Environmental Contamination: Disclosing Liabilities & Asset Impairments
Newell, Gale E., Kreuze, Jerry G., Newell, Stephen J., The National Public Accountant
Water, soil and air contamination have been a major concern in the United States, especially over the last several years. Industrial pollution, in particular, has had a negative influence on the environment and in many cases on the quality of life. Heightened environmental awareness, public pressure, government reaction and corporate good neighbor policies have increased public concern over environmental damage.
This increased concern combined with the high cost of environmental cleanups have changed corporate policies and practices to reduce or eliminate environmental contamination resulting from current operations. In addition, the cleanup of prior environmental damage has been completed (or is underway) at many contaminated sites. Negotiations are ongoing in thousands of jurisdictions concerning the extent of past contamination, the dangers that exist from such contamination, as well as who should pay and how much for its cleanup/containment.
The Upjohn Company, for example, has taken responsibility for the cleanup of a Superfund site in Kalamazoo County, Michigan that will cost in excess of $40 million. Upjohn, in turn, is seeking partial reimbursement from numerous other potentially responsible parties (PRPs).
Growing environmental awareness and concern has contributed to an increasing number of federal governmental regulations concerned with protecting the environment. These federal regulations include the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Superfund Amendments and Reauthorization Act (SARA), the Leaking Underground Storage Act (LUST) and the Safe Drinking Water Act. In addition, other, sometimes stricter, regulations are imposed by state or local governments.
The pressure from environmental groups has been coupled with the recognition by most businesses that being environmentally responsible is good business practice. The environmental impact of a decision is now a major consideration in their decision making process. This article will first review the general relevance of environmental matters to accountants; then discusses the effect of environmental contamination on two important aspects of financial accounting - the recognition and reporting of any potential liability resulting from environmental risk, and the recognition and disclosure of any decrease in an asset's value due to environmental contamination.
Relevance To Accountants
The increasing concern over the environment has had a significant impact on accountants responsibilities. These increased responsibilities affect the management accountant, the cost accountant, the financial accountant, the internal auditor and the external auditor. The management accountant must consider the expected environmental costs in providing data for decision making. The cost accountant must insure that environmental costs incurred in the production process are appropriately allocated to the proper products. The financial accountant must make certain that all potential liabilities and asset impairments due to environmental contamination are properly recognized in the statements. Finally, the internal auditor and the external auditor must make sure that the financial statements and internal reports properly reflect information and disclosures relevant to environmental issues.
The Securities and Exchange Commission has addressed the issue of environmental disclosures. In 1986 the SEC issued the current version of Regulation S-K which requires the registrant to disclose the material effects of complying with regulations concerning environmental costs. There can be little doubt "...the SEC views disclosures of environmental liabilities as effectuating important public purposes..." (Rabinowitz 1991). However, the SEC does not inspect sites for the related environmental liabilities or asset impairments. …