At a different level, but equally important, many federal, state, and local laws mandate the removal or containment (treatment) of dangerous asbestos found in buildings. In addition, laws regulate the manner in which the asbestos fibers may be removed or contained (treated).

Accounting Implications of Soil

Contamination

In 1990, the EITF issued EITF Issue 90-8, "Capitalization of Costs to Treat Environmental Contamination." This issue defines environmental contamination treatment costs as those incurred by an entity to contain, neutralize, prevent, or remove existing or future environmental contamination. Such expenditures may be incurred by an entity voluntarily or involuntarily. The imposition of the costs by law is an example of the latter. The costs may involve the removal of the contaminant, the acquisition of tangible property, or fines imposed in accordance with applicable environmental laws.

According to EITF 90-8, generally these costs should be charged to current operations. Some costs, however, may be capitalized, if recoverable and satisfying at least one of three criteria:

* The costs must extend the sueful life, increase the capacity, or enhance the safety or efficiency of the property owned by the entity. The condition of the property must be enhanced after the expenditures are incurred, relative to the condition when the property was originally built or acquired, if later.

* The expenditures must reduce or preclude environmental contamination that has yet to happen, and that otherwise may result from future operations or activities. Furthermore, such costs must enhance the condition of the property, relative to its condition when built or acquired, if later.

* The expenditures must be incurred as part of the preparation to sell the property that is currently held for such purpose. The accounting issues relevant to garbage dumps and gasoline storage tanks will illustrate the application of these criteria.

Garbage Dumps. EITF 90-8 applies to soil contamination resulting from the operation of a waste site, i.e., a garbage dump or landfill. If such soil contamination occurs, one form of treatment involves refining the soil at the dump site. Refining the soil does not increase the useful life of the waste site. In addition, the condition of the refined soil will not be enhanced relative to its condition when the waste site was built or acquired. The soil is merely restored to its original, uncontaminated condition. Moreover, since the toxic materials are removed, such treatment precludes that toxic material from percolating in the future. Yet, removal of the toxic waste fails to reduce or preclude later operations or activities from producing toxic waste. The risk will be present no matter what quantity of the present soil is refined.

The preponderance of the facts would indicate that the expenditures of refining the soil should be charged to current operations. However, the costs may be capitalized if the waste site is presently for sale and the expenditures were incurred in preparation for the sale.

A second treatment for soil contamination involves the installation of a liner. The liner does not increase the useful life of the garbage dump. Additionally, the liner does not enhance the capacity or efficiency of the site. The liner does upgrade the dump's safety, relative to when it was built or acquired, by precluding existing toxic waste from easing into the soil in future years. The percolating of future toxic waste dumped at the site will be reduced or precluded due to the liner. Thus, the costs associated with the liner may be capitalized in accordance with the first or second criterion.

Gasoline Storage Tanks. EITF 90-8 also applies to leaking underground gasoline storage tanks that contaminate an entity's property. If such environmental contamination occurs, one form of treatment, similar to the first example, involves refining the soil on the contaminated property. Refining the soil does not increase the useful life of the land and does not enhance the capacity or efficiency of the site. This treatment fails to upgrade the land's safety, relative to when it was acquired in an uncontaminated condition. Furthermore, the entity has failed to reduce or preclude gasoline leaks from occurring during future operations or activities. Thus, the expenditures of refining the soil should be charged to current operations. However, the costs may be capitalized if the land is presently for sale and the expenditures were incurred in preparation for the sale.

Another remedy for underground gasoline storage tanks that leak involves encasing the tanks. This should preclude future gasoline leaks from polluting the surrounding soil. This remedy may or may not increase the useful life of the gasoline tanks. Increased resistance to corrosion, rusting, and leaking may be a by-product. In either case, the encasement upgrades the gasoline tanks' safety, relative to when they were constructed or acquired. The leakage and soil pollution from operations in the future will be reduced or precluded due to the encasement. Thus, the expenditures related to the encasement may be capitalized in accordance with the first or second criterion.

A tract of land previously owned by Greyhound, Inc., in downtown Mobile, Alabama, was found to have soil contamination levels above the regulatory limit. The soil contains petroleum products. The spillage came from years of refueling the buses with diesel fuel and the use of diesel products on site. In light of this, the underground fuel storage tanks were recently removed from the contaminated land. Before demolition and new construction can begin, the contamination must be removed. It can be removed by one of two processes. An aeration process can be used which involves digging up all of the contaminated soil, placing it on plastic, and letting it air out on the site. Or, a hauler can move the contaminated soil to an approved dumping location. This is an example of what accounting practitioners are likely to encounter regarding soil contamination.

Asbestos Removal and Treatment

In 1989, the EITF issued EITF 89-13, "Accounting for the Cost of Asbestos Removal," that states that the costs incurred by an entity to treat asbestos fibers within a reasonable period after property with a clear asbestos problem is acquired should be capitalized. These costs are capitalized as part of the acquisition cost of the contaminated property, subject to an impairment test.

The costs incurred to treat asbestos fibers in an existing property may be capitalized as a betterment, subject to an impairment test for the particular property. When these treatment costs are incurred in preparation of selling the property, they should be deferred and recognized at the point of sale, to the extent the costs are recoverable from the sales price.

EITF 90-8 also applies to environmental contamination resulting from air in an office building contaminated with asbestos fibers. One way to treat this type of contamination involves removing the asbestos from the building. Removing the asbestos enhances the safety of the building, relative to its original condition, since the asbestos fibers were present when the building was constructed or acquired. Furthermore, the owner of the contaminated building has eliminated a present environmental problem by removing the asbestos. The owner has also precluded any future contamination resulting from that particular asbestos. But, the owner of the building has failed to reduce or preclude new environmental problems that may result from future use of the building. Thus, the costs of removing the asbestos fibers may be capitalized in accordance with the first criterion of EITF 90-8.

If it is deemed appropriate to charge asbestos treatment costs to current operations, then they should not be reported as extraordinary items on the income statement.

Regardless of whether asbestos treatment costs are capitalized or charged to current operations, SEC registrants should disclose significant exposure for asbestos treatment costs in MD&A. This is a requirement of the SEC.

More Hazards to Consider

The accounting implications of environmental contamination are far- reaching. Environmental contamination sources other than those discussed that are covered by EITF 90-8 include oil tanker spills, rusty chemical storage tanks, air pollution caused by manufacturing activities, lead pipes in office buildings that contaminate drinking water, and well-water chemical contamination of wells containing water that will be used in beer production.

Generally, the expenditures incurred by an entity to treat environmental contamination should be charged to current operations. However, the costs may be capitalized if they meet specified criteria in EITFs 89-13 and 90-8.