I offer the following competitive environmental intelligence supplied by AIG environmental.
AIG Environmental®‘s Joe Boren Slated for a Panel Discussion at RIMS 2006 to Address the Impact of FIN 47 on Corporate Environmental Disclosure Practices
Joe Boren, Chairman & CEO of AIG Environmental® will participate on a panel at the RIMS conference in Hawaii entitled “Negotiating Coverage for Legacy Environmental Liabilities” on Monday, April 24th, at 2:00 PM. The panel will address, among other issues, the impact FIN 47 is having on how companies disclose environmental liabilities in their financial statements, and how environmental insurance can be an excellent tool for helping to manage the uncertainty and risk surrounding these liabilities.
FIN 47 Explicitly Addresses Accounting for Environmental Liabilities
In March 2005, the Financial Accounting Standards Board (FASB) issued an interpretation of an existing standard that has begun to affect the way companies account for the environmental conditions of certain company-owned properties and facilities.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), issues specific interpretation of FASB’s Financial Accounting Standard No. 143 (“FAS 143”), which sets the standard for when a company must account for environmental liabilities associated with conditional asset retirement obligations (ARO’s).
Paragraph 3 of FAS 143 states “if a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made.” Essentially, if a company, by its own determination, can not assess the environmental liabilities associated with a property at the current time, it could wait until those liabilities were more “estimable” before realizing them in their financial statements.
Prior to the release of FIN 47, companies were able to avoid recording environmental liabilities on these properties indefinitely, often maintaining that there was no basis for a reasonable estimate, due to the absence of an active market for the transfer of these liabilities and lack of a means to determine the timing of the retirement obligation. Many companies have also simply taken the position that they had no plans to retire certain assets, ever.
What Has Changed and How Might it Affect Your Clients?
FIN 47 is explicit on the position of recognizing liability, and establishes some baseline tests to identify when an obligation is estimable. Paragraph 4 of the FIN 47 states that a company must recognize the liability when it is incurred if there is enough information to reasonably estimate the fair value of an asset retirement obligation. It goes on further to define that an asset retirement obligation is reasonably estimable if: “…(a) it is evident that the fair value of the obligation is embodied in the acquisition price of the asset, (b) an active market exists for the transfer of the obligation, or (c) sufficient information exists to apply an expected present value technique.”1
- The first reasonable estimability test involves whether such a liability has been factored into the price of the asset in prior transactions. A simple example would be that if a company pays $10 million for an asset with environmental liabilities and a comparable clean asset sells for $25 million, the difference is the liability.
- The second part of the test is whether or not an active market exists for the transfer of environmental liabilities associated with similar properties. For example, brownfield redevelopment projects have utilized liability assumption agreements in which liabilities are “purchased” with regard to the development and/or the transfer of these types of properties.
- The third part of test suggests companies can no longer assert that the liability cannot be estimated by virtue of the uncertainty as to the timing of the obligation. The interpretation now states that while companies may factor the timing uncertainty into the estimate, an estimate must indeed be established. For example, if the best determination that a company could make was that a particular asset would be retired in a minimum of 20 years and a maximum of 100 years from now, the company should base its expected value estimate on some point within that range of years, where previously they might have claimed an amount of “zero” by asserting they had no plans to ever retire or decommission a given facility. Therefore, FIN 47 takes into account the uncertainty of the calculations but makes it more difficult to claim an obligation can not be estimated.
Several publicly traded companies have already announced adjustments to their financials, in one case the adjustment was over $250 million, citing FIN 47 adherence as the reason. Given this development, companies may become more inclined to cleanup and/or dispose of idle or mothballed polluted properties, rather than continue to carry and disclose the environmental liabilities.
environmental Strategist, between the lines: The answers to FIN 47 can be found in the development and execution of an environmental Management Strategy (eMS). Assisting your publicly traded clients in meeting FIN 47 is one more reason you are indispensable.
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