The Fruits of Non-Disclosure

By Greg Rogers, JD, CPA

There are two financial reporting standards that might apply to the environmental conditions at the Orchard-Whitney site.

Statement of Financial Accounting Standards No. 143 (FAS 143) governs accounting for legal obligations, including environmental cleanup obligations, associated with the retirement of property, plant, and equipment. This standard applies only to current owners and capital lessees.

Statement of Financial Accounting Standards No. 5 (FAS 5) governs accounting for loss contingencies, including contingent liabilities associated with pending or probable future legal action to compel environmental cleanup. This standard could apply to the current owner, past owners, or any other party with potential liability for cleanup of the site. 

Based on the currently available facts — namely, that the present owner is non-responsive to tax notices and that there is no indication of pending or threatened legal action for environmental damages or to compel site cleanup — it appears that financial reporting considerations are unlikely to be a relevant consideration with regard to the desired cleanup and redevelopment of the Orchard-Whitney site. In addition, financial reporting considerations are unlikely to deter prospective private or governmental entities interested in buying and redeveloping the site.

The case study does not identify the owner of the site but states that the “current owners of record are non-responsive.” The owner(s) is also delinquent on property tax payments. These facts suggest that the owner might not be a going concern and is almost certainly not a public company.

Consequently, it seems unlikely that the current owner will be concerned about whether it should report an asset retirement obligation for cleanup costs on its balance sheet. It seems even more implausible that the owner would choose to clean up the site in order to eliminate its financial reporting obligation. The relevant considerations might be different with regard to a similar brownfield site owned by a public company or a large private enterprise.

There apparently is no pending legal action against the current or former owners to compel them to clean up the site. Furthermore, there is no indication that the assertion of future legal claims is being considered. Recognition of a liability for an unasserted claim for environmental response costs or damages is appropriate only when the following three conditions are satisfied:

1) It is probable that a claim will be asserted.

2) An adverse outcome is probable.

3) The amount of the loss can be reasonably estimated.

Because these conditions are not satisfied in this case, none of the potentially responsible parties, including General Motors Corporation, will be compelled to recognize a contingent environmental liability for the Orchard-Whitney site. Consequently, financial reporting considerations under FAS 5 provide little incentive for such parties to voluntarily clean up the site in order to eliminate the liability.

I would not expect the obligation to record a liability for cleanup costs under FAS 143 not previously defined to deter a prospective private developer from buying and redeveloping the site, because a commitment to clean up the site will undoubtedly be a central component of any such acquisition.

Governmental entities are not currently required to account for asset retirement obligations under applicable governmental accounting standards. By cleaning up the site, a new buyer would likely eliminate any significant chance of future contingent legal liabilities reportable under FAS 5. Therefore, financial reporting considerations are not likely to be a significant consideration for private or governmental entities considering the purchase and redevelopment of the site. BFN

C. Gregory Rogers, J.D., CPA, is “of counsel” with Guida, Slavich & Flores, president of C.G. Rogers & Co, LLC, and the author of Financial Reporting of Environmental Liabilities and Risks After Sarbanes-Oxley.

Read Rochester’s Poster Child, the case study this article is based on, and other expert advice on the Orchard-Whitney site from the varying perspectives of the Brownfield News editorial board:
DEVELOPER’S DEPARTMENT Can you find a good apple in this orchard?
TECHNICAL DEPARTMENT What a personality!
INSURANCE DEPARTMENT Perfume and lipstick to help developers see past flaws
ACCOUNTING DEPARTMENT Financial reporting considerations not a deterrent
COMMUNITY DEPARTMENT A good place for all of us to live in
OWNER’S DEPARTMENT A potential for renaissance
U.S. EPA DEPARTMENT The classic brownfield story line

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