1996 Electronics Industry Environmental Roadmap - Civil and ...

Appendix H
liabilities [42]. Emerging Issues Task Force (EITF) Issue No. 90-8 considered whether
environmental cleanup costs should be capitalized or expensed once they were disclosed.
Statement 5 requires an accrued provision for losses if the amount of the loss can be reasonably
estimated and if the likelihood of a loss is probable. Footnote disclosure of the contingent loss is
appropriate if the likelihood of the loss is at least reasonably possible. Finally, no disclosure of
contingent losses is required when the likelihood of such a loss is remote.
Because many environmental liabilities, especially those associated with CERCLA site cleanup
costs, are difficult to estimate with any degree of certainty, often those costs are not disclosed
under GAAP [42, 43]. In addition, the Securities and Exchange Commission can issue pronouncements
that supplement (and may even take precedence over) GAAP. The Securities and
Exchange Commission can require these accounting changes only from publicly-traded firms.
These additional accounting requirements (e.g., disclosures in the Management’s Discussion and
Analysis section) are reviewed by the firm’s independent auditors for inconsistencies with the
financial statements, but are not covered by auditor’s letter of opinion. Currently, the SEC requires
the following additional disclosure regarding contingent liabilities: contingencies must be
estimated and disclosed even when it is expected that the loss will not be material, but when
there is at least a reasonable possibility that a loss exceeding amounts already recognized may
have been incurred and the amount of that additional loss would be material to a decision to buy
or sell the registrant’s securities [44]. Slightly stricter guidelines regarding disclosure of
contingent environmental liabilities are currently being considered by the American Institute of
Certified Public Accountants [45].
International Accounting Standards Relating to Disclosure of Contingent Liabilities
International Accounting Standards are issued by the International Accounting Standards
Committee, but are not mandatory in a specific country until they have been adopted by that
country. Under International Accounting Standards, contingent losses should be accrued if it is
probable that future events will confirm that, after taking into account any related probable
recovery, an asset has been impaired or a liability incurred at the balance sheet date, and a
reasonable estimate of the amount of the resulting loss can be made ([41], p. IAS-15). If these
conditions for accrual are not met, contingent losses should be disclosed unless the possibility of
loss is remote.
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