If Your Head Is in the Sand, Your Assets Are Exposed

by Greg Rogers

It is said that you cannot manage what you cannot measure. Might this axiom explain in part why U.S. corporations have for decades tended to fence off contaminated properties rather than seek to sell or redevelop them?

One thing is for sure; until recently, U.S. accounting standards have not encouraged corporations to measure and report brownfield asset values and liabilities. For those inclined to do so, generally accepted accounting principles (GAAP) have made it easy for corporations to ignore the contaminated sites in their real estate portfolios. Contaminated properties have traditionally been “missing in action” on U.S. corporate balance sheets. But that is starting to change.

A new accounting pronouncement that took effect in December 2005 is driving corporations to identify, assess, measure and report a broad range of environmental legal obligations associated with owned and leased properties having known or suspected environmental impairments. This new accounting standard comes in the wake of Sarbanes-Oxley and at a time when corporate financial reporting is subject to greatly increased scrutiny.

Today, if your head is in the sand, your assets are exposed. Together, FIN 47 and Sarbanes-Oxley promise to transform environmental financial reporting from MIA (missing in action) to WYSIWYG (what you see is what you get). The increased pressure for environmental transparency is already affecting the brownfield marketplace and more changes are sure to come.

Understanding FIN 47
Financial Accounting Standards Board (FASB) Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations (AROs), represents a revolutionary expansion in the scope of environmental obligations deemed to be “liabilities” under generally accepted accounting principles (GAAP). For the first time, legal obligations associated with the future retirement of property, plant and equipment are considered existing liabilities, even if the timing or method of settlement of these obligations is conditional on future events.

For example, the regulatory obligation to abate asbestos-containing materials (ACM) prior to demolishing a building must be reported as a liability today, even though the owner of the building has no current plans to demolish the building. That is revolutionary!