ASTM E3123-17

4.1.1 Determining if an environmental risk or liability exists,

4.1.2 Determining if similar environmental risks (for example, permits, plant or process expansion) are being recognized at similar points in their lifecycle,

4.1.3 Determining if several similar environmental risks and liabilities are being managed to similar outcomes,

4.1.4 Determining liability values,

4.1.5 Due diligence analysis for proposed mergers, acquisitions, or spinoffs,

4.1.6 Documenting key decisions on environmental liability provisions, reserves, budgets and cash flow forecasts.

4.1.7 Identifying and analyzing liabilities associated with the following:

4.1.8 Designing and implementing project and program controls,

4.1.9 Defending against third-party lawsuits,

4.1.10 Calculating insurance premiums,

4.1.11 Making and settling insurance claims,

4.1.12 Making purchase accounting adjustments,

4.1.13 Preparing an audit defense, and

4.1.14 Completing financial and investment analysis.

4.2.1 Current awareness of an entity’s accounting framework and applicable generally accepted accounting principles (GAAP) is expected of everyone. Developing related environmental liability recognition policies and procedures commonly requires inputs from internal and external sources, including (but not limited to) accounting, finance, legal, environmental health and safety, capital projects and real estate.

4.2.2 The reporting entity has a duty to identify a risk in order to determine if it meets the criteria for recognition and derecognition. A default assertion of immateriality without data or structured judgement is inconsistent with GAAP and with good commercial and customary practice.

4.2.3 Accrued liabilities must represent losses in future periods. Consequently, certain costs are treated differently for accounting and tax purposes:

4.2.4 Over time, some risks become recognized liabilities and vice versa.

4.2.5 Comprehensive data sources regarding environmental risks and liability quantification are readily available and have improving levels of accuracy (or precision).

4.2.6 Imperfect or incomplete information is a common obstacle to environmental liability recognition: the lack of comprehensive and current data on an environmental risk does not prevent comparison of a past environmental liability with a prospective one. Even with complete knowledge of property and regulatory issues, a reliable calculation of all costs is still challenging but possible.

4.2.7 While uncertain timing of spending is a common factor to determining a present value of a risk or liability, an expected value can generally be calculated from comparable sites, open source estimates, and vendor quotes.

4.2.8 Application of the materiality constraint (FASB Concepts Statement 8; Appendix X2) should enable users of this guide to determine which environmental risks should be recognized and potentially disclosed (Guide E2173). Users of this guide should consider whether an aggregation of many related immaterial risks constitute a recognizable liability.

4.2.9 Application of the cost constraint (FASB Concepts Statement 8) should enable users of this guide to filter or screen which risks should be evaluated in more detail (see 6.3 on the Watch list, also Guide E2137). Users should consider the opportunity costs of not developing a more rigorous estimate, as well as whether data exists to justify an improved estimate.

4.2.10 Recognition may be for a specific phase of activity or other incremental component of a liability. Particularly, GASB 49 specifies the recognition of components of a liability based on the occurrence of certain (commonly sequential) obligating events and recognition benchmarks. The unit of account applied to measurement and recording environmental liabilities must be consistent with the entity’s accounting framework. See 9.9 for further detail on unit of account.

4.2.11 Where terminology such as “probable” and “reasonably estimable” is used to identify risks for recognition, users should clearly state and consistently apply any numerical definitions and ensure these definitions are consistent with their relevant accounting framework(s).

4.2.12 No part of GAAP (or IFRS) specifies a minimum or maximum time horizon for measurement, recognition or derecognition of environmental liabilities. Users should be aware of applicable regulations or policies in determining an appropriate/reasonable timespan. For example, a financial assurance valuation may cover 30 years of forecasted costs, while a contract may presume perpetual spending to manage a liability. [Guide E2173 contains recommendations about displaying key assumptions in X4.4 “Portfolio Assumption Tracking Table”].

4.2.13 US GAAP and IFRS express the preference for calculating liabilities at their prices (ideally “fair value measurement”). There are complexities with calculating some costs (remedy failure, counterparty risk) to determine fair value. Users of this guide should use caution in stating that a single remedy – once implemented – contains all of the possible costs and will successfully extinguish all risks and liabilities anticipated at a site. As noted in Guide E2137, price and cost approaches yield estimates which can differ significantly.

4.2.14 Litigation is both a method of enforcement and type of liability in its own right. The risk of litigation is continuous and generally unavoidable. Awareness of litigation conditions are often part of the determination of recognition and derecognition.

4.2.15 Spending correlates positively with (but is not identical to) liability reduction.

4.2.16 Spending may fail to reduce liabilities.

4.2.17 Spending to address a liability indicates that a liability exists.

4.2.18 It is not unusual for a liability to require immediate recognition under the accounting standards although spending on the liability may not occur in the foreseeable future.

4.2.19 Environmental risks should be regularly reviewed, documented and analyzed to record events, decisions, obligations and responsibilities (see Section 6 and 9.8).

4.2.20 The tools, procedures and vendor experience needed to promptly provide a cost or timing forecast, or both, already exists and is continuously improving; lack of resources or a brief turnaround time are not reasonable justifications for continuously misstating a risk or liability.

4.2.21 Strategic transactions can bring changes to the accounting framework used by an entity, which can trigger recognition and derecognition of liabilities.

4.2.22 Periodic reiterations of recognition steps are useful to stakeholders. If an entity finds that similar liabilities are being recognized and settled in varying ways, a reiteration of policies and procedures can express an entity’s current tolerance for risk and for recognition of environmental liabilities.

4.2.23 As an entity successfully grows while simultaneously extinguishing environmental liabilities, the aggregate liability will eventually become immaterial. See 9.7 for further detail.

4.2.24 The same physical location may have multiple environmental risks and liabilities. The definition and application of the term “unit of account” should be evaluated as an entity grows and settles key risks and liabilities; see 9.7 and 9.9 for further detail.

4.2.25 Completion of some activity (see Section 7) usually precedes derecognition.

4.3.1 Independent of an organization’s standard record retention policies, indefinitely maintaining searchable listings of the following should be given consideration:

4.3.2 Periodically, an organization may find it necessary to study, evaluate or maintain databases of the following:

4.4.1 Overall Process—described in Fig. 1 Environmental Liability Lifecycle – the process is iterative, continuous, and controlled through periodic settlement of liabilities. The four steps are:

4.4.2 Classification by location—any risk or liability must be associated with a specific location. In the case of product warranty risks, this may be an entire nation or customs union. In the case of soil or groundwater contamination, this may be a street address or waste disposal facility. See 9.9 for more detail on applying the concept of a “unit of account”.

4.4.3 Classification by type—there are five common types of environmental liabilities, which may exist simultaneously at the same location: asset retirement obligation, other environmental obligations, commitments, contingencies, and guarantees.

4.4.4 This guide uses the five liability types in the numerical order stated in the 2009 Accounting Standards Codification (ASC) developed by the Financial Accounting Standards Board. Users of this guide should consult the references noted in the following Fig. 2 as well as Appendix X1, and – at least annually – develop an understanding of any recent changes:

4.4.5 In Section 5 of this guide, users may find it useful to follow a more comprehensive process to recognize certain liability types and consider past activity at that location. See Appendix X5 for a process flow example.