Jones Lang LaSalle


For Contaminated Properties, the Future Is Now
Miele says brownfields could become a big problem.
FIN 47 is forcing companies to ’fess up about their expected environmental cleanup costs
Martin C. Daks
NJBIZ Staff
3/13/2006
SPOTLIGHT - ACCOUNTING

A new accounting regulation with roots in nuclear-plant cleanups could crimp operations for real estate developers and other businesses in New Jersey and elsewhere. Known as FIN 47, the rule forces most companies to accrue, or record, the estimated costs of cleaning up their property even if any actual remediation is years away, so investors are aware of the environmental liabilities. Previously, they didn’t have to recognize the costs until the cleanup started.

FIN 47 doesn’t force a company to actually pony up any cash ahead of an actual cleanup; it forces disclosure. But for one early adopter—Ford Motor Co.—it has already resulted in a $251 million charge to earnings. Local experts say it could drag down reported results for smaller businesses, potentially putting their financial statements and bank loans in jeopardy.

"A lot of companies in a lot of industries could be affected by FIN 47," says Lawrence Gray, head of quality assurance for accounting and auditing services at Amper, Politziner & Mattia in Edison. "If there are known environmental or other issues associated with a property or other kinds of assets, and if a company can reasonably estimate the costs, then FIN 47 generally requires them to book it in the current year regardless of when the cleanup will actually occur."
Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, as it’s formally known, took effect Dec. 15, 2005. The interpretation, from the independent agency that sets most rules for the accounting profession, provides guidance on a statement from 2001 that originally focused on accounting for work with nuclear reactors but was quickly expanded to include environmental and other kinds of cleanups.

Calendar-year companies are required to start using the new treatment by the end of 2006, while businesses on a fiscal-year cycle had to adopt it by the end of their earliest year after Dec. 15, 2005.

Some industry watchers say that real estate developers and others who buy contaminated property to hold for future projects could be at risk under FIN 47. Having to recognize the charge for cleanup costs years before the investment yields any earnings may lead some purchasers to consider an early sell-off of such holdings.

This could affect results for the owners of the $1 trillion worth of brownfields and other contaminated properties across the nation that the Chicago-based National Brownfield Association estimates are held by companies. There are about 13,700 brownfields in New Jersey, according to a 2005 report prepared by the state Department of Environmental Protection.

"We’ve been on the lookout for a wave of properties to come onto the market early," says Donald Eisen, executive managing director of East Rutherford-based Cushman Wakefield. "It’s still early and we haven’t seen a flood of properties yet. But it could easily happen."

But Ira Whitman thinks he’s seen what could be the start of a trend. "We’ve seen some anecdotal evidence that more companies are picking up the pace of their cleanup activity," says Whitman, principal of the Whitman Cos., an East Brunswick-based environmental engineering and management firm. "It could be prompted, in part, by FIN 47."

Ford, which closed its Edison plant in 2004, has already implemented FIN 47. In its December 2005 fourth-quarter and year-end financial statements, the automaker picked up a $251 million charge for anticipated expenses related to asbestos removal from various facilities.

"In New Jersey, FIN 47’s impact is likely to hit hard on businesses with real estate-related contamination issues," says Louis Miele, a partner with the Fairfield CPA firm of Leaf, Saltzman, Manganelli, Pfeil & Tendler. "That’s the No. 1 concern of many companies here."

Gray from Amper Politziner points out that the fallout isn’t limited to real estate. His company’s telecommunications clients, for example, may have to consider the useful life of their telephone poles and other equipment, and establish a balance sheet account to cover the estimated repair and other costs involved in their removal. Each year, they could write off, or charge against income, a pro-rata portion of the estimated costs.

"Wood telephone poles may be treated with certain preservatives or other chemicals, and when it comes time to replace the poles, certain disposal and other costs may be incurred," he says. "Before FIN 47, those costs would usually be expensed when they were incurred. Now, however, it looks like estimates of those future costs will be made in the current period, and a liability for them will be established on the balance sheet. It’s a new rule so the details are still being worked out."

Miele notes that FIN 47’s requirement to book a liability for future cleanup costs could cause trouble for a company that has an existing bank loan. "Increasing the liabilities of an enterprise could place it in violation of a bank’s loan covenants, or restrictions, on obligations," he explains. "This doesn’t mean that banks will necessarily start calling in their loans, especially since the liability may not be due until years down the road, but it is an issue that should be examined now."

E-mail to mdaks@njbiz.com