Environmental and Other Obligations associated with long-lived Assets

This page describes complex accounting for environmental and other obligations associated with tangible assets.


Local, state and federal environmental regulations may require companies to perform remediation and site restoration activities based on historical or current operations, and impacts from acquisitions.

Companies may also incur Asset Retirement Obligations (AROs): the legal obligations associated with the retirement of long-lived assets (e.g. facilities, structures, equipment, land disturbance, highly customized installations, etc.) regardless of environmental impact.

Environmental exposures and AROs can impact a Company’s long-term profitability and must be appropriately reflected in financial statements. They can be especially significant in certain sectors, including but not limited to:

  • Energy
  • Chemicals
  • Metals
  • Mining
  • Utilities
  • Automotive
  • Industrial Manufacturing
  • Defense

Financial Reporting Complexities

The practice of applying accounting guidance related to environmental liabilities and AROs in financial statements is extremely diverse, subjective and challenging— especially given the need to integrate engineering professionals in the estimation process.

Review of recent SEC comment letters show there are certain technical issues related to environmental liabilities and AROs that often attract regulatory scrutiny. These include:

  • Consideration of additional losses that may be reasonably possible
  • Assertions around the inability to develop an estimate
  • Use of recoveries/salvage value in estimation
  • Classification of the liabilities
  • Industry-specific events
  • Management estimates and related disclosures

Implementation Considerations

  • Diligence and Financial Reporting: Consider the valuation of the associated liabilities and their impacts on financial statements and future earnings.
  • Investor Communication: Consider how to inform investors who need understand how environmental and other sustainability issues may impact target businesses, and whether there are opportunities to minimize risks, drive out costs and enhance revenues.
  • Operational Considerations: Determine how to best integrate accounting, engineering and technical expertise to address the required business, regulatory, and financial reporting requirements.