Environmental cleanup postponement premium

Are companies paying a premium for postponing recognition?

As noted in the March 5, 2009, post, companies applying FAS 5, Accounting for Contingencies, and FAS 141/141R, Business Combinations (Revised), have options for measuring loss contingency liability costs. One option is for companies to postpone recognition when they believe they cannot reasonably estimate liability costs. Might companies postponing recognition be paying a premium for that option?

It likely is less expensive to resolve environmental cleanup loss contingencies in the near term, rather than later. Paying a premium refers to absorbing the difference in costs for resolving later.

Why should companies expect that costs to resolve later will be higher?

First, environmental problems tend to worsen with time. For example, cleanup needs can increase where contamination sources have been insufficiently secured, e.g., against human and animal intrusion, wind transport, surface water erosion and infiltration. There may be more exposure of personnel to contaminated materials or more subsurface migration of contaminants as time passes.

Second, costs to resolve environmental cleanup tend to rise, e.g., in response to environmental problems worsening. Increases also result from cleanup requirements of regulatory authorities that become more stringent and thereby more costly to meet. They result when structural deterioration due to weathering complicates cleanup.

Third, companies that are postponing recognition of environmental loss contingencies likely also are postponing management of them, including cost management. Those companies, consequently, will be missing the development of favorable cost situations for resolving the liabilities, should they arise. By the time they do recognize and begin management, environmental problems may well have worsened and costs increased.

There appears potentially to be a considerable premium for companies to pay for postponing recognition.

[For more information, see Raymond Rose's "Reconsidering Loss Contingency Postponement—Raising the Game," Environmental Claims Journal, Corporate Environmental Disclosure Column, Scheduled for Vol. 21, Issue 2, Apr-Jun 2009.]