Pursuant to a March 2005 Financial Accounting Standards Board (FASB) Interpretation of FASB Statement No. 143 (i.e. FASB Interpretation No. 47), the manner in which many publicly-traded companies are required to account for future environmental obligations may be drastically changed in the future.  The following summary of these accounting changes should be followed by no later than December 31, 2005 (for calendar year companies), or no later than the end of fiscal years ending after December 15, 2005 (for fiscal year companies).

By these dates, and under the newly adopted Interpretation No. 47, publicly-traded companies must account for the fair value of any future liabilities that attach to an asset, if a reasonable estimate of the fair value of that future liability can be projected.   This estimate should include all assets, even if they are currently not scheduled for retirement (or scheduled to be sold, abandoned, disposed of or recycled in the future).  This includes assets, such as land, buildings or facilities, which will have an environmental liability that will be triggered by a known future event.

As set forth in Interpretation No. 47, future financial statements are required to reflect any recognized and legally required obligations and expenses for environmental remediation, demolition, decommissioning, closure, disposal or recycling that will attach to the property in the future.  A company must attemptto estimate the present fair value of these future obligations, even if the asset is not currently scheduled to be retired, or the conditional event in the future that triggers the environmental liability has not occurred.  If a future event can be reasonably projected, and the costs reasonably estimated, then the liability must be recognized in the current financial statements.   If such information is not available at the present time, then that fact and the supporting reasons shall be disclosed.  When the future environmental liability is capable of reasonable estimation, then the present fair value of that liability must be accounted for.

For example, a public company’s financial statements should reflect legal obligations to remediate property, close hazardous waste units and other facilities, or to dispose of or recycle assets (like equipment and building materials). The company must also attempt to estimate the “present fair value” of these obligations, even if the exact cost and timing of the obligations are not known.  The company can also attempt to assign probabilities to various timing and cost scenarios under the Interpretation.

Although it is important to remember that FASB interpretations are not in and of themselves SEC regulations, the interpretations do become part of the Generally Accepted Accounting Principles (GAAP), under which public companies certify compliance in their SEC reports. As such, Interpretations should be taken into consideration not only when preparing the financial statements of a public company, but also when drafting the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) included in the company’s periodic reports filed with the SEC.   Often such liabilities contained in the financial statements would not have to be singled out for disclosure unless they were material (i.e., of sufficient importance that it would cause a reasonable investor to buy, sell or hold the company’s securities).  That is not the case under Interpretation No. 47.

FASB Interpretation No. 47 is entitled “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” and it can be found on the web at www.fasb.org/pdf/fin%2047.pdf.   Although Interpretation No. 47 is not limited to environmental liabilities, it is interesting to note that all of the examples contained in Appendix A, beginning at page 7, address environmental liability situations. The examples of future situations where environmental liability can be projected, and therefore are subject to this Interpretation, include the following:

            Example 1

• Certain chemically-treated utility poles that are in use will have to be disposed of as hazardous waste when they are taken out of service sometime in the future. The company should identify this liability now and estimate the expected present value of the disposal costs, even though the company does not know the exact date when the poles will be taken out of service.

            Example 2

• Hazardous waste contaminated refractory bricks in a kiln must be periodically replaced and disposed of as hazardous waste under existing regulations. This known legal liability should be identified, as well as the present value of the probable cost of replacement of the bricks over time.

            Example 3

• Asbestos in a factory is legally required to be removed and properly disposed of when the factory is demolished or renovations disturb the asbestos. The legal obligation must be identified.   As soon as the factory owner can reasonably estimate when the factory will be demolished or renovated, and the associated cost of the asbestos removal, they must estimate the present value of the liability.

            Unfortunately, there may be extensive investigation that will be required to determine whether the assets are subject reporting under Interpretation No. 47.  Not only will a legal decision have to be made to confirm whether there is any obligation to estimate and report the liability, environmental managers and consultants may also need to estimate the probable costs and timing of the future remediation, closure, disposal or recycling obligations. Finally, accountants will need to prepare the financial statements to properly reflect the information that must be disclosed.  Indeed, there may also be other issues that may be triggered by this new Interpretation, including SEC and Sarbanes-Oxley issues.

Gary Peters is a member of the  Environmental Group at Howard & Howard.  He concentrates his practice in environmental law with emphasis on water resources and permitting issues. For more information, please  contact Gary at (248) 723-0490 or email    gap@h2law.com.

Copyright 2005 Howard & Howard Attorneys, P.C. This publication is intended to provide information only and does not constitute legal advice.