Question

Waste from an Entity’s XYZ Limited’s production process contaminated the groundwater at the entity’s plant. The entity is not required by law to restore the contaminated environment and there is no court case. However, before the end of the current reporting period, the entity made a public announcement that it would restore the contaminated environment within the next 12 months.

Discuss how XYZ Limited should treat this case in their financials.                          

Answer 1

Under U.S. GAAP, ASC 410-20 is the primary source of guidance on accounting for obligations associated with the retirement of tangible long-lived assets.

This Subtopic provides guidance on accounting for environmental remediation liabilities and is written in the context of operations taking place in the United States; however, the accounting guidance is applicable to all the operations of the reporting entity.

Legal Obligation

An obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel.

Promissory Estoppel

”The principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise and if the promisee did actually rely on the promise to his or her detriment.”

As mentioned in the question XYZ limited made a public announcement to restore the contaminated environment. This will come under promissory estoppel.

Asset Recognition of an ARO (Asset Retirement Obligation)

Under U.S. GAAP, when an ARO is initially recognized, ASC 410-20-25-5 requires that an entity capitalize its asset retirement cost by increasing the long-lived asset's carrying value by the same amount. ASC 410-20-35-2 requires the asset's retirement cost to be recognized subsequently as expense using a "systematic and rational method" (i.e., depreciated) over the long-lived asset's useful life.