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By John F. Burke, CPA,
The CPA Journal

AcSEC has released Statement of Position 96-1, Environmental Remediation Liabilities, dated October 10, 1996. The SOP covers accounting and auditing of such liabilities arising under SFAS No. 5, Accounting for Contingencies. The guidance focuses on the accounting for the costs of remediation after the enterprise becomes aware that laws and regulations require such remediation. It does not cover accounting for environmental remediation actions undertaken at the sole discretion of management.

The basic SOP consists of two parts. The first provides background by describing the various laws that may give rise to environmental liabilities. The second provides authoritative guidance on the recognition, measurement, display, and disclosure of such liabilities. A summary of this section appears in the accompanying sidebar. There are also separate appendices on current accounting literature, a remediation liability case study, auditing, comments on responses to the exposure draft, and explanations of acronyms.

The subject matter of this SOP was covered in our January 1996 article, "Accounting and Disclosure of Environmental Contingencies," by Paul Munter, Rene Sacasas, and Elaine Garcia, that included comments and a sidebar on the exposure draft. However, a number of important changes were made to the exposure draft.

Probably the most controversial area of concern about the exposure draft involved the accrual of legal costs in measuring the liability. The exposure draft stated that the incremental direct costs of the remediation effort to be included in the liability should include the costs of legal work related to the remediation effort. It went on to state that the remediation effort includes the costs of defending against assertions of liability for remediation. Respondents to the exposure draft objected to this, arguing that inclusion of such costs would be a de facto interpretation of SFAS No. 5. This inclusion only added fuel to the fire for many respondents who believed this subject matter was too broad to be handled by AcSEC. AcSEC acknowledged the majority of practice treats litigation costs as period costs and dropped this "guidance" from the final SOP. However, the SOP requires the accrual to include legal fees paid to outside law firms for work related to determining the extent of required remediation actions, the type or remediation actions to be used, or the allocation of costs among responsible parties.

Another area of concern with the exposure draft involved the technology expected to be used in the environmental remediation. The exposure draft required the use of current technology in making the estimate. A majority of respondents suggested it was unrealistic to ignore expected advances in technology. AcSEC agreed but limits the use of advanced technology to that expected to be approved to remediate the specific site.

In making the estimate of potential liability, one of the issues is how the measurement is affected by potential recoveries. Both the exposure and final SOP permit the measurement of the liability, or a component, to be discounted to reflect the time value of money if the aggregate amount of the liability or component and the amount and timing of cash payments are fixed and reliably determinable. While the liability could be discounted, the exposure draft required discounting of recovery assets in all circumstances. Respondents objected to this obvious inconsistency, and the final SOP provides that probable recoveries should be measured at an undiscounted amount if the liability is not discounted and the timing of the recovery is dependent on the timing of the payment of the

The effective date of the SOP has been changed from fiscal years beginning after December 15, 1995, to those beginning after December 15, 1996.

The SOP may be ordered in the normal manner from the AICPA. The product code number is 013500. *

Douglas R. Carmichael, PhD, CPA
Baruch College

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