New GASB Standard for Governmental Reporting of Cleanup Obligations

Client Advisory

February 13, 2006

The Governmental Accounting Standards Board has released for review and comment a proposed new standard, Accounting and Financial Reporting for Pollution Remediation Obligations, Project No. 3-12, which sets forth the circumstances under which a government would be required to report a liability related to cleaning up pollution, and establishes a probability-weighted method, the expected cash-flow technique, that governments would be required to use to determine the estimated amount of the liability that would be reported.

In general, a government would be required to report a liability if any one of five circumstances were present, and if a range of potential outlays for the cleanup could be reasonably estimated. The five triggering circumstances are (1) pollution poses an imminent danger to public health or the environment and the affected government has little or no discretion to refuse to address the problem; (2) a government has violated a pollution-related permit or license; (3) a regulator has identified a government as responsible or potentially responsible in whole or in part for a cleanup, or is likely to do so; (4) a government is named, or is likely to be named, in a lawsuit seeking to compel a cleanup; or (5) a government begins to carry out a cleanup or legally obligates itself to do so.

The expected cash-flow technique to be used in estimating the costs of a cleanup involves assigning probabilities to each of the potential outlays and calculating a weighted average of them. Additional information about the cleanup would also have to be disclosed, including the basis for the cleanup obligation, the assumptions employed in calculating the amount of the liability and an estimate of the amounts that the government expects to recover from insurance or other parties. The proposal would be effective for all financial statements released after June 15, 2007, but if governments have sufficient information to apply the standard to prior periods, they would have to do so.

The GASB is not a federal agency and its standards are not federal laws or rules. However, GASB is recognized as the official source of generally accepted accounting principles (GAAP) for state and local governments.

The full text of the proposed standard is available from the GASB website, The deadline for submitting comments on the proposal is May 1, 2006. Comments may be emailed to or mailed to Director of Research, Project 3-12, Governmental Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116

Questions regarding this advisory should be addressed to Clifford P. Case (212-238-8798,

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