ASTM E3123-24

1.1 Purpose— The purpose of this guide is to provide a series of options or instructions consistent with good commercial and customary practice for recognition and derecognition of environmental liabilities. This guide is consistent with Generally Accepted Accounting Principles (GAAP). Recognition of environmental liabilities is essential to determining the current book value of an entity.

An entity may have future spending to extinguish risk and liabilities triggered in the past. Serious consequences, ranging from failed audits and poor capital stewardship to financial fraud and bankruptcy, exist for entities omitting material information from financial statements.

1.2 Objective— This guide enables users to reliably determine if a given type of environmental liability exists and subsequently has been settled, consistent with the accounting definitions in place.

1.3 This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.

1.1 Purpose— The purpose of this guide is to provide a series of options or instructions consistent with good commercial and customary practice for recognition and derecognition of environmental liabilities.

This guide is consistent with Generally Accepted Accounting Principles (GAAP).

Recognition of environmental liabilities is essential to determining the current book value of an entity.

An entity may have future spending to extinguish risk and liabilities triggered in the past.

Serious consequences, ranging from failed audits and poor capital stewardship to financial fraud and bankruptcy, exist for entities omitting material information from financial statements.

1.2 Objective— This guide enables users to reliably determine if a given type of environmental liability exists and subsequently has been settled, consistent with the accounting definitions in place.

1.3 This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.

4.1 Use—this guide is intended for use on a voluntary basis for evaluating environmental liabilities, often with Guide E2137 for estimation and Guide E2173 for disclosure. The user may elect to apply this guide for any or all of these purposes:

• 4.1.1 Determining if an environmental risk or liability exists,
• 4.1.2 Determining if similar environmental risks (for example, permits, plant or process expansion) are being recognized at similar points in their lifecycle,
• 4.1.3 Determining if several similar environmental risks and liabilities are being managed to similar outcomes,
• 4.1.4 Determining liability values,
• 4.1.5 Due diligence analysis for proposed mergers, acquisitions, or spinoffs,
• 4.1.6 Documenting key decisions on environmental liability provisions, reserves, budgets and cash flow forecasts.
• 4.1.7 Identifying and analyzing liabilities associated with the following:
  • 4.1.7.1 certain remedial alternatives,
  • 4.1.7.2 future land uses, property transfer and redevelopment decisions,
  • 4.1.7.3 land use alternatives for former landfills and chemically impacted sites,
  • 4.1.7.4 Meeting regulatory requirements,
• 4.1.8 Designing and implementing project and program controls,
• 4.1.9 Defending against third-party lawsuits,
• 4.1.10 Calculating insurance premiums,
• 4.1.11 Making and settling insurance claims,
• 4.1.12 Making purchase accounting adjustments,
• 4.1.13 Preparing an audit defense, and
• 4.1.14 Completing financial and investment analysis.

4.2 Principles—the following principles are an integral part of this guide and should be used to resolve ambiguity or dispute regarding the recognition and derecognition of environmental liabilities. These principles are drawn from several sources, including historical and current accounting principles, court decisions, academic studies, as well as good commercial and customary practice.

• 4.2.1 Current awareness of an entity’s accounting framework and applicable generally accepted accounting principles (GAAP) is expected of everyone. Developing related environmental liability recognition policies and procedures commonly requires inputs from internal and external sources, including (but not limited to) accounting, finance, legal, environmental health and safety, capital projects and real estate.
• 4.2.2 The reporting entity has a duty to identify a risk in order to determine if it meets the criteria for recognition and derecognition. A default assertion of immateriality without data or structured judgement is inconsistent with GAAP and with good commercial and customary practice.
• 4.2.3 Accrued liabilities must represent losses in future periods. Consequently, certain costs are treated differently for accounting and tax purposes:
  • 4.2.3.1 Costs for response activities resulting from an event in the current reporting period that will be fully completed within the current period (with no on-going future obligations) do not require accrual but are expensed as incurred in the current period.
  • 4.2.3.2 Costs for environmental cleanup activities that are related to active ongoing operations (not a past event), including ongoing discharge treatment and monitoring, groundwater or air monitoring, etc. are not appropriate for inclusion in environmental liability accruals.
  • 4.2.3.3 Costs for capital expenditures (investments) in new property, plant and equipment are also not appropriate for accrual. Rarely, certain capital expenditures will effectively settle a liability, but accounting and tax rules for accruals and investments are specialized and distinct. An entity’s accounting framework will already address these differences.
• 4.2.4 Over time, some risks become recognized liabilities and vice versa.
• 4.2.5 Comprehensive data sources regarding environmental risks and liability quantification are readily available and have improving levels of accuracy (or precision).
• 4.2.6 Imperfect or incomplete information is a common obstacle to environmental liability recognition: the lack of comprehensive and current data on an environmental risk does not prevent comparison of a past environmental liability with a prospective one. Even with complete knowledge of property and regulatory issues, a reliable calculation of all costs is still challenging but possible.
• 4.2.7 While uncertain timing of spending is a common factor to determining a present value of a risk or liability, an expected value can generally be calculated from comparable sites, open source estimates, and vendor quotes.
• 4.2.8 Application of the materiality constraint (FASB Concepts Statement 8; Appendix X2) should enable users of this guide to determine which environmental risks should be recognized and potentially disclosed (Guide E2173). Users of this guide should consider whether an aggregation of many related immaterial risks constitute a recognizable liability.
• 4.2.9 Application of the cost constraint (FASB Concepts Statement 8) should enable users of this guide to filter or screen which risks should be evaluated in more detail (see 6.3 on the Watch list, also Guide E2137). Users should consider the opportunity costs of not developing a more rigorous estimate, as well as whether data exists to justify an improved estimate.
• 4.2.10 Recognition may be for a specific phase of activity or other incremental component of a liability. Particularly, GASB 49 specifies the recognition of components of a liability based on the occurrence of certain (commonly sequential) obligating events and recognition benchmarks. The unit of account applied to measurement and recording environmental liabilities must be consistent with the entity’s accounting framework. See 9.9 for further detail on unit of account.
• 4.2.11 Where terminology such as “probable” and “reasonably estimable” is used to identify risks for recognition, users should clearly state and consistently apply any numerical definitions and ensure these definitions are consistent with their relevant accounting framework(s).
• 4.2.12 No part of GAAP (or IFRS) specifies a minimum or maximum time horizon for measurement, recognition or derecognition of environmental liabilities. Users should be aware of applicable regulations or policies in determining an appropriate/reasonable timespan. For example, a financial assurance valuation may cover 30 years of forecasted costs, while a contract may presume perpetual spending to manage a liability. [Guide E2173 contains recommendations about displaying key assumptions in X4.4 “Portfolio Assumption Tracking Table”].
• 4.2.13 US GAAP and IFRS express the preference for calculating liabilities at their prices (ideally “fair value measurement”). There are complexities with calculating some costs (remedy failure, counterparty risk) to determine fair value. Users of this guide should use caution in stating that a single remedy – once implemented – contains all of the possible costs and will successfully extinguish all risks and liabilities anticipated at a site. As noted in Guide E2137, price and cost approaches yield estimates which can differ significantly.
• 4.2.14 Litigation is both a method of enforcement and type of liability in its own right. The risk of litigation is continuous and generally unavoidable. Awareness of litigation conditions are often part of the determination of recognition and derecognition.

Note 1: When estimating litigation exposure and potential costs, the user should consider if the litigation includes the potential for fines that are imposed on a daily basis for each violation.

• 4.2.15 Spending correlates positively with (but is not identical to) liability reduction.
• 4.2.16 Spending may fail to reduce liabilities.
• 4.2.17 Spending to address a liability indicates that a liability exists.
• 4.2.18