3 Accounting
3.4 Liabilities
3.4.18 Environmental and Certain Asset Retirement Liabilities
3.4.18.10 Many of governments’ activities have a direct impact on environment and, in some cases, they may contaminate it or create potential for contamination. State and federal laws may require significant remediation work necessary to restore a property or properly dispose of hazardous materials, such as, removing underground fuel storage tanks, cleanup and removal of sewage lagoon, etc. or work to eliminate a potential adverse impact, such as decommissioning wells, proper disposal of radioactive materials, etc. These situations may result in environmental liabilities and certain asset retirement liabilities which are reportable on the Schedule 09 and in various note disclosures.
3.4.18.20 Pollution remediation may be unplanned and results from accidents, improper use of an asset (e.g., oil spill, etc.) or might be inherent for the type of assets used (e.g., x-ray machines, etc.). In some cases contamination occurred in the past on government owned property that the municipality may now be obligated to clean up. Pollution remediation liabilities include obligations to pay for activities for pre-cleanup (such as site assessment), clean-up (neutralization, containment, or removal), oversight or enforcement of laws, and post remediation monitoring related to contamination.
3.4.18.30 Certain Asset Retirement liabilities are an obligation which is legally enforceable, associated with the retirement of a tangible capital asset. Legally enforceable refers to some legal requirement by a third party such as due to federal, state, or local laws or regulations; a legally binding contract with a third party, or issuance of a court judgement. Due to these legally enforceable liabilities, other parties could compel the government to fulfill an asset retirement obligation, leaving the government with little or no discretion to avoid the obligation.
3.4.18.40 The government must disclose environmental liabilities; see sample note disclosure. If the amount of environmental liabilities can be reasonably estimated and it’s probable that the government will be obligated to pay it, the amount should be reported on the Schedule 09 (ID No. 263.93). The government can use current costs to perform the required work, or present value of future costs. The federal (e.g., EPA, FERC, etc.) and state agencies (e.g., Department of Ecology, Department of Natural Resources, Department of Health, etc.) provide resources to help governments’ determining possible future cost of related remediation. This estimate must be revisited at least on an annual basis to adjust the liability for inflation or deflation and to evaluate whether there has been a significant change in the estimated costs associated with the liability.
3.4.18.45 The government must disclose an asset retirement liability once the retirement of the asset is reasonably certain; see sample note disclosure. Indicators of certainty would be a date stated in a contract, governing board approval to decommission or otherwise retire the asset, a legal judgement with a stated timeframe for retirement, etc. The amount should be reported on the Schedule 09 (ID No. 263.93).
The asset retirement liability is the estimated current cost of what it would take to meet the legal obligation – taking in all available evidence at a reasonable cost. The current cost should include all legally required costs to be incurred, as if this liability were to be taken care of at the end of the reporting period. This estimate must be revisited at least annually, to adjust the asset retirement liability for inflation or deflation and to evaluate whether there has been a significant change in the estimated costs associated with the liability.
3.4.18.50 The most common indicators of a governments’ environmental and asset retirement liabilities are:
- Government must take an action due to imminent endangerment of public health;
- Government is or will be named as a party responsible for a remediation;
- Government is or will be named in the lawsuit requiring a remediation;
- Government started or legally obligated itself for remediation;
- Government will retire certain capital assets with special disposal or decommissioning obligations as subject to local, state and federal environmental laws and regulations or due to contractual obligations or other legally binding situations.
- For example, if a city decides to retire a sewer lagoon, the asset cannot simply be abandoned due to the risk to groundwater. Therefore, a city might incur significant costs to decommission it. Recognition occurs on the Schedule 09 when there is certainty the asset will be retired and when costs can be estimated. The most common assets subject to such reporting are dams, wells, wastewater treatment lagoons, radioactive equipment, sand/gravel/etc. mining areas, underground storage tanks, etc.
3.4.18.60 The above requirements do not apply to landfills which are discussed in 3.4.10, Solid Waste Utilities: Closure and Postclosure Cost Accounting.