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Business and Policy Areas
Business and Policy Areas

GASB Proposes New Standards on Pollution Clean-up Costs

February 3, 2006

The publication of Governmental Accounting Standards Board (GASB) Statements 34 and 35 introduced full accrual accounting for the government as a whole. All state and local governmental entities now prepare financial statements that portray a comprehensive picture of their finances. Cities, states, and other general purpose governments now apply the same accrual accounting as utilities, hospitals, and other business enterprises. They report all of their assets—not just cash and receivables, but capital assets such as roads and school buildings—and all of their debts—from short-term accounts payable to long-term bonds outstanding.

In the years since, GASB has pursued several projects intended to ensure that certain costs and long-term obligations not specifically addressed by current accounting standards will be included in accrual-basis statements, including termination benefits (such as early retirement incentives) and retiree health insurance. One of those projects focuses on obligations related to cleaning up pollution. Although some public institutions are responsible for cleaning up polluted areas (such as brownfields) and face significant costs to do so, there is no authoritative standard in the accounting literature that specifically provides guidance on when to add a liability to the financial statements and how to measure the size of that liability.

The pollution project has led to the proposal of new standards in January 2006 in an Exposure Draft, "Accounting and Financial Reporting for Pollution Remediation Obligations." The draft sets forth the circumstances under which an institution would be required to report a liability related to cleaning up pollution. It also establishes a probability-weighted method—the expected cash flow technique—that institutions would be required to use to determine the estimated amount that would be reported.

When Would Pollution-Related Obligations Be Reported?

Colleges and universities would not be required to search for pollution that they may be responsible for cleaning up. Rather, the proposed standards identify five events that, were any to occur, would require a government to determine if it can report a liability in its financial statements:

  • Pollution poses an imminent danger to the public or environment and an institution has little or no discretion to avoid fixing the problem.
  • An institution has violated a pollution prevention-related permit or license.
  • A regulator has identified an institution as responsible (or potentially responsible) for cleaning up pollution, or for paying all or some of the cost of the clean up (or evidence indicates a regulator will do so).
  • An institution is named in a lawsuit (or evidence indicates it will be) to compel it to address the pollution.
  • An institution begins to clean up pollution or conducts related remediation activities (or the government legally obligates itself to do so).

If one or more of these events has occurred and a range of potential outlays for the clean up can be reasonably estimated, then institutions generally would report a liability in their financial statements (in certain instances an institution would instead record capital assets when goods and services are acquired). If an institution can estimate outlays for only certain portions of the clean-up effort—such as legal fees, testing the polluted site, or monitoring after the clean up—then it would report a liability for those activities. The institution would later report liabilities for the remaining parts of the clean up when ranges of outlays for them become reasonably estimable. Periodically during the clean-up effort, the estimated ranges would be re-evaluated and possibly revised as new information becomes available.

How Would Costs and Obligations Be Determined?

GASB proposes using these estimated ranges of outlays to determine the liability related to cleaning up pollution. The proposed approach—the expected cash flow measurement technique—involves assigning probabilities or likelihoods to each of the potential outlays and calculating a weighted average. For example, a college or university might estimate that there is a 10 percent chance that cleaning up a polluted site would cost $1 million, a 60 percent chance of $2 million, and a 30 percent chance of $3 million. The expected cash flow would be calculated as follows:

($1 million × 0.1) + ($2 million × 0.6) + ($3 million × 0.3) = $2.2 million.

The $2.2 million would be reported as the liability in the institution’s financial statements. 

In situations where an institution cannot reasonably estimate the liability for the entire remediation effort, it would employ an approach that reports liabilities for only the activities that can be reasonably estimated. For example, if an institution receives an administrative order that requires it to take action at a site or risk paying penalties, the response may be limited to performing a remedial investigation and feasibility study at this stage. The cost of the study may be reasonably estimated; however, circumstances may be such that further response actions cannot be reasonably estimated. In this case, only the cost of study would be accrued. This approach limits the subjectivity of the estimated liability, but it should not be used to delay recognition beyond the point at which a reasonable estimate of the potential liabilities can be made.

An institution would report expenses as it accrues costs related to cleaning up the pollution. As work is done on the site cleanup, the liability would be reduced for payments made. Entities that apply FASB Statement No. 71 should report a regulatory asset related to its pollution remediation obligation when appropriate in accordance with that statement.

What Information Would Public Institutions Disclose?

In addition to the liabilities, expenses, and expenditures that would be reported in the financial statements, the proposed standards would require colleges and universities to disclose information about the pollution clean-up efforts in the notes to the financial statements, including:

  • the nature and source of the obligation to clean up the pollution,
  • the amount of the estimated liability if it is combined with other liabilities in the financial statements,
  • the methods and assumptions employed to estimate the liability,
  • the potential for changes in the estimate due to changes in prices, technology, laws and regulations, and other factors, and
  • an estimate of the amount the institution expects to recover from insurance or other parties, thereby reducing its liability.

If the liability or portions of it are not reported in the financial statements because a range of potential outlays cannot be estimated, then an institution would describe the nature of the pollution remediation activities in the notes.

What Changes Were Made to the Proposal Based on Public Feedback?

The proposed standards are a revision of a prior proposal that was released for public comment in March 2005. In response to public comment, GASB made a number of changes to the proposal. For example, the five events that require estimation of a liability were revised to clarify their meaning and to avoid potential misunderstanding. In addition, GASB expanded opportunities for some pollution remediation outlays to be capitalized rather than recorded as liabilities and expenses.

Although some respondents expressed support for the use of the expected cash flow technique, others were concerned that it is subjective and volatile. However, based on its research and discussions with remediation professionals, GASB concluded that there was sufficient experience with pollution remediation to allow for objective estimates and that using a range of estimates is likely to be less volatile and subjective than a single best estimate. Therefore, GASB retained the expected cash flow technique in the proposed standard.

When Would Public Institutions Implement These Standards?

If colleges and universities have sufficient information to apply the proposed standards to prior periods presented in their financial statements, they would be required to apply the standards retroactively. Otherwise, colleges and universities would be required to measure their pollution remediation liabilities as of the start of the first fiscal year beginning after June 15, 2007.

What Does GASB Need to Complete This Project?

When GASB sets standards, a crucial part of its “due process” activities is the publication of proposals for public discussion and comment. The substance of the comments from each of GASB’s constituents is more important to GASB’s deliberations than the total number of people for or against a certain proposal. An Exposure Draft is not an opinion poll, and GASB’s ultimate decisions are not necessarily those with the most popular support.

GASB relies on the comments of the people who prepare and audit financial statements to assess the technical accuracy and appropriateness of its proposals. GASB often poses questions regarding critical issues in its proposed standards, which it did with two questions in this draft.

Address comments on the proposed standards to the director of research, Project No. 3–12. Comments can be e-mailed to or mailed to Governmental Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116. The deadline for submitting comments is May 1.  Please share your comments with NACUBO.

NACUBO contact:  Sue Menditto, director, accounting policy.