Disclosure of Environmental Liabilities: The Updated ASTM Standard E2173-16

By: Bruce Martin

Accounting and financial reporting standards require companies to estimate environmental liabilities as part of their normal accounting and reporting practices.  In 2010, the Financial Accounting Standards Board (FASB) described the framework for financial statements, stressing the four “elements of financial statement”: recognition, measurement, presentations, and disclosure.  ASTM International has developed standard guides for estimating and disclosing environmental liabilities, and in 2016, an update was issued for the ASTM E2173-16: Standard Guide for Disclosure of Environmental Liabilities. 

The purpose of the E2173-16 standard on disclosure of environmental liabilities is “to provide a series of options or instructions consistent with good commercial and customary practice in the United States for environmental liability disclosures accompanying audited and unaudited financial statements.” While the guide is intended for use on a voluntary basis by a reporting entity that provides financial disclosure regarding environmental liabilities, it contains a number of key principles and considerations that can be of benefit to organizations seeking to demonstrate consistency and leadership in understanding, controlling, preventing, and reducing environmental liabilities.

The key part of the standard centers around determining whether a disclosure in a financial statement is warranted.  Below are some of the major circumstances that might give rise to environmental liabilities that may be subject to disclosure:

  • Enforcement of environmental laws or regulations regarding investigation, cleanup, maintenance or land use controls, or other costs. Such circumstances arise if a responsible party, or reporting entity, is required to assess and remediate a property under an environmental law, such as a requirement to perform corrective action under RCRA.
  • Contractual assumption of risk or risk transfer agreements, such as insurance contracts, indemnity agreements, or similar contractual agreements to assume liability
  • Commencement of litigation or assertion of a claim or assessment by a party alleging legal liability on the part of the reporting entity,
  • Other information known by the reporting entity that indicates an environmental liability has been incurred

When a reporting entity becomes exposed to one of the circumstances described above, the E2173-16 standard then describes the process and information on the material circumstances that should be prepared by the entity in anticipation of disclosure.

Disclosure should be made when an entity believes its environmental liability for an individual circumstance or its environmental liability in aggregate is material.  The E2173-16 standard includes several references in the Appendices, including court decisions, references from the Securities and Exchange Commission (SEC), as well as Public Company, Federal, Government, and International Accounting Standard Boards (i.e., PCAOB, FASB, GASB, and IASB) that help a reporting entity determine and establish when a liability is deemed material.  The key message from these sources is that the entity should have a clearly defined and documented process for establishing and defining when liabilities, including environmental liabilities, are material and therefore, subject to disclosure in financial statements.

Not every environmental liability warrants the same level of detail in its disclosure.  As described in the standard, disclosure will be guided by the scope and objective of the financial statement, and accordingly, by the materiality of the environmental liability and the level of information available.

Scrutiny from investors and regulators on these continues to increase, along with demands for organizations to more consistently and accurately report on environmental liabilities.  The ASTM E 2173-16 Standard Guide for Disclosure of Environmental Liabilities, along with the ASTM E2137-16 Guide for Estimating Monetary Costs and Liabilities for Environmental Matters offer reporting entities valuable guidance on identifying, estimating and disclosing environmental liabilities in a systematic and thorough that is not only consistent with financial accounting standards, but allows organizations to be proactive and  demonstrate consistency and leadership in understanding, controlling, preventing, and reducing environmental liabilities.

EHS Support has developed and maintains financial reserve and disclosure programs for environmental liabilities for numerous US-based and international businesses.  We focus on compliance with the appropriate accounting standards, but also in ensuring a pragmatic, business-focused approach that provides confidence that your environmental reserves are properly quantified in a manner that is auditable and reproducible.   Should your company be developing financial reserves?  Are your existing systems compliant with the latest guidance and accounting standards? We can answer those questions and complete a complimentary analysis of your current liability program.

Bruce MartinABOUT THE AUTHOR As a certified professional environmental auditor (CPEA), Bruce Martin has 23 years of varied experience in environmental management consulting, including environmental, health and safety auditing; merger and acquisition environmental due diligence; environmental management systems; site assessments, training, and environmental investigations… Read More
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