Introduction:  The Governmental Accounting Standards Board (GASB) has issued Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, to provide guidance to state and local governments about how to estimate and report the costs of environmental remediation.  Governments are required to measure their environmental remediation liabilities in accordance with GASB 49 as of the start of the first fiscal year beginning after December 15, 2007.  Implementation of GASB 49 is required to conform to generally accepted accounting principles (GAAP).

Significant Changes from AICPA SOP 96-1:  In the past, most governments accounted for and disclosed remediation liabilities in compliance with American Institute of Certified Public Accounts (AICPA) Statement of Position (SOP) 96-1, Environmental Remediation Liabilities.  The requirements of GASB 49 are significantly different than those of SOP 96-1.  GASB 49 identifies the specific events (obligating events) that trigger a requirement to initially measure remediation liabilities and subsequent circumstances (recognition benchmarks) that trigger a requirement for remeasurement.  It also requires remediation liabilities to be measured using an expected cash flow technique based on the probability-weighted average of all estimated cost outcomes.  Additionally, GASB 49 significantly limits the ability of state and local governments to capitalize cleanup costs and requires detailed note disclosures about the liabilities.

Common Impacts and Consequences:  The actual impacts of GASB 49 implementation will be entity-specific; however, there are several common situations that state and local governments should be aware of and plan for, including:

• Environmental remediation liabilities will be reported in the financial statements earlier than before.  This may result in “new” liabilities being recognized immediately upon implementation of the standard.

• Recognized environmental liabilities will be higher and, therefore, have a negative impact on Net Assets and fund balances.

• Remediation projects that are funded through capital improvement monies will be required to be recognized.

• Current data collection processes, organization systems and internal controls will not be adequate to ensure timely identification of obligating events and recognition benchmarks.

• The expected cash flow measurement technique will be problematic due to the complexity of subjectively assigning probabilities to the various possible remediation cost-at-completion outcomes.  For many governments, the pitfalls inherent to the expected cash flow technique will result in higher volatility of reported environmental liabilities when remeasurements are required by the standard.

• More detailed note disclosures will be required, raising significant concerns for governments involved in litigation or insurance claims/cost recovery related to environmental liabilities.

How We Can Help:  If you have a difficult environmental remediation liability issue, or just want to understand what constitutes best practice in GASB 49 implementation, Risk Strategics can help. Our GASB 49 implementation services include:

• Design and execution of cost beneficial GASB 49 transition solutions.

• Technical support including evaluation of current liability measurement processes, scoping and documentation of necessary changes, and performing liability measurements using best practices for the expected cash flow technique.

• Training and training materials.

• Documentation support.

• Quality assurance and review activities.

• Project/change management.