Liability and the financial statement.

• Author: Adams, Jane B.
• Position: Meeting the Environmental Challenge

Some guidance on when liabilities associated with environmental expenditures should be recognized, and when and what should be disclosed.

There has been a significant increase in the volume of environmental disclosure provided by corporations after the Environmental Protection Agency agreed to share corporate environmental data with the Securities and Exchange Commission (SEC). With the increasing evidence that these disclosures are moving from minimal to more complete, the following questions arise: What is causing the heightened awareness and increased disclosures? Is this a signal that there is a deficiency in the accounting requirements?

A number of factors may be contributing to corporate awareness of the impact of environmental issues on the financial statements:

Legislation. Some of the major legislation enacted during the last two decades, and strengthened by amendment in the last few years, include the Resource Conservation and Recovery Act (RCRA), Toxic Substances Control Act (TSCA), Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or the Superfund Act), and the Clean Air Act. These regulations address the containment of pollution and preservation of resources.

They also impose responsibility for the cleanup for past contamination. The resulting environmental liabilities fall into four primary categories: * Liabilities for environmental cleanup or remediation costs; * Liabilities for ongoing compliance with legislation directed at curtailing future contamination and minimizing the impact of operations on the environment; * Liabilities for violations imposed as penalties; and * Liabilities for damages imposed or awarded due to environmental contamination.

Information. There has been an observable increase in disclosures of environmental liabilities and contingencies in financial statements since the EPA began sharing information with the SEC. So far, that information has included: * Lists of companies named as potentially responsible parties under CERCLA and the associated hazardous waste sites that have been designated for remediation priority; * Lists of all cases on which EPA action is pending under RCRA or CERCLA; * All facilities barred from government work under the Clean Water Act; and * All hazardous waste disposal facilities subject to cleanup under RCRA.

The SEC is reviewing disclosures to determine whether the registration statements and other reports of public companies provide sufficient information about the extent of...