UTS 142.12 Accounting and Financial Reporting for Pollution Remediation Obligations

Sec. 1 Purpose

The purpose of this Policy is to provide guidance related to the application of GASB Statement No. 51 to The University of Texas System’s financial statements. If applicable, please contact the U. T. System Office of the Controller at controllersoffice@utsystem.edu for assistance in determining the appropriate accounting and reporting. GASB Statement No. 51 may be downloaded from the GASB’s website at www.gasb.org.

Sec. 2 Principles

The University of Texas System follows the requirements and guidelines provided in GASB pronouncements (statements, interpretations, technical bulletins and concept statements).

Sec. 3 Policy Statement

Governmental Accounting Standards Board (GASB) Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, issued in November 2006, addresses accounting and financial reporting standards for pollution remediation obligations. A pollution remediation obligation is an obligation to address the current or potential detrimental effects of existing pollution and contamination. These obligations will generally require the recognition and reporting of remediation liabilities and, in certain instances, will result in recognition and reporting of capital asset transactions at the time those assets are acquired. Remediation activities do not include pollution prevention or control obligations with respect to current operations, such as obligations to install air emissions controls, wastewater treatment systems, storm water runoff controls, or use environmental-friendly products.

Sec. 4 Pollution Remediation Obligation 

A pollution remediation obligation is an obligation to address the current or potential detrimental effects of existing pollution and contamination.  These obligations will generally require the recognition and reporting of remediation liabilities and, in certain instances, will result in recognition and reporting of capital asset transactions at the time those assets are acquired. Remediation activities do not include pollution prevention or control obligations with respect to current operations, such as obligations to install air emissions controls, wastewater treatment systems, stormwater runoff controls, or use environmental-friendly products.

Once any one of the five obligating (or triggering) events below occurs, The University of Texas System is required to estimate the components of expected remediation costs and determine whether costs for component activities should be (1) accrued as a liability or, if appropriate, (2) capitalized when goods and services are acquired.

Obligating (triggering) events include the following:

a) The University is compelled to take remedial action because of an imminent endangerment to health and safety, or the environment;

b) The University violates a hazardous materials-related permit or license, requiring corrective action (e.g., violation of Resource Conservation and Recovery Act (RCRA), permit or similar permits under State law requiring corrective action);

c) The University is named, or evidence indicates that it will be named, by a regulator as a Responsible Party (RP) or Potentially Responsible Party (PRP) for remediation, or as an entity responsible for sharing remedial costs;

d) The University is named, or evidence indicates that it will be named, in a lawsuit to compel participation in remediation; or

e) The University commences, or legally obligates itself to commence remediation (e.g. cleanup of leaking underground storage tanks or removal of friable asbestos-containing materials).

Estimating and Reporting. Most remediation costs do not qualify for capitalization and should be accrued as a liability and expense when a range of expected costs is reasonably estimable or as an expense upon receipt of goods and services used for pollution remediation activities. If the University cannot reasonably estimate the range of all components of the liability, it should recognize the liability as soon as the range of each component (e.g., legal services, site investigation, required post-remediation monitoring) becomes reasonably estimable. The liability should be recorded at the current value of the costs the University expects to incur to perform the work. This amount should be estimated using the expected cash flow technique, which measures the liability as the sum of probability-weighted amounts in a range of possible estimated amounts, resulting in the estimated mean or average.

Capitalization. Remediation costs should only be capitalized if the costs are incurred (1) to prepare property for sale in anticipation of a sale, (2) to prepare property for use when the property was acquired with known or suspected contamination that was expected to be remediated, (3) to perform remediation that restores a contamination-caused decline in service utility that was recognized as an asset impairment, or (4) to acquire property, plant, and equipment for use in remediation activities that also will have a future alternative use other than for remediation efforts. See Exhibit 2, which summarizes the accounting treatment for outlays that are to be capitalized.

Uncommon Remediation Obligations. For remediation obligations that are not common or similar to situations at other sites with which the University has experience, GASB Statement No. 49 includes a series of recognition benchmarks, steps in the remediation process, that the University should consider in determining when components of remediation liabilities are reasonably estimable. Thus, the measurable transactions and events that result in a remediation liability may be relatively limited at initial recognition, but would increase over time as more components become reasonably estimable. GASB Statement No. 49 also requires re-measurement of the liability (and its components) when new information indicates increases or decreases in estimated costs.

GASB Statement No. 49 does not apply to the following:

a) pollution prevention or control obligations with respect to current operations such as obligations to install air emissions controls, wastewater treatment systems, storm water runoff controls, or use environmental-friendly products, or to fines, penalties, and other non-remediation costs such as civil wrongs (toxic torts) arising from exposure to a toxic substance, litigation in support of potential cost recoveries, workplace health and safety costs, etc.;

b) future remediation activities required upon retirement of an asset (asset retirement obligations, such as nuclear reactor decommissioning or hazardous materials handling facility closure) during the periods preceding the retirement; however, GASB Statement No. 49 applies to those activities at the time of the retirement if obligating events are met and a liability has not been recorded previously;

c) post-closure care obligations within the scope of GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs. This is unlikely for the University in that GASB Statement No. 18 is based on the October 9, 1991, U.S. Environmental Protection Agency (EPA) rule, “Solid Waste Disposal Facility Criteria,” which establishes closure requirements for all municipal solid waste landfills (MSWLFs) that receive solid waste after October 9, 1991;

d) recognition of asset impairments or liability recognition for unpaid claims by insurance activities (seehttps://www.utsystem.edu/sites/policy-library/policies/uts-1429-accounting-and-financial-reporting-impairment-capital-assets and

e) accounting for non-exchange transactions, such as Brownfield redevelopment grants (see https://www.utsystem.edu/sites/policy-library/policies/uts-1422-policy-accounting-and-financial-reporting-nonexchange

Sec. 5 Obligating (Triggering) Events

When University management knows or reasonably believes that a facility or site is contaminated, the financial staff, in consultation with environmental health and safety and risk management staff, must determine whether one or more components of a remediation obligation are recognizable as a liability when any of the following events occurs:

a) The University is compelled to take remedial action because contamination creates an imminent endangerment to public health or welfare or the environment, leaving it little or no discretion to avoid remedial action. This criterion applies to events that compel the University to take remedial action even if no law requires such action.

b) The University is in violation of a hazardous materials-related permit or license requiring corrective remedial action (i.e. RCRA permit or similar permits under state law).

c) The University is named, or evidence indicates that it will be named, by a regulator as a RP or a PRP for remediation, or as an entity responsible for sharing remedial costs.

d) The University is named, or evidence indicates that it will be named, in a lawsuit to compel it to participate in remediation. There is a presumption that a lawsuit can be excluded from consideration if it is substantially the same as a lawsuit previously determined to be without merit in relevant judicial determinations.

e) The University commences, or legally obligates itself to commence, cleanup activities or monitoring or operation and maintenance of the remediation effort. If these activities are voluntarily commenced and none of the other obligating events have occurred relative to the entire site, the amount recognized should be based on the portion of the remediation project that the University has initiated and is legally required to complete.

This specific obligating event normally does not include pre-cleanup activities, such as environmental due diligence site assessments that may be undertaken voluntarily by the University. However, the GASB believes that if the University legally obligates itself to commence pre-cleanup activities, those activities also should be included in the measurement of a remediation liability.

Voluntary Assumptions of a Remediation Obligation. If the University voluntarily assumes a remediation obligation, it may not need to record a liability for the entire cleanup effort. For example, if the University sells land and voluntarily obligates itself to clean part of the site in the sales agreement, or if the University voluntarily signs a consent decree making itself a responsible party for cleanup activities, the University would be required to recognize a liability for only that work that the University had legally obligated itself to do. This could be significantly less than the cost the University would expect to incur to clean the entire site.

Non-friable Asbestos-Containing Materials. If the University voluntarily decides to remove non-friable asbestos-containing materials (e.g., vinyl flooring), this is not considered an obligating event. However, if the removal activity causes the asbestos to become friable, this invokes an obligating event. In addition, if the University determines that any asbestos-containing materials pose an imminent threat to health and safety, then related asbestos removal is considered an obligating event.

Purchase of a Facility. If the University purchases a facility, and in the course of due diligence determines that it will voluntarily remediate contamination or remove hazardous substances, there would be an obligating event under this Statement for the remediation effort when the University commences the cleanup activity, not at the time management makes the decision that they will voluntarily enter into the remediation work. The University only has an obligation to complete the expected cost of completing the removal work that has been started. If all remediation work that has started has been completed at year end; there is not any remediation obligation to accrue or to disclose.

Determining whether an obligating event has occurred. When determining whether an obligating event has occurred, campus financial staff should discuss potential events with campus environmental health and safety and risk management staff. The U. T. System Administration Controller’s Office will also discuss with the U. T. System Office of Risk Management when preparing for year-end and for preparation of the footnotes.

Obligating Events Have Not Occurred. If the campus and the U. T. System determines there are no obligating events during the year, that conclusion should be documented based upon the campus and U. T. System’s discussions with the appropriate staff. No further work is necessary.

Obligating Events Have Occurred. If the campus determines an obligating event(s) has occurred, the campus financial staff must:

a) consider the types of expenses or capital acquisitions that are involved in the various component activities,

b) evaluate the costs associated with various component activities to determine whether they are reasonably estimable,

c) follow the required approach to the measurement of the estimated costs, and;

d) determine whether any of the allowable circumstances apply that would result in a cost being capitalized.

Sec. 6 Incorporation of Expected Recoveries from Insurance Companies, or Others, if Any, into the Measurement Using Expected Cash Flow Technique

Expected recoveries from other parties and expected insurance recoveries from policies that indemnify the University for its remediation obligations should in all cases be included in the measurement by reducing the expense. Insurance recoveries should be recognized only when either realized or realizable. Clearly, if insurance proceeds have been received, the recovery must be recognized and recorded. In addition, if the insurance company has admitted or acknowledged coverage, an insurance recovery would be realizable and should be recorded. Without such acknowledgement or recognition, the recovery is considered to be unrealized. If the insurer has denied coverage, the insurance recovery generally is not recognizable.

The remediation liability may or may not be affected as follows.

a) If the expected recoveries are not yet realized or realizable, the affected liability should be reduced, i.e., the expected recovery is net against the liability (debit liability and credit expense).

b) However, if the expected recoveries are realized or realizable as outlined in Paragraphs 21 and 22 of GASB Statement No. 42, they should be recognized separately from the liability as recovery assets (e.g., debit cash or receivables and credit expense). For example, if expected outlays are $10,000 and expected recoveries of $3,000 are realized or realizable, the pollution remediation expense would be $7,000, the recovery asset would be $3,000, and the pollution remediation liability would be $10,000. If the pollution remediation liability had previously been recorded at a net amount of $7,000 because the recovery was not yet realized or realizable, the liability would be increased by $3,000 when the recovery asset is recorded because it becomes realized or realizable.

Under the expected cash flow technique, the measurement of the University’s remediation liability should include all remediation work that the University expects to perform, including work expected to be performed for other RPs or PRPs, whether or not the University is required to do that work. Expected recoveries from those other parties and expected insurance recoveries from policies that indemnify the University for its remediation obligations also should be included in the measurement by reducing the expense and affecting the liability as follows:

a) Expected recoveries from other RPs, PRPs, and insurers should be measured consistently with the related remediation outlays based on their current value and using the expected cash flow technique.

b) If recoveries become expected in periods following the completion of all remediation work, such that a remediation liability no longer exists, those transactions should be recorded, for example, as revenue and cash or accounts receivable when they are realized or realizable.

Sec. 7 Recording of Remediation Costs in the Statement of Revenues, Expenses, and Changes in Net Position

If the conclusion is that remediation costs and a liability should be recognized as a result of an obligating event, and the amount is estimable and measured and does not meet the criteria for capitalization, it must be reported in the University’s statement of revenues, expenditures, and changes in net position as an operating remediation loss.

Sec. 8 Disclosure Requirements

For disclosure purposes, the U. T. System Controller’s Office will need the information on remediation costs and liabilities in order to disclose in the University’s footnotes the following information:

a) the nature/type of contamination and source of the remediation obligation (e.g., federal, State, or local laws or regulations);

b) the amount of the estimated liability (if not apparent from the financial statements);

c) the methods and assumptions used for the estimates;

d) the potential for changes due to, for example, price increases or reductions, technology, or applicable laws or regulations; and

e) estimated recoveries reducing the liability.

For remediation liabilities, or portions thereof, that are not yet recognized because they are not reasonably estimable, the University should disclose a general description of the nature of the remediation activities.

When pollution remediation outlays qualify for capitalization under the provisions of GASB Statement No. 49, the following considerations should be made:

a) Land improvements – no dollar threshold for capitalization. Land Improvements include the removal of underground storage tanks and the complete demolition of a contaminated building; and

b) Building improvement – total outlays must be greater than $100,000 to qualify for capitalization. Building improvements include the costs associated with cleaning up asbestos or other contaminants.

Sec. 9 Effective Date

The provisions of this Statement were effective for financial statements for periods beginning after December 15, 2007, or Fiscal Year 2009 for the U. T. System.