1. Statement 49 — Pollution Remediation Obligations The views expressed in this presentation are those of Mr. Galloway. Official positions of the GASB are determined only after extensive due process and deliberation.

2. GASB’s Pollution Project  Project added to research agenda in 2001 for issues not covered in GASB 18  Preliminary Views issued March 2005 39 respondents Public hearing  Exposure Draft issued January 2006 45 respondents  Statement—November 2006

3. Impact of Pollution on State and Local Governments

4. History of Pollution Laws  60’s—Growing societal concern  70’s—Pollution PREVENTION Laws Clean Air Act of 1970 Resource Conservation and Recovery Act of 1976 Clean Water Act of 1977 Similar state laws  80’s—Pollution REMEDIATION Laws

5. Legal Liability Standards  Varies by state and law Many are similar to Superfund  Liable under Superfund— Current and previous site owners and operators Disposers Transporters

6. Legal Liability Standards  Liability under Superfund— Strict—responsible without regard to fault Joint and several—can be held responsible for entire cleanup effort  States share costs at National Priorities List sites Orphaned Private sites—10% of remedy and 100% of operation and maintenance Public facilities—50% of all response costs

7. Legal Liability Standards  Safe harbor (under Superfund Amendments and Reauthorization Act of 1986), but not in all states Foreclosure Innocent buyer who exercised due professional care in acquisition  Site inspection  Site history  Neighboring polluters

8. Map Features Water dischargers Superfund Hazardous waste Toxic releases Air emissions BRS Multi-activities Schools Hospitals Churches Populated Places Streets Streams Water Bodies Zipcodes CountiesWater dischargersSuperfundHazardous wasteToxic releasesAir emissionsBRSMulti-activitiesSchoolsHospitalsChurchesPopulated PlacesStreetsStreamsWater BodiesZipcodesCounties 2.0 mi across. Tips: Click on the map or choose another option.

9. Scope of Pollution Remediation Obligations ED

10. Pollution REMEDIATION  Obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities Site assessments Cleanup, contain, or neutralize hazardous wastes or hazardous substances  oil, asbestos, lead, and hundreds more Regulatory oversight charges O&M and monitoring sites

11. Issues Excluded From Scope  Pollution prevention or control obligations  Asset retirement obligations—including landfills (Statement 18)  Fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4)

12. Accounting for Pollution Remediation Obligations

13. Recognition Threshold  Determine whether one of more components of a pollution remediation obligation are recognizable as a liability when... 1. Government knows or reasonably believes that a site is polluted, and 2. Obligating event occurs

14. Obligating Events a. Compelled to take remediation action because of pollution-caused imminent endangerment b. Violate pollution-prevention permit—for example, RCRA permit c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

15. Obligating Events (continued) d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation  Excludes lawsuits having no merit e. Govt. commences, or legally obligates self to commence  Limited to portion legally required to complete

16. Recognition Overview  Component approach Recognize components of liability as they become reasonably estimable Recognition benchmarks  Cost accumulation, not fair value  Current value, not present value  Expected cash flow technique

17. Cost Accumulation Approach  Measured based on pollution remediation outlays expected to be incurred to settle those liabilities  Profits and risk premium should be included only when the government expects to use another party to perform remediation work

18. Current Value  What it would cost to do all work now  Based on reasonable and supportable assumptions about future events Approved laws and regulations Existing technology expected to be used

19. Expected Cash Flow  FASB introduced this approach in Statement 143 in 2001 (Con. 7)  Also applied in: Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including indirect Guarantees of Indebtedness of Others Interpretation No. 46 (R), Consolidation of Variable Interest Entities Others

20. Two Contingencies—FAS 5 Recognition Potential PaymentProbability(a) x (b) $060% $0 $20040%$80 $0 Potential PaymentProbability(a) x (b) $060% $0 $20040%$80 $0 $1 Now it’s 100% probable. But how much do you record?

21. Two Contingencies— Expected Cash Flow Permutations of Potential Payments Joint Probabilities Contingency 1 Contingency 2 Total $0 36% $0$200 24% $200$0$20024% $200 $40016% 100%

22. Two Contingencies— Expected Cash Flow Permutation math $200 X.48 = $96 $400 X.16 = $64 $160 Shortcut math $200 X.4 = $80 $160 OR

23. Which Outlays?  All direct outlays attributable to remediation All outlays—not just incremental costs Consistent with Statement 18 Includes payroll, pension, and OPEB  May include indirect outlays General overhead A matter of professional judgment

24. Expense or Capitalize?  For: All outlays when primary purpose of project is remediation Incremental outlays when primary purpose is not remediation  Generally an expense  Capitalize in certain situations Do NOT record liabilities for capitalizable costs  Take into account expected recoveries

25. Capitalization Permitted When: a. Cleanup to prepare property for sale (limited to fair value) b. Polluted property bought and cleaned for use (limited) c. Asset impaired and cleanup restores lost service utility (limited) d. Acquire PP&E that have future alternative use, e.g., land (limited to future service utility)  For a. & b.—capitalize only if incurred within reasonable period

26. Expected Recoveries from PRPs and Insurance  Reduce expense (and expenditure, if available) and...  If not realized or realizable— Net against remediation liabilities  When realized or realizable Accrete liability and report separate recovery assets (cash or receivable)

27. Recoveries example Expected outlays $10,000 Expected recoveries 3,000 Net remediation expense $7,000 If recovery not realized or realizable: Pollution remediation liability = $7,000 If recovery realized or realizable: Recovery asset (receivable) = $3,000 Pollution remediation liability = $10,000

28. Annual Adjustment  Adjust liability annually for changes Inflation or deflation Price increases/decreases for specific cost elements Changes in technology Changes in laws or regulations  Same approach used in Statement 18

29. Financial Reporting Display  Government-wide Program cost, or Special item, or Extraordinary item No separate display of liability required  Governmental funds Expenditures recognized when liquidated with expendable available resources No pollution liability, only payables for goods and services used

30. Disclosures  For recognized liabilities and recoveries Nature and source of the pollution remediation obligation—for example, federal or state law Liability, if not apparent on statement Methods and assumptions Potential for change in estimate Estimated recoveries reducing the liability

31. Disclosures  For liabilities (or portions thereof) not yet recognized because not reasonably estimable General description of nature of the pollution remediation obligation Supersedes FAS 5 disclosure of “reasonably possible”

32. Effective Date & Transition  Period beginning after December 15, 2007  Measure liabilities at beginning of that period so beginning net assets can be restated  Apply retroactively if you have sufficient objective verifiable information to apply to prior periods  Early application encouraged

33. Implementation Ideas  No need to inventory all polluted sites  Send year-end inquiry to departments Similar to contingent liability inquiries, but for obligating events  Use average costs developed by state regulators Modify to fit site if situation different

34. Questions? Wesley Galloway Telephone—(203) 847-0700 ext.272 WAGalloway@gasb.org