AUTUMN 2013
FMI
*
IGF JOURNAL
13
(c) The government:
(i) Is directly responsible
(based on
a legal obligation to perform the
remediation from agreements or
contracts, legislation of another
government, or the government’s
own legislation)
; or
(ii) Accepts responsibility
(typically
based upon a voluntary assumption
of responsibility based on the
government’s own actions or
communications, provided these
create an obligation meeting the
definition of a liability)
;
(d) It is expected that future economic
benefits will be given up
(in other
words, the government or government
organization expects to expend their own
resources to clean up the contaminated
site)
; and
(e) A reasonable estimate of the amount
can be made.
As you can see from the criteria above, the
existence of an environmental standard in
and of itself is not the obligating event that
creates a liability. The existence of contami-
nation that exceeds an environmental stan-
dard at the financial reporting date is a nec-
essary condition for recognition of a liability.
The expectation that future economic
benefits be given up is also critical. A gov-
ernment would typically not be required
to recognize a liability for a contaminated
site to be remediated solely through natu-
ral attenuation (where contaminants are
cleaned up or attenuated naturally through
soil or groundwater, with no disbursements
for remediation costs for the government).
Since the government is not sacrificing any
future economic benefits to perform the re-
mediation, a liability would not be required
under PS3260. Similarly, with contamina-
tion caused by asbestos, a government is
generally not required to immediately clean
up the contamination, though they must
disclose the presence of the contamination
to potential purchasers. The government
would be giving up future economic bene-
fits when the fair market value of the build-
ing with the asbestos is less than its cost.
Initial application of this standard may be
accounted for retroactively or prospectively.
For sites which remain in active use, this
section doesn’t apply and entities would
continue to assess potential obligations
for remediation against the definition of a
liability in PS3200, Liabilities.
Liability Measurement – The Devil Is
In the Details
The estimate of a liability should include
those costs directly attributable to
remediationactivities, basedon information
available at the financial statement date.
The estimated costs would include post-
remediation operations; maintenance and
monitoring that are an integral part of the
remediation strategy for a contaminated
site. Costs of assets acquired as part of
remediation activities, to the extent those
assets have no alternative use, should also
be factored into the costs.
Directly attributable costs would
include, but are not limited to, payroll
and benefits, equipment and facilities,
materials, and legal and other professional
services relate to the remediation of the
contaminated site. Estimated costs would
be those required to bring a site up to the
current minimum acceptable standard for
its use prior to contamination – which is
not necessarily to a perfect state.
Costs such as re-vegetation of the affected
land, consultations with stakeholders,
project management and training are
only included in measurement of the
liability to the extent that they directly
relate to the actual remediation of the site.
Substantial judgment needs to be applied
in determining whether an expenditure
truly relates to the remediation. Those in
charge of financial reporting should not
act in isolation but should consult with
remediation project teams and professional
engineers to determine the objective and
desired outcome of each expenditure. To
illustrate – re-sodding and planting of trees
on contaminated land to make the area
more visually appealing to the community
would typically not be considered part of
the remediation process, and therefore,
would generally not be included in the
liability. On the other hand, if the grass
and trees were required as they establish
roots in the soil which limits the flow of
contaminants into a nearby water stream,
it could be directly linked to remediation
and would then be included in the liability.
Remediation projects often involve
incurring expenditures over many years.
When remediation costs are planned to be
incurred over many years, the costs should
be escalated to cover expected increases
in costs over the duration of the project.
Escalation should cover anticipated
increases in the cost of equipment,
material, labour, fuel, and freight amongst
others. Professional judgement needs to be
applied to determine the most appropriate
escalation factor to apply, based on the
anticipated rate of inflation for these items.
Similarly, where project cost estimates are
prepared based on assessments from prior
years which have not have been updated to
current year dollars, the prior-year estimate
should be redeveloped or indexed for an
inflationary factor to calculate impact in
current year dollars.
The estimate of the liability should also
be discounted when the estimated costs
to settle the liability are based on future
cash requirements which are expected
to be incurred beyond the end of the
next fiscal year. Professional judgment
is again required to determine the most
appropriate discount rate that should be
applied. Estimated future cash flows could
be discounted using the Government of
Canada or Provincial lending rates to
approximate its current value, or using
actuarial discount rate assumptions as
applied to other public sector entities.
Given the uncertainty and complexity
of many remediation projects, total
estimated project costs can often include
two forms of contingencies - a contingency
for design allowance, and a general risk
contingency. A design allowance is often
included to represent a contingency for
the accuracy of cost estimates, expressed as
a percentage of project costs. The design
allowance reflects known uncertainties in
future operating and capital expenditures,
based on best practices. Based upon the
likelihood of the design allowance being
incurred, it is often included in the liability
measurement. Total project costs may also
include a further risk contingency to reflect
worst case class estimate uncertainties.
The extent of uncertainties related to the
likelihood of incurring these additional
costs, would impact if they are included in
the liability estimate.
The treatment of long term monitoring
costs also requires professional judgment.
PS3260, Contaminated Sites, indicates
that such costs should be included in the
liability estimate in certain instances. An
assessment needs to be performed as to
whether the long-term monitoring costs
are integral to the remediation strategy
of a site. For example, does the long term
monitoring performed determine the
effectiveness of the remediation strategy,
and enable the remediation strategy to
be adopted based on actual conditions
and progress? If so, this may suggest
that long term monitoring is essential to
remediation, and should be included in the
measurement of the liability.
An Action Plan for PS3260
Based upon the complexity and challenges
of implementing PS3260, management of
government entities with contaminated
sites should be working now on their
action plan. However, PS3260 should not
ACCOUNTING FOR CONTAMINATED SITES
