decommissioning, decontamination, reclamation, restoration
cash payments. Extinguishment through bankruptcy or corpo-
and abandonment.
rate dissolution is uncommon. Extinguishment (or settlement)
3.1.8 claim—a demand for payment or performance of
is the normal condition for derecognition.
services.
3.1.21 fair value—an estimate of the price that could be
3.1.9 commitment—contracts creating environmental risks,
received for an asset or paid to settle a liability in a current
typically outside of regulatory oversight. For example, a lease
transaction between marketplace participants that are
requirement to “return a property to original condition at
unrelated, knowledgeable about factors relevant to the liability
lease-end” may create duties beyond those obligations caused
and the transaction, able, and willing to transact in the
by environmental regulations. Another example is a cost-
reference market for the liability. Sometimes interchangeably
sharing agreement for environmental liabilities between a
called “due diligence value”. Also, this approach implies a
buyer and a seller, or between an insurer and their insured.
comprehensive and auditable expected value calculation.
3.1.10 component—a portion of a liability.
3.1.22 fines and penalties—a subtype of environmental
liabilities defined primarily in ASC Topic 450 Contingencies;
3.1.11 contingency—an existing condition, situation or set
tax deductibility of fines and penalties is typically a relevant
of circumstances involving uncertainty as to possible gain or
factor in the value and materiality of an environmental liability.
loss to an entity that will ultimately be resolved when one or
more future events occur or fail to occur (ASC 450-20-20).
3.1.23 guarantee—a type of environmental liabilities de-
Examples include (a) injury or damage caused by products
fined primarily in ASC Topic 460 Guarantees, the distinct value
sold; (b) risk of loss or damage of property by fire, explosion
of a promise to perform or pay, in the event that another party
or other hazards; (c) actual or possible claims and assessments;
does not. Under “joint and several liability”, a guarantee
(d) threat of expropriation of assets; and (e) pending or
typically exists among the PRPs at a Superfund site. The cost
threatened litigation. (ASC 450-30-05-10)
of a CERCLA financial assurance instrument, such as a letter
3.1.12 constructive obligation—the concept that past prac- of credit or performance bond, is a guarantee above and
tice or statement creates a valid expectation on the part of a beyond the cost of the guaranteed work or payment itself.
E3123 − 24
3.1.24 incurred—In GARS A10 – Certain Asset Retirement diation liabilities”, “pollution remediation obligation”, “Super-
Obligations (formerly Statement 83), part of a two-factor test fund cleanup costs, “spill response costs” and others (see ASC
410-30).
that an asset retirement obligation exists; incurred is used in
place of probable.
3.1.34 present obligation—an existing duty to achieve an
outcome; whether enforced or not, conditions already exist for
3.1.25 interperiod equity—from GASB Concepts State-
enforcement.
ment 4 – “the state in which current period inflows of resources
3.1.35 probable (ASC 410-20)—one part of a two-factor test
equal current period cost of services.” When this is achieved, it
goes on to say, “the burden of the cost of [current period] for liability recognition in FASB ASC 410-20, meaning that
which can be reasonably expected or believed on the basis of
services is borne by present-year taxpayers and revenue
available evidence or logic but is neither certain nor proved.
providers” rather than “shifted to future-year taxpayers or
revenue providers through an increase in the level of borrow-
3.1.36 probable—(Merriam Webster definitions):
ing” or paid from net resources accumulated in past periods.
• Supported by evidence strong enough to establish pre-
sumption but not proof
3.1.26 legal obligation—duty to carry out what the law
(regulation) or a contract states.
• Establishing a probability
3.1.27 liability—In FASB Concepts Statement No. 6, Ele-
• Likely to be or become true or real
ments of Financial Statements, “probable future sacrifices of
3.1.37 probable (ASC 450-20 and by reference ASC 410-
economic benefits arising from present obligations of a par-
30)—one part of a two-factor test for liability recognition in
ticular entity to transfer assets or provide services to other
FASB ASC 450, meaning likely to occur. This has commonly
entities in the future as a result of past transactions or events.”
been (but not authoritatively) interpreted to mean more than 75
Alternatively, a portion of an enterprise’s balance sheet con-
or 80 percent likely to occur (see 5.2.3 for further information).
taining long-term debt, short-term accounts payable, pensions
3.1.38 probable (IAS 37)—one part of a three-factor test for
and for the purpose of this guide, environmental liabilities.
liability recognition in IAS 37, meaning that which is more
This includes legal obligations as well as constructive obliga-
likely than not (that is, more than 50% likely).
tions (promissory estoppel), and may also be in the form of
3.1.39 provision (IAS 37)—an accrual or accrued liability,
commitments, contingencies or guarantees.
sometimes of uncertain timing or amount
3.1.28 long-tail liability—a liability with a long settlement
3.1.40 purchase accounting adjustment—the process by
period. Environmental liabilities are a type of long-tail liability.
which assets and liabilities are adjusted to fair value, promptly
3.1.29 materiality—the significance of an item to users of a
after an acquisition. For environmental liabilities, this com-
financial statement that considers all relevant and surrounding
monly results in corrections based on significant findings and
circumstances. For this guide, materiality is essential in the
decisions learned after the due diligence process and transac-
recognition process, but is not a factor in the derecognition tion negotiations.
process. A material item is one that its omission or misstate-
3.1.41 reasonably estimable—one part of a two-factor test
ment is of such a magnitude in the surrounding circumstances
for liability recognition in FASB ASC 410 and 450, GASB
that either the judgment of a reasonable person relying on the
Statements 10, 18, 49 and 83, intended to prevent the accrual
financial statement would have been changed or influenced by
in the financial statements of amounts so uncertain as to impair
its inclusion or correction, or there is a substantial likelihood
the integrity of those statements.
that the item, after assessing the inferences, and their
3.1.42 reasonably possible—used in ASC 450, an outcome
significance, drawn from the given set of facts associated with
expressed as a likelihood, or probability, associated with a
the financial statement, would be viewed as significantly
given event occurring that lies in the range between remote and
altering the information made available to statement’s user.
probable. The probability values assigned to remote and
Relevant sources of information and references are included in
probable are determined by the enterprise, based on such
Appendix X2.
factors as the industry, peer behavior, the aggregate number of
3.1.29.1 Discussion—This definition is not intended to re-
environmental liabilities, spending experience, and other pos-
place the definition of materiality periodically issued by the
sible outcomes (including associated uncertainties).
SEC (See Appendix X2).
3.1.43 recognition—creation of an accrual for an environ-
mental liability. Also, “booking a liability”.
3.1.30 noncontingent—not dependent on a future outcome.
3.1.44 recognition benchmark—an accounting term from
3.1.31 obligating event—a past outcome which confirmed
US GAAP noting specific points in the life of an environmental
an obligation.
risk or liability, such as a remedial investigation, feasibility
3.1.32 obligation—a legally enforceable duty of several
study, or remediation, when a revised estimate of the liability
types: (a) contractual, (b) regulatory, (c) constructive (promis-
is advisable or necessary.
sory estoppel), or rarely (d) equitable.
3.1.45 reliably estimable—one part of a three-factor test for
3.1.33 other environmental obligation—in contrast to an liability recognition in IAS 37 intended to prevent the accrual
asset retirement obligation to remove an asset from service,
in the financial statements of amounts so uncertain as to impair
other environmental obligations include “environmental reme- the integrity of those statements.
E3123 − 24
3.1.46 remote—an accounting term from US GAAP; the 3.2.13 IAS—International Accounting Standard
chance of the future event or events occurring is slight,
3.2.14 IASB—International Accounting Standards Board
generally in the range of 1% to 5% as determined by a financial
3.2.15 IFRS—International Financial Reporting Standard
statement preparer.
3.2.16 NPL—National Priorities List
3.1.47 reserve—less formally, any accrual for environmen-
3.2.17 PRP—potentially responsible party
tal liabilities; more precisely, a provision that is matched with
sequestered assets to fund future expenditures.
3.2.18 RCRA—Resource Conservation and Recovery Act
(as amended 42 USC Section 6901 et seq.)
3.1.48 risk—exposure to a possible liability
3.2.19 SEC—Securities and Exchange Commission
3.1.49 settlement—extinguishment of environmental
liabilities, normally through the performance of services or
4. Significance and Use
cash payments. Settlement through bankruptcy or corporate
dissolution is uncommon. Settlement (or extinguishment) is the
4.1 Use—this guide is intended for use on a voluntary basis
normal condition for derecognition.
for evaluating environmental liabilities, often with Guide
E2137 for estimation and Guide E2173 for disclosure. The user
3.1.50 tax deductibility—whether spending on an environ-
may elect to apply this guide for any or all of these purposes:
mental liability reduces taxable income.
4.1.1 Determining if an environmental risk or liability
3.1.51 unasserted claims—As stated by FASB in ASC
exists,
410-30-25-23, future actions of an entity, when they occur,
4.1.2 Determining if similar environmental risks (for
may create a legal obligation to perform environmental reme-
example, permits, plant or process expansion) are being
diation; however, no obligation exists currently (for example, if
recognized at similar points in their lifecycle,
the obligation arises only when and if an entity ceases to
4.1.3 Determining if several similar environmental risks and
operate a facility). Costs related to asset retirement, including
liabilities are being managed to similar outcomes,
costs of future site restoration or closure that are required upon
4.1.4 Determining liability values,
the cessation of operations or sale of facilities, may create a
4.1.5 Due diligence analysis for proposed mergers,
current obligation that would be recognized in accordance with
acquisitions, or spinoffs,
Subtopic 410-20.
4.1.6 Documenting key decisions on environmental liability
3.1.52 unenforced obligations—If an environmental reme-
provisions, reserves, budgets and cash flow forecasts.
diation or asset retirement obligation is expected to exist but
4.1.7 Identifying and analyzing liabilities associated with
has not yet been enforced, an entity may face uncertainty as
the following:
whether or not the unenforced obligation represents an unas-
4.1.7.1 certain remedial alternatives,
serted claim and therefore, under certain circumstances, is not
4.1.7.2 future land uses, property transfer and redevelop-
recognizable as a liability.
ment decisions,
3.1.53 unit of account—the level at which an environmental
4.1.7.3 land use alternatives for former landfills and chemi-
risk or liability is aggregated or disaggregated for recognition
cally impacted sites,
purposes, commonly a combination of site location and liabil-
4.1.7.4 Meeting regulatory requirements,
ity type (“Main Street plant ARO”).
4.1.8 Designing and implementing project and program
controls,
3.2 Acronyms and Initialisms:
4.1.9 Defending against third-party lawsuits,
3.2.1 AICPA—American Institute of Certified Public Ac-
4.1.10 Calculating insurance premiums,
countants
4.1.11 Making and settling insurance claims,
3.2.2 ARO—Asset Retirement Obligation
4.1.12 Making purchase accounting adjustments,
3.2.3 ASC—Accounting Standards Codification, from the
4.1.13 Preparing an audit defense, and
Financial Accounting Standards Board
4.1.14 Completing financial and investment analysis.
3.2.4 AULs—activity and use limitations
4.2 Principles—the following principles are an integral part
3.2.5 CERCLA—Comprehensive Environmental Response,
of this guide and should be used to resolve ambiguity or
Compensation and Liability Act of 1980 (as amended, 42 USC
dispute regarding the recognition and derecognition of envi-
Section 9601 et seq.)
ronmental liabilities. These principles are drawn from several
sources, including historical and current accounting principles,
3.2.6 CFR—Code of Federal Regulations
court decisions, academic studies, as well as good commercial
3.2.7 EPA—United States Environmental Protection Agency
and customary practice.
3.2.8 FASB—Financial Accounting Standards Board
4.2.1 Current awareness of an entity’s accounting frame-
work and applicable generally accepted accounting principles
3.2.9 FIN—FASB Interpretation Number
(GAAP) is expected of everyone. Developing related environ-
3.2.10 GAAP—Generally Accepted Accounting Principles
mental liability recognition policies and procedures commonly
3.2.11 GARS—Governmental Accounting Research System,
requires inputs from internal and external sources, including
from the Governmental Accounting Standards Board
(but not limited to) accounting, finance, legal, environmental
3.2.12 GASB—Governmental Accounting Standards Board health and safety, capital projects and real estate.
E3123 − 24
4.2.2 The reporting entity has a duty to identify a risk in liabilities must be consistent with the entity’s accounting
order to determine if it meets the criteria for recognition and framework. See 9.9 for further detail on unit of account.
derecognition. A default assertion of immateriality without data
4.2.11 Where terminology such as “probable” and “reason-
or structured judgement is inconsistent with GAAP and with ably estimable” is used to identify risks for recognition, users
good commercial and customary practice.
should clearly state and consistently apply any numerical
definitions and ensure these definitions are consistent with their
4.2.3 Accrued liabilities must represent losses in future
periods. Consequently, certain costs are treated differently for relevant accounting framework(s).
accounting and tax purposes: 4.2.12 No part of GAAP (or IFRS) specifies a minimum or
maximum time horizon for measurement, recognition or derec-
4.2.3.1 Costs for response activities resulting from an event
ognition of environmental liabilities. Users should be aware of
in the current reporting period that will be fully completed
applicable regulations or policies in determining an
within the current period (with no on-going future obligations)
appropriate/reasonable timespan. For example, a financial
do not require accrual but are expensed as incurred in the
assurance valuation may cover 30 years of forecasted costs,
current period.
while a contract may presume perpetual spending to manage a
4.2.3.2 Costs for environmental cleanup activities that are
liability. [Guide E2173 contains recommendations about dis-
related to active ongoing operations (not a past event), includ-
playing key assumptions in X4.4 “Portfolio Assumption Track-
ing ongoing discharge treatment and monitoring, groundwater
ing Table”].
or air monitoring, etc. are not appropriate for inclusion in
4.2.13 US GAAP and IFRS express the preference for
environmental liability accruals.
calculating liabilities at their prices (ideally “fair value mea-
4.2.3.3 Costs for capital expenditures (investments) in new
surement”). There are complexities with calculating some costs
property, plant and equipment are also not appropriate for
(remedy failure, counterparty risk) to determine fair value.
accrual. Rarely, certain capital expenditures will effectively
Users of this guide should use caution in stating that a single
settle a liability, but accounting and tax rules for accruals and
remedy – once implemented – contains all of the possible costs
investments are specialized and distinct. An entity’s accounting
and will successfully extinguish all risks and liabilities antici-
framework will already address these differences.
pated at a site. As noted in Guide E2137, price and cost
4.2.4 Over time, some risks become recognized liabilities
approaches yield estimates which can differ significantly.
and vice versa.
4.2.14 Litigation is both a method of enforcement and type
4.2.5 Comprehensive data sources regarding environmental
of liability in its own right. The risk of litigation is continuous
risks and liability quantification are readily available and have
and generally unavoidable. Awareness of litigation conditions
improving levels of accuracy (or precision).
are often part of the determination of recognition and derec-
4.2.6 Imperfect or incomplete information is a common
ognition.
obstacle to environmental liability recognition: the lack of
comprehensive and current data on an environmental risk does
NOTE 1—When estimating litigation exposure and potential costs, the
user should consider if the litigation includes the potential for fines that are
not prevent comparison of a past environmental liability with a
imposed on a daily basis for each violation.
prospective one. Even with complete knowledge of property
and regulatory issues, a reliable calculation of all costs is still 4.2.15 Spending correlates positively with (but is not iden-
challenging but possible. tical to) liability reduction.
4.2.7 While uncertain timing of spending is a common 4.2.16 Spending may fail to reduce liabilities.
factor to determining a present value of a risk or liability, an 4.2.17 Spending to address a liability indicates that a
expected value can generally be calculated from comparable
liability exists.
sites, open source estimates, and vendor quotes.
4.2.18 It is not unusual for a liability to require immediate
4.2.8 Application of the materiality constraint (FASB Con- recognition under the accounting standards although spending
on the liability may not occur in the foreseeable future.
cepts Statement 8; Appendix X2) should enable users of this
guide to determine which environmental risks should be 4.2.19 Environmental risks should be regularly reviewed,
recognized and potentially disclosed (Guide E2173). Users of documented and analyzed to record events, decisions, obliga-
this guide should consider whether an aggregation of many tions and responsibilities (see Section 6 and 9.8).
related immaterial risks constitute a recognizable liability. 4.2.20 The tools, procedures and vendor experience needed
4.2.9 Application of the cost constraint (FASB Concepts to promptly provide a cost or timing forecast, or both, already
Statement 8) should enable users of this guide to filter or screen exists and is continuously improving; lack of resources or a
which risks should be evaluated in more detail (see 6.3 on the brief turnaround time are not reasonable justifications for
Watch list, also Guide E2137). Users should consider the continuously misstating a risk or liability.
opportunity costs of not developing a more rigorous estimate, 4.2.21 Strategic transactions can bring changes to the ac-
as well as whether data exists to justify an improved estimate.
counting framework used by an entity, which can trigger
recognition and derecognition of liabilities.
4.2.10 Recognition may be for a specific phase of activity
or other incremental component of a liability. Particularly, 4.2.22 Periodic reiterations of recognition steps are useful to
GASB 49 specifies the recognition of components of a liability stakeholders. If an entity finds that similar liabilities are being
based on the occurrence of certain (commonly sequential) recognized and settled in varying ways, a reiteration of policies
obligating events and recognition benchmarks. The unit of and procedures can express an entity’s current tolerance for
account applied to measurement and recording environmental risk and for recognition of environmental liabilities.
E3123 − 24
4.2.23 As an entity successfully grows while simultane- 4.3.2.2 Regulator websites covering environmental
ously extinguishing environmental liabilities, the aggregate compliance, enforcement, permitting, spills, to confirm those
liability will eventually become immaterial. See 9.7 for further records are accurate
detail. 4.3.2.3 Regulator websites covering similar (unrelated) li-
4.2.24 The same physical location may have multiple envi- abilities to determine if data provides predictive insights.
ronmental risks and liabilities. The definition and application 4.3.2.4 Public interest and news websites that track envi-
of the term “unit of account” should be evaluated as an entity ronmental compliance issues.
grows and settles key risks and liabilities; see 9.7 and 9.9 for
4.4 General Process for Recognition and Derecognition:
further detail.
4.4.1 Overall Process—described in Fig. 1 Environmental
4.2.25 Completion of some activity (see Section 7) usually
Liability Lifecycle – the process is iterative, continuous, and
precedes derecognition.
controlled through periodic settlement of liabilities. The four
4.3 Liability management practices—the following prac- steps are:
tices are an integral part of this guide and users should employ 4.4.1.1 Watch list (pre- and postrecognition)—consists of a
them to reliably recognize and derecognize environmental screened listing of risks, identified by type, location and other
liabilities attributes. A detailed explanation is in 6.3 and Section 7 of this
guide.
4.3.1 Independent of an organization’s standard record re-
tention policies, indefinitely maintaining searchable listings of 4.4.1.2 Recognition (liability accrual and footnoting)—each
type of environmental liabilities has a recognition process for
the following should be given consideration:
4.3.1.1 Extensive spending history, provision or reserve converting a risk to an accrual (or footnote) listed in Section 5
of this guide.
change decisions, project phase decisions, and key site
activities, including remediation, capital expenditures, permit- 4.4.1.3 Settlement (work, spending, negotiations)—consists
of routine activities to study, remediate, restore, monitor,
ted discharges, asset retirement.
4.3.1.2 Correspondence with regulators, especially docu- redevelop and manage a property to satisfy one of the five
types of liabilities. This also includes payments to others for
ments which identify specific obligations (such as notices of
violation, consent decrees, administrative orders). Environ- their performance or guarantee or cashout of these activities.
4.4.1.4 Extinguishment and Derecognition—confirmation
mental data collected in support of this correspondence.
4.3.1.3 Active, inactive and closed business units and cor- that your entity settled the obligation, commitment, contin-
gency or guarantee and that the liability no longer exists. The
porations.
4.3.1.4 Properties used (whether owned, leased, divested, or accrual is removed from the financial statements.
4.4.2 Classification by location—any risk or liability must
a common ecological resource) in a way that causes environ-
mental liabilities, especially those with activity and use limi- be associated with a specific location. In the case of product
warranty risks, this may be an entire nation or customs union.
tations.
4.3.1.5 Activity and use limitations needed, requested and In the case of soil or groundwater contamination, this may be
a street address or waste disposal facility. See 9.9 for more
issued, even for divested properties.
detail on applying the concept of a “unit of account”.
4.3.1.6 Zoning change requests, applications to create or
4.4.3 Classification by type—there are five common types of
remove activity and use limitations.
environmental liabilities, which may exist simultaneously at
4.3.1.7 Environmental permits (such as RCRA, NPDES,
etc.)
4.3.1.8 Vendor, property, general liability insurance
policies, along with listings of any claims submitted and their
respective disposition.
4.3.1.9 Waste disposal and treatment sites used, along with
transporters, corresponding insurance, waste manifesting.
NOTE 2—These may include Publicly-Owned Wastewater Treatment
Plants that receive and process liquid wastes transported by pipe way,
sewer or in bulk (tanker truck).
4.3.1.10 Purchased, processed, marketed, recycled and
waste chemical compounds; end users, recyclers, and trans-
porters.
4.3.1.11 Environmental counterparties, such as successor
property owners, adjacent property owners, nearby contribu-
tors to common ecological resources (wetlands, aquifers, river
sediments), other PRPs on multiparty cleanup projects (Super-
fund sites), unrelated entities which promised to settle some
ARO or remedial obligation.
4.3.2 Periodically, an organization may find it necessary to
study, evaluate or maintain databases of the following:
4.3.2.1 Bankruptcy filings of environmental counterparties FIG. 1 Environmental Liability Lifecycle
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the same location: asset retirement obligation, other environ- for recognition. Ideally, such cooperation is formalized in
mental obligations, commitments, contingencies, and guaran- process and procedure documents to maximize the documen-
tees. tation and memorialization of key assumptions and conclusions
4.4.4 This guide uses the five liability types in the numerical and to improve consistency in the development of the same.
order stated in the 2009 Accounting Standards Codification Citations have been provided in this guidance to the applicable
(ASC) developed by the Financial Accounting Standards standards under FASB (US), GASB (US) and IASB (multiple
Board. Users of this guide should consult the references noted international jurisdictions) for the user but it is not intended to
in the following Fig. 2 as well as Appendix X1, and – at least be a comprehensive discussion of these standards.
annually – develop an understanding of any recent changes: 5.1 Asset retirement obligations—Fig. 3 describes the pro-
4.4.5 In Section 5 of this guide, users may find it useful to cess for determining if an asset retirement obligation exists.
follow a more comprehensive process to recognize certain Examples are listed in Appendix X4 (1.)
liability types and consider past activity at that location. See 5.1.1 Determine the accounting framework relevant to the
Appendix X5 for a process flow example. recognition of asset retirement obligations.
5.1.2 Is there an asset in service now? Alternatively, has the
5. Recognition Process for Specific Liability Types
entity recently acquired an asset which was:
GENERAL GUIDANCE: recognition and derecognition is 5.1.2.1 Built—normally as an investment or capital
expenditure, or sometimes as a joint venture with partners
an accounting activity requiring concurrent work in other
disciplines (law, science, construction). Users of this guide are 5.1.2.2 Bought—as an operating asset; sometimes through
an investment in a partnership where the ARO is shared among
presumed to be using an accounting framework appropriate to
their entity, and maintaining the tools, policies and procedures by the owners
5.1.2.3 Otherwise conveyed as an obligation, through such
to ensure compliance with that framework. For a new entity,
building an accounting framework commonly requires consid- obligating events as those listed in 6.1. For example, a
government may complete tax forfeiture, condemnation or
eration of the principal standard setting organization for a
given entity. For US-based corporations, FASB (X1.2) is the expropriation proceedings (and assume title to property) and
thereby assume an asset retirement obligation.
primary authority. For non-Federal governments in the US,
GASB (X1.3) is the primary standard issuer. For non-US 5.1.3 Will there be an ARO activity? Does the asset retire-
ment obligation have an known end-of-service-life activity?
corporations, IASB is the primary standard issuer (see X1.6) or
country-specific “local GAAPs” or a combination. A more Common activities include demolition, decontamination, sur-
face reclamation, abandonment. Excludes certain transactions,
comprehensive listing is in Appendix X1; while these are the
primary standard setters, users of this guide should confirm such as obligations resulting from improper operations (that is,
environmental remediation liabilities).Will there be a cost
with their internal financial reporting specialists that tools,
policies and procedures already reflect appropriate accounting (“probable future sacrifice of resources”) to take the asset out
of service, even if the exact date and/or method of settlement
citations. As previously noted, while the accounting frame-
works discussed in this guide contain some similarities in is uncertain? Is there little or no discretion to avoid the ARO
process, they also demonstrate differences in some key provi- activity? The lack of enforcement of an obligation does not
sions. A leading practice is for members of an entity’s cancel the obligation or prevent recognition of the obligation.
accounting, legal, and environmental functions to confer and 5.1.3.1 Has a new government action (law, statute, ordi-
collaborate on the applications and conventions of the entity’s nance) been enacted which changes the ARO activity? Is there
relevant guidance and the assessment of potential obligations an incremental activity to an ARO – regardless of cause –
FIG. 2 Five Liability Types
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(3) The entity is able to produce a cost estimate for a
regulator’s financial assurance process.
5.1.4.4 Instances may occur in which there is insufficient
information to reasonably estimate the fair value. For example,
assets may have several large components, each of which have
a flexible and interdependent useful life; frequently recalculat-
ing an indeterminate useful life may not be meaningful. In
these situations (see ASC 410-20-50-2), entities may be re-
quired to disclose the facts and reasoning for the opinion that
reasonable estimate of the fair value measurement isn’t pos-
sible.
5.1.4.5 Under IFRS, IAS 37 provides that the provision for
a liability should be the best estimate of the expenditure that
would be required to settle the obligation as of the balance
sheet date. This is the amount that an entity would pay to settle
the obligation or to transfer the liability to a third party as of the
balance sheet date. Although it will often be "impossible or
prohibitively expensive" to transfer or settle the liability as of
the balance sheet date, estimating that amount provides the best
indicator of the expense required to settle the obligation at such
time.
5.1.4.6 Under U.S. GAAP, when an ARO is initially
FIG. 3 Asset Retirement Obligations
recognized, ASC 410-20-25-5 requires that an entity capitalize
its asset retirement cost by increasing the long-lived asset’s
which must be recognized in addition to the original scope,
carrying value by the same amount. ASC 410-20-35-2 requires
schedule and budget? For example, an adjustment (also, “new
the asset’s retirement cost to be recognized subsequently as
layer”) to an existing ARO is appropriate when the valuation
expense using a "systematic and rational method" over the
changes for new information or new investments at a facility.
long-lived asset’s useful life.
Other examples can be found in Appendix X4(1).
5.1.4.7 Periodically, market-driven variables – interest rates,
5.1.3.2 Agreement between entities (contract or commit-
discount rates, current exchange rates, diesel fuel costs, an
ment) defining financial responsibility for an ARO.
entity’s credit rating, time to product obsolescence for a factory
5.1.3.3 Has an ARO been conveyed from a third party, in a
– can change the valuation of an ARO while having no effect
form such as promissory estoppel (also, constructive obliga-
on the recognition of the ARO.
tion)? For example, a large partnership may lose a small
5.1.4.8 An owner’s decision to idle or close a facility before
partner to dissolution or bankruptcy and need to reallocate that
the end of its useful life will necessarily revise an ARO.
stranded share to the remaining partners. Alternatively, a
5.2 Environmental obligations – Fig. 4—describes the pro-
county may rezone a property, causing the owner to remove
cess for determining if another type of environmental obliga-
some evidence of prior use(s).
tion (non-ARO) exists. This Section will address recognition
5.1.4 Determine what is known about cost and timing of an
arising from historical release practices or non-normal opera-
ARO activity. Can a reasonable estimate of the ARO be made?
tions (non-ARO environmental remediation activities). In
Accounting presumption is that fair value measurement (ASC
some cases, the assessment of whether the contamination
820, GASB 72, IFRS 13) is the optimal measurement basis.
results from normal or non-normal operations may be subject
See Guide E2137 for further detail on estimation techniques;
to judgement. Generally, it will be expected that releases that
the following conditions confirm that a reliable estimate can be
are of sufficient significance to report to the relevant environ-
developed:
mental regulator upon their discovery and for which a regulator
5.1.4.1 It is evident that the fair value is embodied in the
may expect immediate response, rather than a response at end
acquisition price of the asset. For example a purchase and sales
of life, will be considered as resulting from non-normal
agreement contains an explicit valuation for a conveyed ARO.
operations and should be assessed for the potential recognition
5.1.4.2 An active market exists for the transfer of the
of a liability. Examples are listed in Appendix X4(2).
obligation.
5.1.4.3 Sufficient information exists to apply an expected 5.2.1 Determine accounting framework—Environmental re-
present value technique mediation activities resulting from pollution, contamination or
(1) The settlement date and method of settlement have release events are referred to variously in different accounting
been specified by others frameworks. ASC 410-30 refers to these as “Environmental
(2) Information is available to reasonably estimate the Obligations”, GASB 49 refers to them as “Pollution Remedia-
settlement date or range of settlement dates, the method of tion Obligations” and IASB’s IAS 37 includes them in the
settlement or potential methods of settlement, and the prob- more general “Provisions” category along with other types of
abilities associated with potential settlement dates and methods potential losses and obligations. Pollution cleanup and reme-
of settlement. diation activities, components, and costs are listed in 9.1.
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appropriate accounting guidance, and confer with accounting
and legal functions, to assess the likelihood of such losses and
to comply with disclosures as appropriate. See Guide E2173
for more information regarding the disclosures of environmen-
tal liabilities.
5.2.4 Is the loss reasonably estimable?—To accrue costs for
a liability in the financial statements, the amount of the loss
must be estimable with sufficient reliability that they do not
compromise the integrity of the financial statements. FASB and
GASB guidance require that a loss be “reasonably estimable”
and IASB guidance requires that a loss be “reliably estimable.”
See 9.2.3 for a comparison of the citations for this term. While
these terms are not defined specifically in the guidance, each
standard contains common concepts. See Section 9 for further
detail.
NOTE 3—This guide considers that environmental response actions
have been performed at contaminated sites in many countri
...