Recognition, Measurement and Disclosure of Environmental Liabilities

During the past fifteen years, environmental legislation has proliferated at the federal, state and local levels. There is evidence that corporate executive and director attitudes have begun to reflect a greater awareness of, and increasing sensitivity to environmental issues. However, much of this same evidence shows a disparity between the perceived importance of environmental issues, and the quality of environmental disclosure in publicly available financial statements. In part, the existence of this disparity has been tentatively attributed to a lack of detailed accounting standards relating to environmental issues, and to a reluctance on the part of corporate management to fully apply existing standards that would facilitate more complete disclosure. To deal with the demands for improved financial reporting, the accounting profession must confront fundamental questions relating to timing (i.e., determining when a loss becomes sufficiently probable to require accrual and recognition in the financial statement), recognition, (i.e., formally recording or incorporating an item in the financial statements), measurement (i.e., determining the value at which to record a probable loss), and disclosure (i.e., given the uncertainties surrounding the loss, determining where (and how) in the financial statements the facts should be communicated). These questions are closely interrelated, and will almost certainly require reliance on outside expertise to provide the information necessary to make informed professional judgments. The paper undertakes to review current standards and practices with regard to the recognition, measurements, and disclosure of environmental related liabilities in corporate financial statements. Its purpose is twofold: to establish the nature and extent of current requirements and practices; and to identify emerging trends likely to result in demands for still more detailed disclosure. Keywords: Pollution, Financial Reporting