Final guidance on pollution remediation.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle

Late last year, the Governmental Accounting Standards Board (GASB) issued definitive guidance on how state and local governments should account for any legal obligation to remediate pollution. The new standard, GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, will take effect beginning with fiscal years ending December 31, 2008.

GASB Statement No. 49 focuses exclusively on a government's obligation to incur outlays for the remediation (rather than the avoidance) of existing (rather than future) pollution. The liability thus calculated must include direct outlays; it also may include indirect outlays (e.g., general overhead). If equipment or facilities will have to be purchased or constructed as part of the remediation effort, the anticipated outlays should be incorporated into the calculation of the liability. (Later, when the equipment is actually acquired, the related outlay would be treated as a reduction of the liability rather than as an asset).

One of five obligating events must occur before a liability for pollution remediation can be recognized:

* The government faces a situation of imminent endangerment that leaves it little or no choice but to remediate;

* The government is in violation of a pollution-related permit or license;

* The government has been named (or there is evidence that it will be named) as a responsible party or as a potential responsible party (or an equivalent situation);

* The government is the object of a lawsuit (or there is evidence that it will be the object of a lawsuit) compelling remediation (and experience does not indicate that the suit will be deemed without merit); or

* The government voluntarily commences or obligates itself to commence remediation.

GASB Statement No. 49 directs that the liability be reported at current cost. For some of the more common types of pollution remediation efforts, a government should have all of the information needed to estimate its liability when an obligating event first occurs, or soon thereafter. In other, less familiar situations, much more time may be needed to arrive at a meaningful estimate of many or most of the components of the liability. GASB Statement No. 49 provides a set of benchmarks (i.e., milestones) to guide the estimation process. Whenever one of these milestones is reached, a government must 1) determine whether it has become possible to measure components of the liability previously considered to be...