Guidance on Accounting for Environmental Liabilities

Prepared by TBS - Government Accounting Policy Division
Last updated: February 23, 2005

Objective

This document provides guidance on the issues surrounding the accounting for the liability for contaminated sites. The accounting for liabilities is independent from decisions surrounding the funding of these liabilities. In other words, the determination of liability amounts should not be influenced by the availability of funding and amounts reported for liability purposes may be different than amounts sought for funding.

Introduction

As per the Policy on Accounting for Costs and Liabilities Related to Contaminated Sites, it is the policy of the government to account for costs and liabilities related to the management and remediation of environmentally contaminated sites when contamination occurs if the government is obligated, or is likely obligated, to incur such costs:

• for reasons of public health and safety;
• due to contractual arrangements; or
• to meet standards set out in an act or regulation of a government (federal, provincial or municipal) in Canada or abroad which are considered to be acceptable to the government.

Sites to include in the liability

The criterion for recording a liability is based on the requirement that the government is obligated or likely obligated to incur future remediation/management costs. Likely is defined as a 70% or greater chance.

When the government owns the site, the liability should be recorded whether or not the government is responsible for the contamination. The following exception applies, if the contamination is due to contamination by a third party, and it is likely that the third party will fund the remediation costs (or a portion thereof), the estimated liability should be reduced by this amount.

Where the site is leased by the government or is occupied by the government "without an interest", a liability should be recorded where the government acknowledges it is responsible for the contamination or where the government has accepted responsibility for remediation as part of the lease agreement.

Where the contamination exists on a site not owned by the government, and the government neither leases nor occupies the site (past and present), the government would only be obligated (or likely obligated) to incur remediation costs where it clearly caused the contamination (e.g. contamination from federal land has extended to non-federal land, or a government vehicles spills contamination on to non-federal land).

Where the contamination exists on a site not owned by the government, and the government neither leases nor occupies the site (past and present), and is not responsible for the contamination, the government may agree to fund remediation costs as part of a transfer payment agreement (likely a contribution agreement). In these circumstances, the accounting for the costs would fall under the guidance of accounting for contributions (see section 7.2 of the Accounting Manual). No liability should be accounted for under this section.

Determining the level of responsibility for contamination may not be clear; departments should seek the advice of Treasury Board Secretariat - Real Property Services in these situations.

Accounting Entries

1 - Department performs assessment of site

Assessment of site to determine whether contamination exists: record as annual operating expense.

FRA Coding Rationale:

Assessment costs to determine whether contamination exists are recorded as an annual operating expense, as there is no evidence that a prior period event has given rise to a liability (i.e. contamination). The accounts payable FRA is credited for the amount owing.

Authority Coding Rationale:

Depending on the Department's vote structure, the payment can be charged to either B11A(*) or B12A - Program expenditures or Operating expenditures vote. Since accounts payable has no impact on appropriations, "R300 - All other assets and liabilities" is used.

Object Rationale:

Object code "0495 - Services related to the assessment of potentially contaminated sites" has been created to track expenses. "6299 - Net Increase or Decrease to Other Liability accounts" is used to for the establishment of the payable.

2 - Results of assessment

Scenario 2A

Assessment identifies Class 1 (action required) or Class 2 (action likely required; likely = 70% or greater probability) contamination or Class I (with likely obligation). Estimated costs of future assessments (to determine extent of contamination) and remediation/management are $2 million.

Liabilities should only be recorded for sites identified as Class 1 or Class 2 under the Canadian Council of the Ministers of the Environment National Classification System (CCME NCS) or equivalent rating under another rating system. In certain situations, a liability can be recorded for sites identified as class I. In these situations, although there is insufficient information to provide a Class 1 or 2 under the CCME NCS rating system (which requires firm answers to 85% of the questions), the department has sufficient information to know that the government is likely obligated to remediate the site.

The recorded liability for contaminated sites should include the estimate of costs to remediate the site to a level appropriate to the lands current or intended use. Costs include any estimate expenses related to the remediation and management of sites that have been identified as a Class 1, Class 2 and in limited cases Class I sites. Estimated costs associated with steps 5 to 10, of the 10-step process for addressing contaminated site guidance, which was issued by the Contaminated Sites Management Working Group ( http://www.ec.gc.ca/etad/csmwg/pub/fed_aprch/en/c2_e.htm) can be included in the estimated liability.

Costs should exclude any expenses associated with determining the existence of contamination (i.e. steps 1 to 4 of 10-Step Process for Addressing a Contaminated Site). Costs should also exclude overhead costs and project management costs internal to the department. However, where the department intends to perform the remediation itself, the liability may include estimated project management costs.

Departments may record estimates of liabilities for sites not yet assessed where contamination discovered at one site is considered likely to be discovered at other sites. This would be the case where sites are considered homogeneous. For example, where a type of structure situated across Canada is painted or treated with the same product and assessments performed at a sample of sites have uncovered contamination, the liability estimate for remediation/management should cover the estimate for all similar structures.

The liability should be estimated based on current available technology and on current year estimates (i.e. what would be the cost today of performing the remediation). The liability estimate should be reviewed at least each year-end to reflect any changes in estimates. At a minimum, prior year estimates should be increased by inflation over the previous year; the Consumer Price Index (CPI) would be used in these cases. Estimates should be reduced to their present value (i.e. discounted) if an approved long-term strategy for dealing with the contamination exists and calls for costs to be incurred well into the future (i.e. beyond ten years) and the stream of estimated costs is detailed by year.

A contingent liability may also be reported for Class 1, 2 and I sites that have a reported liability. In this case, report any estimated costs beyond those recorded in the liability where it is unclear whether these would be incurred. An example is where two remediation options are being considered; the department may report the less costly option as the liability and report the difference in costs with the more costly option as a contingent liability.

FRA Coding Rationale:

The costs and liabilities related to the management and remediation of environmentally contaminated sites are recorded when the contamination occurs or when it is discovered. The estimated remediation costs are debited to FRA 51321 Operating Expenses and credited to FRA 24141 - Environmental Liabilities.

Authority Coding Rationale:

The recording of the estimated liability does not affect appropriations since an expenditure has not occurred at this point. "F127 - Expense related to environmental liabilities" is used for the expense while "R300 - All other assets and liabilities" is used for the liability.

Object Rationale:

"3469 - Charge to other liability account" should be used to record the expense while "7029 - Allowance for valuation of assets and liabilities - other allowances" should be used to record the allowance.

Scenario 2B

Assessment identifies Class 3 (Available information indicates that the site is not a high concern. Additional investigation may be carried out to confirm the classification and some degree of action may be required.)

• No accounting entry required - no liability to be recorded.
• Report as a contingent liability the estimate of any future remediation work that may be required. Contingent liabilities should include the estimated management and remediation costs for sites where it is unclear whether the government is obligated to incur remediation costs. Costs should exclude overhead costs and project management costs internal to the department.
• Any future assessment or remediation work is recorded as an annual expense

Scenario 2C

Assessment identifies Class N (available information indicates that there is likely no remediation required)

• No accounting entry required.
• Site does not represent a contingent liability - report no amount.

Scenario 2D

Assessment identifies Class I (insufficient information to classify the site) with no likely obligation

• No accounting entry required - no liability to report at this point.
• Consider for contingent liability reporting if appropriate.
• Once future site assessment is performed and classification changes, follow guidance for new site class.

3 - Remediation, Risk Management and/or Care and Maintenance Work Is Performed

Scenario 3A

The opening liability is $2 million. Remediation work is performed during the year in the amount of $1.5 million. At year-end, remaining costs to remediate the site are estimated at $1,000,000.

Operating expenses of $1.5 million are recorded.

Accounting entry is the same as scenario 1, except object code "0496 - Services related to the remediation of contaminated sites" is used.

The outstanding liability is reduced to $1 million.

Accounting entry is the reversal of the codes used to establish the liability in Scenario 2A.

Scenario 3B

Strategy for site is a risk management approach (e.g. care and maintenance expenditures are planned for work to prevent contamination migration but no direct remediation is planned). Estimated stream of payments is: $40,000 for annual monitoring costs to test for run-off and $30,000 for annual processing cost to minimize contamination effects (e.g. processing run-off water). Annual costs are estimated to occur for the foreseeable future.

A liability should be recorded to reflect the obligation to incur annual costs into the future. Departments should calculate the estimated present value of the stream of payments. If the end date of the payment stream is not known and for administrative simplicity, departments my use a factor or 10 to record a liability (in this case 10 x $70,000 = $700,000). However, where the annual payments or the estimated liability are material, departments should make every effort to calculate the liability with greater precision.

Each year, the actual annual costs are recorded as operating expenses. The liability is not reduced by the annual costs incurred each year. The liability is adjusted for inflation or any other factor that may affect the estimate of annual costs at each year-end.

Record liability:

Accounting entry is the same as scenario 2A.

Record annual payment of costs:

Accounting entry is the same as scenario 3A except for the object code "0497 - Services Related to the Care and Maintenance of Contaminated Sites".

4 - Site has been remediated - Treatment of annual expenses to monitor for future contamination

Record ongoing assessment/monitoring costs as an annual operating cost.

Once a site has been fully remediated, any assessment or future monitoring costs to test for contamination would be accounted for similar to the initial assessment costs of the site (entry 1).

Year-End Reporting

Departments must review the amounts reported for their contaminated sites each year-end as at March 31. While the reporting date is specified as March 31, departments are to consider any information that they are aware of subsequent to this date in completing their update of the Federal Contaminated Sites Inventory (FCSI). Any information that affects amounts reported and relates to a condition that existed prior to year-end should be considered in quantifying amounts. For example, where contamination is discovered in April 2004 on a site that was owned by the government in the prior fiscal year, the liability should be included in amounts reported for March 31, 2003. However, if the contamination were caused by an event of the new year, such as a chemical spill in April 2004, the estimated liability would not be reported for March 31, 2003. In the rare instance where the estimated liability is significant, consider reporting the incident as a subsequent event.

Departments are required to update the (FCSI) as information becomes available. Departments must also sign off on the liabilities and contingent liabilities information contained in the FCSI each year-end.