Accounting for Environmental Costs: A Hazardous Subject

Abstract

In the 1990s, corporate America began to face the environmental costs of industrial practices and consumer preferences that had seemed, only a few decades ago, to be the legitimate rights of a growing nation. This article deals with a pragmatic and critical aspect of environmental protection: corporations'accounting practices in reporting the costs of past, present and future environmental activities. Based on our 1990 survey of 125 major U.S. corporations, the article is designed to help financial and business executives better understand the environmental issues their accounting departments wrestle with daily. According to the survey, companies that recognize their environmental responsibility by chartering board-level committees generally are viewed more favorably by shareholders. Arguably, corporations choosing this strategy will be better positioned in a future in which environmental issues occupy an increasing share of the U.S. regulatory and legislative agendas, public concern and scientific research. Despite the growing importance of environmental issues, only 14% of survey respondents had a formal board committee. Since these issues often involve litigation, companies clearly preferred to assign oversight responsibilities to the general counsel's office. Further, only 11% had accounting policies specifically addressing environmental accounting; fewer than a third of those disclosed the policies in financial statement footnotes. TIMING OF RECORDING CLEANUP LIABILITIES Hazardous waste remediation (or cleanup) under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act (RCRA) or similar state or local statutes often is a company's largest cost and the most difficult to estimate. The materiality of the amounts involved, CERCLA'S joint and several liability provisions and often protracted legal proceedings surrounding such cases complicate the required accounting judgments. The most important accounting pronouncements directly addressing the recognition and measurement of environmental cleanup liabilities are Financial Accounting Standards Board Statement no. 5, Accounting for Contingencies, and the limited focus of Emerging Issues Task Force Issue no. 90-9, Capitalization of Costs to Treat Environmental Contamination. Also, FASB lnterpretation no. 14, Reasonable Estimation of the Amount of a Loss, provides guidance on recording a liability when a range of probable loss can be estimated. However, while environmental matters may receive greater FASB attention in the future, the near-term likelihood of a formal FASB standard is quite low. The survey asked at what point respondents recorded hazardous waste remediation liabilities from prior activities. The results appear in exhibit 1, page 53. Accounting practice was mixed regarding timing of cleanup liability recognition, possibly due to the difficulty of estimating the costs' components. Some companies recognized liabilities at the sale, disposal or abandonment of facilities; others recognized them at or before completion of a remedial investigation and feasibility study (RI/FS). Practice variations between companies reflected not only the emerging nature of environmental liabilities but also the unique nature of individual cleanup sites and environmental problems. When viewed in the context of Statement no. 5, the responses indicated measurability (the ability to reasonably estimate) rather than probability was most often the deciding factor in determining when to record a liability. ESTIMATING REMEDIATION COSTS Recognizing a liability for hazardous waste remediation frequently depends on being able to estimate remediation costs reasonably. Although current accounting literature provides some guidance, many other aspects must be considered. Developing a reliable estimate requires evaluating technological, regulatory and legal factors, each of which calls for exercise of management judgment to reach a supportable accounting conclusion. …

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