Environmental liabilities under FAS 157-f

Does FASB’s new FAS 157-f bring changes that affect measurement of environmental liabilities?

FASB released on May 1, 2009, the proposed staff position paper (FSP) FAS 157-f, “Measuring Liabilities under FASB Statement No. 157” [Text] (and will accept comments on the document until June 1, 2009).

FASB cited in FAS 157-f as background the concern expressed by companies about the successful determination of liability fair value when observable market information is lacking. For this and other issues it noted, FASB concluded “that the consistency in application of FAS 157 could be improved” with additional guidance, a role that FAS 157-f was drafted to serve.

The normal situation for environmental liabilities (e.g., litigation and cleanup) is no market, active or inactive, to obtain quoted prices for “identical” or “similar” liabilities—for establishing fair value. For such circumstances, FAS 157-f calls for use of:

...Another valuation technique that is consistent with the principles of Statement 157. [An example] would be an income approach, such as a present value technique. [Para. 9.d]

Application of an "income approach" already is indicated in FAS 157 guidance, which describes this approach as using:

...Valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). [Para. 18.b]

So, FAS 157-f brings no change for companies intending fair value measurement of environmental liabilities under FAS 157. That is, for cleanup-related liabilities, expected present value methodology remains suitable (and normally effective) for their fair value measurement. Meanwhile, any successful approach—income or otherwise—to measuring litigation-related liabilities must overcome the difficulty of anticipating litigation outcomes.

Concerning environmental liabilities, FASB's release of FAS 157-f, if nothing else, serves to remind companies that there is an approach for handling the uncertainties inherent in cost estimation for cleanup liabilities—and that is the application of expected present value methodology.

[See the April 10, 2009, post in Knowing Disclosure on determining fair value for environmental contingencies.]