Fair value for environmental contingencies?

Can companies determine fair value for environmental loss contingencies?

As noted in the post on April 2, 2009, FASB stepped back from its earlier requirement that loss contingency liabilities for acquired properties (e.g., from mergers and acquisitions) be measured at fair value. With its release of FAS 141R-1 [Text] on April 1, 2009, FASB requires measurement at fair value only “if [it] can be determined [emphasis added].”

Fair value measurement formerly was required (period, no excuses for uncertainty about costs) under FAS 141R, which preceded FAS 141R-1's release. Companies complained to FASB, however, that fair value measurement of litigation-related loss contingencies was too difficult. That is, litigation outcomes were too uncertain to predict, meaning litigation costs were too uncertain to measure.

So, for that and other concerns expressed about litigation-related contingencies, FASB retreated. It made recognition of (acquired) loss contingencies at fair value no longer a broad requirement, but dependent on whether the acquiring company believed that fair value could be determined on a case-by-case basis. FASB attempted no distinction between litigation-related contingencies and those that are not.

Companies routinely have environmental contingencies that are not litigation-related, or at least not primarily driven by litigation outcomes. Cleanup-related contingencies make up the largest group of those. Companies normally can determine fair value for cleanup contingencies—through application of expected present value methodology in which uncertainty about cost is incorporated (as probability) into cost estimation.

Can companies determine fair value for environmental loss contingencies? Likely yes for cleanup-related contingencies, despite cost uncertainty; expected present value methodology is an applicable tool. No may be a credible answer for litigation-related contingencies, because litigation outcomes, including costs, can be so difficult to predict.