GASB Update — Pollution Remediation
School Advisor, 2006 Issue No. 3

Over the years, schools have been faced with many types of pollution cleanup issues. This history includes events like underground storage tanks, black mold, and contaminated land, just to name a few. The accounting treatment for these kinds of events has been left to judgment and historically based on an “expense-as-incurred” method. Recently, the Government Accounting Standards Board (GASB) has stepped into this gap to provide guidance on this issue. They have issued an exposure draft titled Accounting and Financial Reporting for Pollution Remediation Obligations. When finalized it is expected to be issued as GASB 49 this fall.

Here is a brief summary of the new accounting rules discussed in the draft to deal with a possible pollution clean-up situation.

Description

The goal of the guidance is to define when to recognize a liability for the cost of cleanup in the financial statements and how to measure the size of that liability. The suggested method to value the liability would be the “expected-cash-flows” technique. This method essentially looks at the costs of potential cleanup actions and the probability of having to perform that action. The standard clearly states that it is expected that the liability computed would continue to change and evolve as facts become known. It is built on known facts at the time of each valuation.

While schools are not required to search for such obligations, the proposed standard identifies five events that, if any occur, would require a district to determine if it must report a liability in its financial statements.

• Pollution poses an imminent danger to the public or environment and a district has little or no discretion to avoid fixing the problem.
• A district has violated a pollution prevention-related permit or license.
• A regulator has identified a district as responsible (or potentially responsible) for cleaning up pollution, or for paying all or some of the cost of the cleanup (or evidence indicates a regulator will do so).
• A district is named in a lawsuit (or evidence indicates it will be) to compel it to address the pollution.
• A district begins to cleanup pollution or conducts related remediation activities (or the district legally obligates itself to do so).

If one or more of these events has occurred and a range of potential outlays for the cleanup can be reasonably estimated, then a district generally would report a liability in its financial statements. If a district can estimate outlays for only certain portions of the cleanup effort—such as legal fees, testing the polluted site, or monitoring after the cleanup—then it would report a liability for those activities. The district would later report liabilities for the remaining parts of the cleanup when ranges of outlays for them become reasonably estimable.

Periodically during the cleanup effort, the estimated ranges would be reevaluated and possibly revised as new information becomes available. The expected-cash-flow technique of measurement involves assigning probabilities or likelihoods to each of the potential outlays and calculating a weighted average of them.

Governmental Fund Level Recognition (Modified Accrual)

For districts presenting financial statements for governmental funds, typically the general fund, expenditures would be reported when payment for cleanup activities is due. This method is similar to the one used for debt payments and self insurance liabilities and would approximate what is likely done now.

Governmentwide and Proprietary Fund Level Recognition (Full Accrual)

A district would report expenses in the government-wide financial statements as it accrues costs related to cleaning up the pollution. As work is done on the site cleanup, the liability would be reduced for payments made.

Disclosures

The district’s financial statements would include disclosures about the nature of the remediation and the size of the obligation along with the methods and assumptions used in evaluating the potential obligation. Insurance recoveries would also be included in the discussion.

Proposed Effective Date and Additional Information

The new standard would be effective for the school districts’ June 30, 2008 year end financial statements. More information and the complete exposure draft of the final version when released can be found on the GASB’s website at www.gasb.org/exp. As always, once the standard is finalized we will provide you with a school-specific discussion of its implications.