III.Policy 360 Pollution Remediation

/ Montana Operations Manual
Policy / Category / Accounting
Effective Date / 07/01/2008
Last Revised / Not Approved Yet
Issuing Authority / Department of Administration
State Financial Services Division
360 Pollution Remediation

I.Purpose

Pollution remediation is an obligation to address current or potential detrimental effects of existing pollution by participating in pollution remediation activities. This policy provides guidancechapter establishes state accounting policy for recording and disclosingreporting expenses and liabilities related to anan agency’s pollution remediation obligations. This chapter aAlso discussesd are the what events that may createwill promptan obligations and when those obligations should be recorded. In addition, each agency will be required to follow any specific accounting procedures and policies issued by the State Financial Services Division.

II.Scope

This policy applies to all state agencies and component unitsinstitutions, excluding community colleges.

III.Policy 360 – Pollution Remediation

IV. Overview

V. Components and Benchmarks

VI. Recoveries and Capitalization

VII. Financial Statement Presentation

VIII. Examples

III.IV.Policy -- Accounting for Pollution RemediationOverview

GASB Statement No. 49 –,Accounting and Financial Reporting for Pollution Remediation Obligations provides authoritative guidanceis effective beginning with the fiscal year ending June 30, 2009. The provisions of GASB Statement No. 49 should be applied retroactively, thus requiring the restatement of beginning net position in the year of implementation. A pollution remediation obligation is an obligation to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities.

A.Activities include:

1.Pre-cleanup activities, such as the performance of a site assessment, site investigation, and corrective measures feasibility study, and the design of a remediation plan

2.Cleanup activities, such as neutralization, containment, or removal and disposal of pollutants, and site restoration

3.External government oversight and enforcement-related activities, such as work performed by an environmental regulatory authority dealing with the site and chargeable to the government

A.4.Operation and maintenance of the remedy, including required monitoring of the remediation effort (postremediation monitoring)

B.Pollution remediation outlays

Pollution remediation outlays include all direct outlays, attributable to thepollution remediation activitiesy. Examples includewould be payroll, and benefits, equipment, and facilities, and materials, and legal and other professional services.,along with someEstimated indirect outlays such as (including general overhead) may be included. Outlays related to natural resource damage,(such as re-vegetation outlays), are included only if incurred as part of thea pollution remediation effort.

Outlays that are not part of performing pollution remediation,and should not be included, are, natural resource damage not incurred in the remediation effort, fines, penalties, toxic torts, workplace safety product and process safety outlays, litigation support involved with potential recoveries, and outlays borne by society at large rather than by a specificthe government.

Outlays for operation and maintenance of a remedial action, including post-remediation monitoring required by remedial action plan, are part of the pollution remediation rather than a separate future obligation. PThese post-remediation monitoring estimates should take into account that such outlays are not likely to extend indefinitely,;although the estimatesthey should be reassessed periodically.

C.Obligating events

Pollution remediation obligating events

When an agency knows or reasonably believes that a site is polluted, thate agency needs tomust determine ifwhether one or more of the following obligating events have occurred and thus(which would cause the pollution remediation obligation isto be recognized as a liability):

1. The government is compelled to take remediation action because of pollution creates an imminent endangerment to the public health or welfare or the environment, leaving it little or no discretion to avoid remediation action. (This criterion applies to events that compel a government to take remediation action even if no law requires such action. It is not limited to the Superfund law or the Resource Conservation and Recovery Act (RCRA)).
2. The government is in violation of a pollution prevention -related permit or license or permit, such as a RCRA permit or similar permits under state law.
3. The government is named, or evidence indicates that it will be named, by a regulator as a responsible party, or potentially responsible party (PRP) for remediation, or as a government responsible for sharing costs.
4. The government is named, or evidence indicates that it will be named, in a lawsuit to compel the government to participate in remediation.
5. The government commences, or legally obligates itself to commence cleanup activities or monitoring or operation and maintenance of the remediation effort. If a government legally obligated itself to commence pre-cleanup work, such as a remedial investigation and feasibility study (RI/FS), it should include that work in the amount that it is legally required to complete. If these activities are voluntarily commenced and none of the other obligating events have occurred relative to the entire site, the amount recognized should be based on the portion of the remediation project that the government had initiated and is legally required to complete.

Just as GASB statement 18 requires landfill closures and postclosure care liabilities to be adjusted each year, this Statement requires that governments remeasure their pollution remediation liabilities as new information becomes available. Estimates of a pollution remediation liability should be adjusted when benchmarks are met or when new information indicates changes in estimated outlays. Application of this requirement generally will require pPollution remediation liabilities tomust be reevaluated annually and adjusted as necessary. each period. Adjustments that result in net increases or decreases in the amounts of previously reported liabilities should be reported in the Statement of Activities, Statement of Revenues, Expenses and changes in Fund Net Position, or another similar statement depending on the agency (for example, expense) of the period.

IV.V.Components and Bbenchmarks

A.Recognition benchmarks

Pollution remediation liabilities should be recognized as the ranges of their components become reasonably estimable. In some cases,, there government may be have insufficient information to reasonably estimate the ranges of all components of the liability. In these cases, the government should recognize pollution remediation liabilities should be recognized as the range of each component of the liability (e.g., legal services, site investigation, or required post remediation monitoring) becomes reasonably estimable.

In cases where the pollution remediation is common, such as similar or routine situations, a government will be able to reasonably estimate a range of all components of theits liability can be reasonably estimated early in the process and the entire estimated liability should be recognized at that stage. If the agency uses estimates developed by a state environmental regulator, the average should be evaluated to ensure that they are applicable to the polluted site.

The range of an estimated remediation liability should be defined and periodically refined as the different stages on the remediation process occur. Certain stages of a remediation process provide benchmarks that should be considered when evaluating the extent to which a range of potential outlays for a remediation effort or process is in youra reasonable estimate. These bBenchmarks should not delay recognition of the liability, and are not generally used for common or similar situations., ratheraAt a minimum, the estimate of a pollution remediation liability should be evaluated as each of these benchmarks occurs:

1. Receipt of an administrative order
2. Participation, as a responsible party or a PRP, in the site assessment or investigation
3. Completion of a corrective measures feasibility study
4. Issuance of an authorization to proceed
5. Remediation design and implementation, through and including operation and maintenance, and postremediation monitoring

B.Measurement of the obligation

Pollution remediation obligations liabilities should be measured based on the pollution remediation outlays expected to be incurred to settle those liabilities.,andPollution remediation obligations should be measured at their current value, which would be the cost of purchasing all equipment, services and facilities during the current period. Current value has the following characteristics:

V.Capitalization of pollution remediation outlays

A.Capitalization situations

Pollution remediation outlays should be capitalized in the governmental-wide and proprietary fund statements when goods and services are acquired if purchased for any of the following circumstance:

VI.Recoveries and Capitalization

A.Accounting for recoveries

Agencies should reduce their expense for pPollution remediation liabilities and expenses should be reducedwith by anticipated recoveries from other responsible parties and insurers as follows:

1. If the expected recoveries are not yet realized or realizable, they should reduce the measurement of the liability.
2. If the expected recoveries are realizable, they should be recognized separately from the liability as recovery assets (cash or receivables).

. An insurance recovery generally is realizable when the insurer admits or acknowledges coverage, potentially before covered outlays take place. Recoveries received once the liability no longer exists should be recorded as revenue (and cash or a receivable) once the recovery is realized or realizable. How this offsetting is achieved depends on whether the recovery is realized/realizable or unrealized.

1. Capitalization situations

Pollution remediation outlays should be capitalized in the government-wide and proprietary fund statements when goods and services are acquired if purchased for any of the following circumstances:

1. To prepare property in anticipation of a sale
2. To prepare property for use when the property was acquired with known or suspected pollution that was expected to be remediated
3. To perform pollution remediation that restores a pollution-caused decline in service utility that was recognized as an asset impairment
4. To acquire property, plant and equipment that have a future alternative use

For outlays under the first two criteria, capitalization is only appropriate if the outlays take place within a reasonable period prior to the expected sale or following acquisition of the property, respectively (or are delayed beyond the State’s control).

VII.Financial Sstatement Ppresentation

A.Government-wide and proprietary fund financial statements

Pollution remediation costs should be reported in the Statement of Activities (gGovernment-wide) or the Statement of Revenues, Expenses, and Changes in Fund Net Position (Pproprietary funds) as a program or operating expense,(or as revenue)s for recoveries received after remediation activities have been completed, special item or extraordinary item[1] as appropriate.

B.Governmental fund financial statements

For goods and services used for pollution remediation activities, amounts that are normally expected to be liquidated with expendable available financial resources should be recognized as liabilities upon the receipt of those goods and services. In the sStatement of rRevenues, eExpenditures, and cChanges in fFund bBalances, any facilities and equipment acquisitions for pollution remediation activities should be reported as expenditures. Estimated recoveries from insurers and other responsible parties should reduce any associated pollution remediation expenditures when the recoveries are measureable and available.

C.Accounting for the obligation

When an agency determines a pollution remediation obligation exists and information is available to make a reasonable and supportable estimation of expected outlays, a long-term liability must be established. The portion of this liability expected to be paid within one year must be recorded to the current Pollution Remediation Obligation, account number 2618 – Pollution Liability – Cur. The liability that is expected to be paid afterlonger than one year iswill be recorded in account number 2638 – L-T Pollution Liability.

There related are also, non-budgeted expense accounts (required whenthat have been set up to offset budgeted expenses for GAAP reporting. These will be used if the outlays qualify for capitalization) can be found by searching accounts that begin with “6” and descriptions that begin with “Poll” (by going, in SABHRS, to Set Up Financials/Supply Chain > Common Definitions > Design ChartFields > Define Values > ChartField Values – Account).. If a new account is needed, please contact State Financial Services Division.

Account / Account Description
61169 / Pollution Remediation Capitalized Salary – NB
61211 / Pollution Remediation Capitalized Hourly Wages – NB
61313 / Pollution Remediation Capitalized Other Comp – NB
61431 / Pollution Remediation Capitalized Employee Benefits – NB
61915 / Pollution Remediation Capitalized Other Personal Services – NB
62154 / Pollution Remediation Capitalized Other Services- NB
622A8 / Pollution Remediation Capitalized Supplies and Materials – NB
62328 / Pollution Remediation Capitalized Communication – NB
62480 / Pollution Remediation Capitalized Travel – NB
62550 / Pollution Remediation Capitalized Rent – NB
62612 / Pollution Remediation Capitalized Utilities – NB
62780 / Pollution Remediation Capitalized Repair & Maintenance – NB

VIII.Required note disclosures

A.CAFR Note 5 – Capital assets

When pollution remediation outlays qualify for capitalization under the provisions of GASB 49 the following considerations should be made.

B.CAFR Note 11 – State debt

For recognized pollution remediation and recoveries of pollution remediation outlays, agencies must disclose the following to the State Financial Services Division.

IX.VIII.Examples

At this point a pollution remediation liability occurring in a proprietary funds is not foreseen, thusThe examples below are for governmental funds only.

A.Example of expected cash flow technique

TheAn agency is responsible for the cleanup of five underground fuel storage tanks. Based on experience with similar sites, engineers believe a reasonable estimate of the range and probabilities of cleanup outlays are as follows:

• Best case $150,000, is 30% likely. Most likely
• $320,000 is, 60% likely. Worst case,
• $450,000, is 10% likely.

The liability is calculated at $282,000: ($150,000 x 30%) + ($320,000 x 60%) + ($450,000 x 10%). It is estimated that half½ of the outlay will be paid within one year and the other half½ will be paid following year.
Liability Calculation:
($150,000 x 0.3) + ($320,000 x 0.6) + ($450,000 x 0.1) = $282,000
Liability recognition if there is no recovery is expected recovery or if expected recovery is not yet realizable (Entitywide Ledger):
Entitywide Ledger
Debit / 62XXX / Appropriate NB OperatingpollutionEexpense account / 282,000
Credit / 2618 / Current Portion Pollution Remediation Liability – Cur / 141,000
Credit / 2638 / Long Term PortionL-T Pollution Remediation Liability / 141,000
Liability recognition if $100,000 is expected to be recovered, but it is not yet realized or realizable (Entitywide Ledger):
Debit / 62XXX / Appropriate NB pollution expense account / 182,000
Credit / 2618 / Pollution Liability – Cur / 91,000
Credit / 2638 / L-T Pollution Liability / 91,000
Liability recognition if expected recovery is realized or realizable (Actuals Ledger):
Assuming thatIf $100,000 of the remediation is expected to be recovered through insurance, in addition to the firstprior entry listed, the following entry would bise made in either the actuals ledger (for cash received) or the entitywide ledger (for accounts receivable) depending on the fund.
Debit / 1104XX or 12XX / Appropriate Cash in Bank or an appropriate Aaccounts rReceivable Aaccount / 100,000
Credit / 62XXX / Appropriate NB pollutionOperating expense account / 100,000
To record thea recovery thatif it is realized or becomes rrealizable after remediation is completeion and the liability no longer exists of remediation (Actuals Ledger):
Debit / 1104XX or 12XX / Appropriate Cash in Bank or an appropriate Aaccounts rReceivable Aaccount / 100,000
Credit / 585805 / Pollution Remediation Recoveryed / 100,000

B.Example of a qualified capitalization

On Aug. 1, 2008 theAn agency purchased a building and land for $100,000 with the expectation of cleaning up the site for resale. The, at expected outlays ofarebetween $130,000 andto $170,000; n. No amounts within the range awere considered better estimates. Pollution remediation is measured at $150,000: ($130,000 x 50%) + ($170,000 x 50%). The agency expects to sell the propertyhas a potential buyer for $245,000. Pollution remediation is measured:
(($130,000 x 0.5) + ($170,000 x 0.5)) = $150,000
The sum of the purchase price and expected pollution remediation outlays (totaling $250,000$100,000 + $150,000), exceeds the fair market value ((of $245,000)) by $5,000.
No amount is recorded for the expected pollution remediation that is capitalized; those outlays are not be recognized until they are incurred. Reporting:
Because amounts exceeding the fair market value of the building and land cannot be capitalized, the agency wouldmust record a liability and expense (at the time of obligation)offor $5,000 (Entitywide Ledger):. No amount is recorded for the expected pollution remediation that would be capitalized because those outlays would not be recognized until they were incurred.
Liability Recognition when obligated:
Entitywide Ledger
Debit / 62XXX / Appropriate NB pollution expense accountAppropriate Operating Expense / 5,000
Credit / 2618 / Pollution Liability – CurCurrent Portion Pollution Remediation Liability / 5,000
Capital asset recognition when outlay is incurred; see MOM Policy 335 – Capital Assets for asset related guidance (Entitywide Ledger):
Debit / 64299 / Buildings – General / 100,000
Debit / 62780 / Poll Rem Cap Rpr&Main - NB / 145,000
Credit / 1104 / Cash in Bank / 245,000
Capital Asset Recognition when outlay is incurred (see MOM Chapter 1700 for AM entry/offset journal details):
Entitywide Ledger
Debit / 64299 / Buildings – General / 100,000
Debit / 62780 / Pollution Remediation Capitalizable Repair & Maintenance – NB / 145,000
Credit / 1104 / Cash / 245,000

C.Decision tree

360 Pollution RemediationPage 1 of 10

[1] SOP 96‐1 states that an environmental remediation obligation is not an event that is unusual in nature and, as such, does not meet the criteria for classification as extraordinary. Nevertheless, GASB is not convinced that pollution remediation will never meet the criteria for reporting as an extraordinary item and, accordingly, has made that reporting alternative available in Statement 49.