Question

Remediation Required:

A Brazilian listed entity, Company B, violated environmental regulations by seeping hazardous chemicals from its production plant into a nearby pond. As of 12/31/X1, government regulators are aware of the pollution and plan to take action against the company. Company B anticipates that this action will include fines, plus a requirement to remediate the pollution. What disclosure or accruals are required by Company B? How would this accounting differ if Company B were subject to U.S. GAAP?

Answer 1

Disclosures or accruals are required for the hazardous waste leak -

IAS 37 (Provisions) applies to this issue.

Some considerations:

•Par. 13 of IAS 37 distinguishes between 1) provisions, which are probable outflows arising frompresent obligations, and 2) contingent liabilities, which are possible future outflows. Onlyprovisions, and not contingent liabilities, are recognized as liabilities. Contingent liabilities mustbe disclosed, however.

•Additional discussion ofpresent obligationandpast eventis provided in par. 15-22.

•Appendix C, examples 2A and 2B are also useful for this analysis. Example 2A is likely the closest comparison to our situation, in that legislation (or in our case, government action) is expected, and the entity presumably would not clean up absent government action. In thatexample, the obligating event is defined as the contamination of land, given that legislation is“virtually certain.” Students could argue that in our case, the legislation is not described asvirtually certain. A “plan to take action” on the part of the government leaves more uncertainty asto whether action will actually be taken.

While this example 2A is the closest to our scenario, the differences between our fact pattern and Example 2A are important.Virtually certain meets the probable threshold. Regulators thatplan totake actionlikely does not meet the “probable” threshold. Ultimately, this may depend upon how probableis defined. Par. 23 notes that probable means “more likely than not to occur.” (more than 50% likely.)

Ultimately, this case is a judgment call. A student would not be wrong to argue – on the basis of all evidence collected – that more information is needed to reach a conclusion,potentially based on discussions with company attorneys. There is one word in the case that mayresult in a tipping point, however, and that is: Company B anticipates this action will includefines, plus a requirement to remediate. This appears to point to the Company’s view that a loss is“more likely than not.”Disclosure requirements for provisions are set forth in IAS 37, par. 84-85, and contingent liabilitydisclosures are set forth in par. 86

How does this differ under US GAAP?

ASC 410-30 (Environmental Obligation) applies to contamination that is not part of the normal operationof a plant (par. 15-3a). This topic follows a “FAS 5” (or ASC 450-20) model for requiring recognition ofcontingent liabilities. Namely, a liability should be recognized if:

1) It is probable that a loss has beenincurred, and

2) The loss amount can be reasonably estimated.

Since Company B anticipates that this action will include fines, plus a requirement to remediate the pollution and it is probable that loass has been incurred but they cannot estimate the loss amount so it will not recoreded till loss amount can be reasonably estimated.