Standard Operating Procedures

SUBJECT: Pollution Remediation Obligation
SOURCE: GASB Statement No. 49 Accounting and Financial Reporting for Pollution Remediation Obligations
ORIGINAL DATE OF ISSUE: February 2010
CSOP NO: 34.0
RATIONALE: To provide accounting guidance for pollution remediation obligations
CSOP:
  1. What is a pollution remediation obligation?
  2. Criteria Necessary to Establish a Liability
  3. What costs will be used to estimate the liability for pollution remediation?
  4. What costs will NOT be used to estimate the liability for pollution remediation?
  5. Recording a Pollution Remediation Obligation
  6. When Pollution Remediation Costs can be Capitalized
  7. Disclosure Requirements
  1. What is a pollution remediation obligation?

    A pollution remediation obligation is reporting a liability on the financial statements related to cleaning up existing pollution or contamination.

  2. Criteria Necessary to Establish a Liability

    In order to establish a liability for pollution remediation, the following three criteria must be met:
    • An obligating event must occur.
    • Costs are anticipated to be more than one million dollars.
    • Work will not be complete within the current fiscal year.

    Obligating Event: When IU knows or reasonably believes a site is polluted, IU will need to determine whether any one or more of the following apply:

    • The pollution creates an imminent endangerment to public health, public welfare or the environment.
    • IU is in violation of a pollution prevention-related permit or license.
    • IU is named, or will be named, by a regulator as a responsible party or potentially responsible party for cleaning up pollution or for paying all or some of the costs of the clean-up.
    • IU is named, or will be named, in a lawsuit to compel it to address the pollution.
    • IU commences or legally obligates itself to clean-up activities.

    If any one of the above apply AND costs are anticipated to be $1M or more and not completed within the current fiscal year, fill out the Pollution Remediation Obligating Events Acknowledgement form and forward to the Capital Asset Manager in the Bloomington Universtiy Capital Asset Office. The Capital Asset Manager will work with the department and Financial Management Services to establish the appropriate liability to be recorded.

  3. What costs will be used to estimate the liability for pollution remediation?

    • Pre-cleanup activities such as site assessments/investigations, feasibility studies, and remediation plans
    • Cleanup activities such as neutralization, containment, removal of pollutants, and site restoration
    • External government oversight and enforcement-related activities for work performed by an environmental regulatory agency
    • Operation and maintenance of the remedy including required monitoring of the remediation

  4. What costs will NOT be used to estimate the liability for pollution remediation?

    The following expenses are not part of the pollution remediation effort and should not be included when assessing the million dollar threshold:

    • Penalties
    • Toxic torts
    • Safety costs
    • Litigation support costs
    • Costs borne by society at large
    • Prevention obligations with respect to current operations

    If a pollution remediation obligation cannot be estimated it should be disclosed in the notes to the financial statements with the following:

    • The obligating event to clean-up the pollution
    • A general description of the nature of the pollution remediation activities to clean-up the pollutant

  5. Recording a Pollution Remediation Obligation

    The pollution remediation obligation should be recorded prior to the start of clean-up and as soon as the clean-up costs can be reasonably estimated. If a bid is requested and awarded, the contractor's bid can be used as the obligation estimate. The obligation should be recorded net of any insurance recoveries. The pollution remediation obligation should be evaluated quarterly and adjusted as needed.

    Example: In June 2009, Indiana University decided to remodel an academic building and remove any asbestos. The remodel project would commence in January 2010 and was expected to take two years. The remodeling contract was let for bid and the winning bid included an itemized amount for asbestos remediation of $1,200,000.

    Recording of Pollution Remediation Obligation:
    Pollution Remediation Expense 1,200,000  
    Pollution Remediation Obligation   1,200,000

    Reduction of Liability as Work is Completed:

    Pollution Remediation Obligation 50,000  
    Cash   50,000

  6. When Pollution Remediation Costs can be Capitalized

    In certain circumstances pollution remediation costs may be capitalized. If any of the following criteria apply, the Capital Asset Management department will review and determine if the costs will be capitalized:

    • To prepare property in anticipation of a sale. Not to exceed the estimated fair market value of the property when the remediation is complete.
    • To prepare property for use when the property was acquired with known or suspected pollution and is expected to be cleaned up. Only the costs necessary to place the asset.
    • To perform pollution remediation that restores a pollution-caused decline in service utility that was recognized as an asset impairment. Only the costs necessary to put the asset back into service for its intended use will be capitalized.
    • To acquire property, plant, and equipment that has a future alternative use. The purchase of any property, plant, and equipment should be capitalized if the asset will provide a service after the pollution remediation is completed.

  7. Disclosure Requirements

    Reported pollution remediation obligations should disclose the following in the notes to the financial statements:

    • The obligating event to clean-up the pollution
    • The amount of the estimated liability 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
    • An estimate of the amount the university expects from insurance or other parties, thereby reducing its liability
DEFINITIONS: Pollution remediation obligation - An obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities.

Penalties - Sanction imposed by a court of law.

Toxic Torts - Special type of personal injury lawsuit in which the plaintiff claims exposure to a chemical caused the plaintiff's injury.

Safety Costs - Costs associated with measures taken to prevent injury.
CROSS REFERENCE: CSOP 22.0 Accounting for the Impairment of Capital Assets
RESPONSIBLE ORGANIZATION: All organizations