But when does transparency become speculation?
Estimating costs accurately for remediation work is difficult. Add to that difficulty the uncertainty that the work will be undertaken, or the property will be sold as is. Complete the estimate in the face of changing regulations and newly discovered contaminants. This defines speculation.
Sarbanes-Oxley combined with new trends in accounting implies these costs must be estimated and property values written down.
Yet, if property values are decreased with an environmental liability, what happens when a company then chooses to remediate the contamination?
The costs associated with the clean up are expensed.
Your books just took a double hit, and there is no provision to reduce the liability until the building is sold.
Good risk management can help avoid this situation.
First, avoid spills and contamination by using proper handling and secondary containment. If spills occur, clean them up immediately.
Perform, or have an environmental professional complete, a survey of all current conditions which could lead to property devaluation. Fix the problems you can.
Review your environmental liability insurance options. In other words, think about pre-funding any contamination loss. Like fire insurance, once the claim occurs, the building is worth less. The fire insurance will either pay the actual cash value (economic loss) or rebuild the structure (physical loss)
If you accept the actual cash value, the building value decreases and your cash position increases for no net gain. If you rebuild, the books do not change.
What happens when the building burns, and you’re uninsured? You still must account for the loss with a reduced property value.
Look at environmental liability with the fire insurance analogy in mind. If you insure against environmental impacts and one occurs, you will then have the option as to how you want to handle the claim.
