GENERAL SECTION

Balancing Forces in Setting
Financial Reserves for Remediation

BACKGROUND
Setting financial reserves for environmental remediation liabilities is an integral part of balancing the financial obligations of a company to shareholders with the need to reinvest capital for growth. While the American Institute of Certified Public Accountants (AICPA) sets standards for estimating and reporting environmental remediation liabilities, the specific application of their guidance is open to interpretation. There is a great deal of uncertainty among environmental managers how to apply these standards, particularly in cases when decision makers are attempting to account for short-term capital intensive remedies and long-term remedies with significant operation and maintenance expenses.

ISSUES IN ESTIMATING RESERVES
The AICPA Statement of Position 96-1 Environmental Remediation Liabilities sets standards for when environmental liabilities should be recognized and how to reasonably estimate the liability. In general the liability should be recognized if:

Litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or assessment is probable.

And

Based on available information, it is probable that the outcome of such litigation, claim, or assessment will be unfavorable.

The financial reserves to an environmental remediation liability should be set at either a most probable value, or, if due to uncertainty it is only possible to estimate a range of probable cost, the low end of the range of probable cost.

It is at the point of determining the range of potential remediation costs or the most probable cost where most environmental managers have difficulty. The reserve setting process is often confused with the annual budgeting process, which has a different purpose. While the annual budget is an assignment of financial resources for the following year, the accrual process looks beyond the next year into the entire project lifespan. The conflict generally comes more from ambiguous project goals, resulting from a reactionary approach to environmental matters, than from project uncertainty. While project uncertainty is resolved as data is developed, ambiguous project goals are resolved by project management.

RESOLVING THE CONFLICT
A comprehensive environmental management system can accommodate both the accrual setting and budgeting process because it manages the uncertainty in environmental projects. Through using tools such as influence diagrams, decision trees cost-benefit analysis, and risk analysis the project uncertainty, whether regulatory, extent of contamination, or effectiveness of a remediation system, can be resolved to develop clear project objectives, contingency plans and a more certain range of probable cost.

CONCLUSION
The conflicts between business objectives and the accrual process can be resolved through management techniques and tools available to deal with uncertainty. The Payne Firm has assisted clients to incorporate this approach in their environmental management system and strategic planning. For more information about setting environmental reserves, feel free to contact Mike Saul or Dan Weed at (513) 489-2255 or via e-mail at mts@paynefirm.com or ddw@paynefirm.com.