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ASTM E3123-18

ASTM E3123-18

Standard Guide for Recognition and Derecognition of Environmental Liabilities

2018-03-30 /Active
Significance and Use:

4.1 Use—this guide is intended for use on a voluntary basis for evaluating environmental liabilities, often with Guide E2137 for estimation and Guide E2173 for disclosure. The user may elect to apply this guide for any or all of these purposes:

4.1.1 Determining if an environmental risk or liability exists,

4.1.2 Determining if similar environmental risks (for example, permits, plant or process expansion) are being recognized at similar points in their lifecycle,

4.1.3 Determining if several similar environmental risks and liabilities are being managed to similar outcomes,

4.1.4 Determining liability values,

4.1.5 Due diligence analysis for proposed mergers, acquisitions, or spinoffs,

4.1.6 Documenting key decisions on environmental liability provisions, reserves, budgets and cash flow forecasts.

4.1.7 Identifying and analyzing liabilities associated with the following: certain remedial alternatives, future land uses, property transfer and redevelopment decisions, land use alternatives for former landfills and chemically impacted sites, Meeting regulatory requirements,

4.1.8 Designing and implementing project and program controls,

4.1.9 Defending against third-party lawsuits,

4.1.10 Calculating insurance premiums,

4.1.11 Making and settling insurance claims,

4.1.12 Making purchase accounting adjustments,

4.1.13 Preparing an audit defense, and

4.1.14 Completing financial and investment analysis.

4.2 Principles—the following principles are an integral part of this guide and should be used to resolve ambiguity or dispute regarding the recognition and derecognition of environmental liabilities. These principles are drawn from several sources, including historical and current accounting principles, court decisions, academic studies, as well as good commercial and customary practice.

4.2.1 Current awareness of an entity’s accounting framework and applicable generally accepted accounting principles (GAAP) is expected of everyone. Developing related environmental liability recognition policies and procedures commonly requires inputs from internal and external sources, including (but not limited to) accounting, finance, legal, environmental health and safety, capital projects and real estate.

4.2.2 The reporting entity has a duty to identify a risk in order to determine if it meets the criteria for recognition and derecognition. A default assertion of immateriality without data or structured judgement is inconsistent with GAAP and with good commercial and customary practice.

4.2.3 Accrued liabilities must represent losses in future periods. Consequently, certain costs are treated differently for accounting and tax purposes: Costs for response activities resulting from an event in the current reporting period that will be fully completed within the current period (with no on-going future obligations) do not require accrual but are expensed as incurred in the current period. Costs for environmental cleanup activities that are related to active ongoing operations (not a past event), including ongoing discharge treatment and monitoring, groundwater or air monitoring, etc. are not appropriate for inclusion in environmental liability accruals. Costs for capital expenditures (investments) in new property, plant and equipment are also not appropriate for accrual. Rarely, certain capital expenditures will effectively settle a liability, but accounting and tax rules for accruals and investments are specialized and distinct. An entity’s accounting framework will already address these differences.

4.2.4 Over time, some risks become recognized liabilities and vice versa.

4.2.5 Comprehensive data sources regarding environmental risks and liability quantification are readily available and have improving levels of accuracy (or precision).

4.2.6 Imperfect or incomplete information is a common obstacle to environmental liability recognition: the lack of comprehensive and current data on an environmental risk does not prevent comparison of a past environmental liability with a prospective one. Even with complete knowledge of property and regulatory issues, a reliable calculation of all costs is still challenging but possible.

4.2.7 While uncertain timing of spending is a common factor to determining a present value of a risk or liability, an expected value can generally be calculated from comparable sites, open source estimates, and vendor quotes.

4.2.8 Application of the materiality constraint (FASB Concepts Statement 8; Appendix X2) should enable users of this guide to determine which environmental risks should be recognized and potentially disclosed (Guide E2173). Users of this guide should consider whether an aggregation of many related immaterial risks constitute a recognizable liability.

4.2.9 Application of the cost constraint (FASB Concepts Statement 8) should enable users of this guide to filter or screen which risks should be evaluated in more detail (see 6.3 on the Watch list, also Guide E2137). Users should consider the opportunity costs of not developing a more rigorous estimate, as well as whether data exists to justify an improved estimate.

4.2.10 Recognition may be for a specific phase of activity or other incremental component of a liability. Particularly, GASB 49 specifies the recognition of components of a liability based on the occurrence of certain (commonly sequential) obligating events and recognition benchmarks. The unit of account applied to measurement and recording environmental liabilities must be consistent with the entity’s accounting framework. See 9.9 for further detail on unit of account.

4.2.11 Where terminology such as “probable” and “reasonably estimable” is used to identify risks for recognition, users should clearly state and consistently apply any numerical definitions and ensure these definitions are consistent with their relevant accounting framework(s).

4.2.12 No part of GAAP (or IFRS) specifies a minimum or maximum time horizon for measurement, recognition or derecognition of environmental liabilities. Users should be aware of applicable regulations or policies in determining an appropriate/reasonable timespan. For example, a financial assurance valuation may cover 30 years of forecasted costs, while a contract may presume perpetual spending to manage a liability. [Guide E2173 contains recommendations about displaying key assumptions in X4.4 “Portfolio Assumption Tracking Table”].

4.2.13 US GAAP and IFRS express the preference for calculating liabilities at their prices (ideally “fair value measurement”). There are complexities with calculating some costs (remedy failure, counterparty risk) to determine fair value. Users of this guide should use caution in stating that a single remedy – once implemented – contains all of the possible costs and will successfully extinguish all risks and liabilities anticipated at a site. As noted in Guide E2137, price and cost approaches yield estimates which can differ significantly.

4.2.14 Litigation is both a method of enforcement and type of liability in its own right. The risk of litigation is continuous and generally unavoidable. Awareness of litigation conditions are often part of the determination of recognition and derecognition.

Note 1: When estimating litigation exposure and potential costs, the user should consider if the litigation includes the potential for fines that are imposed on a daily basis for each violation.

4.2.15 Spending correlates positively with (but is not identical to) liability reduction.

4.2.16 Spending may fail to reduce liabilities.

4.2.17 Spending to address a liability indicates that a liability exists.

4.2.18 It is not unusual for a liability to require immediate recognition under the accounting standards although spending on the liability may not occur in the foreseeable future.

4.2.19 Environmental risks should be regularly reviewed, documented and analyzed to record events, decisions, obligations and responsibilities (see Section 6 and 9.8).

4.2.20 The tools, procedures and vendor experience needed to promptly provide a cost or timing forecast, or both, already exists and is continuously improving; lack of resources or a brief turnaround time are not reasonable justifications for continuously misstating a risk or liability.

4.2.21 Strategic transactions can bring changes to the accounting framework used by an entity, which can trigger recognition and derecognition of liabilities.

4.2.22 Periodic reiterations of recognition steps are useful to stakeholders. If an entity finds that similar liabilities are being recognized and settled in varying ways, a reiteration of policies and procedures can express an entity’s current tolerance for risk and for recognition of environmental liabilities.

4.2.23 As an entity successfully grows while simultaneously extinguishing environmental liabilities, the aggregate liability will eventually become immaterial. See 9.7 for further detail.

4.2.24 The same physical location may have multiple environmental risks and liabilities. The definition and application of the term “unit of account” should be evaluated as an entity grows and settles key risks and liabilities; see 9.7 and 9.9 for further detail.

4.2.25 Completion of some activity (see Section 7) usually precedes derecognition.

4.3 Liability management practices—the following practices are an integral part of this guide and users should employ them to reliably recognize and derecognize environmental liabilities

4.3.1 Independent of an organization’s standard record retention policies, indefinitely maintaining searchable listings of the following should be given consideration: Extensive spending history, provision or reserve change decisions, project phase decisions, and key site activities, including remediation, capital expenditures, permitted discharges, asset retirement. Correspondence with regulators, especially documents which identify specific obligations (such as notices of violation, consent decrees, administrative orders). Environmental data collected in support of this correspondence. Active, inactive and closed business units and corporations. Properties used (whether owned, leased, divested, or a common ecological resource) in a way that causes environmental liabilities, especially those with activity and use limitations. Activity and use limitations needed, requested and issued, even for divested properties. Zoning change requests, applications to create or remove activity and use limitations. Environmental permits (such as RCRA, NPDES, etc.) Vendor, property, general liability insurance policies, along with listings of any claims submitted and their respective disposition. Waste disposal and treatment sites used, along with transporters, corresponding insurance, waste manifesting.

Note 2: These may include Publicly-Owned Wastewater Treatment Plants that receive and process liquid wastes transported by pipe way, sewer or in bulk (tanker truck). Purchased, processed, marketed, recycled and waste chemical compounds; end users, recyclers, and transporters. Environmental counterparties, such as successor property owners, adjacent property owners, nearby contributors to common ecological resources (wetlands, aquifers, river sediments), other PRPs on multiparty cleanup projects (Superfund sites), unrelated entities which promised to settle some ARO or remedial obligation.

4.3.2 Periodically, an organization may find it necessary to study, evaluate or maintain databases of the following: Bankruptcy filings of environmental counterparties Regulator websites covering environmental compliance, enforcement, permitting, spills, to confirm those records are accurate Regulator websites covering similar (unrelated) liabilities to determine if data provides predictive insights.  Public interest and news websites that track environmental compliance issues.

4.4 General Process for Recognition and Derecognition: 

4.4.1 Overall Process—described in Fig. 1 Environmental Liability Lifecycle – the process is iterative, continuous, and controlled through periodic settlement of liabilities. The four steps are:

FIG. 1 Environmental Liability Lifecycle

Environmental Liability LifecycleEnvironmental Liability Lifecycle Watch list (pre- and postrecognition)—consists of a screened listing of risks, identified by type, location and other attributes. A detailed explanation is in 6.3 and Section 7 of this guide. Recognition (liability accrual and footnoting)—each type of environmental liabilities has a recognition process for converting a risk to an accrual (or footnote) listed in Section 5 of this guide. Settlement (work, spending, negotiations)—consists of routine activities to study, remediate, restore, monitor, redevelop and manage a property to satisfy one of the five types of liabilities. This also includes payments to others for their performance or guarantee or cashout of these activities. Extinguishment and Derecognition—confirmation that your entity settled the obligation, commitment, contingency or guarantee and that the liability no longer exists. The accrual is removed from the financial statements.

4.4.2 Classification by location—any risk or liability must be associated with a specific location. In the case of product warranty risks, this may be an entire nation or customs union. In the case of soil or groundwater contamination, this may be a street address or waste disposal facility. See 9.9 for more detail on applying the concept of a “unit of account”.

4.4.3 Classification by type—there are five common types of environmental liabilities, which may exist simultaneously at the same location: asset retirement obligation, other environmental obligations, commitments, contingencies, and guarantees.

4.4.4 This guide uses the five liability types in the numerical order stated in the 2009 Accounting Standards Codification (ASC) developed by the Financial Accounting Standards Board. Users of this guide should consult the references noted in the following Fig. 2 as well as Appendix X1, and – at least annually – develop an understanding of any recent changes:

FIG. 2 Five Liability Types

Five Liability TypesFive Liability Types

4.4.5 In Section 5 of this guide, users may find it useful to follow a more comprehensive process to recognize certain liability types and consider past activity at that location. See Appendix X5 for a process flow example.


1.1 Purpose—The purpose of this guide is to provide a series of options or instructions consistent with good commercial and customary practice for recognition and derecognition of environmental liabilities. This guide is consistent with Generally Accepted Accounting Principles (GAAP). Recognition of environmental liabilities is essential to determining the current book value of an entity. An entity may have future spending to extinguish risk and liabilities triggered in the past. Serious consequences, ranging from failed audits and poor capital stewardship to financial fraud and bankruptcy, exist for entities omitting material information from financial statements.

1.2 Objective—This guide enables users to reliably determine if a given type of environmental liability exists and subsequently has been settled, consistent with the accounting definitions in place.

1.3 This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.

derecognition; environmental liability; liability derecognition; liability disclosure; liability recognition;
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