FIN 47: The Future Is Now

For now, "independent auditors are driving this first round of FIN 47 disclosures," says Greg Rogers, president of Advanced Environmental Dimensions, a consulting firm. Audit firms routinely look to each other for rule interpretation precedents and apply them in such a way that they eventually become industrywide practices, he says

But not every company needs such prompting. Consider United Technologies. While the aerospace company's auditors approved its application of FIN 47, its internal accounting team first brought the issue to light. Internal accountants started working on FIN 47 in May, according to Jay Haberland, vice president of business controls at United Technologies.

Companies affected by FIN 47 will likely hail from the industrial sector, and include utility, refinery, mining, and chemical companies, says Doug Reynolds, a national office partner with auditor Grant Thornton. He adds that those are the companies with enough capital to build a facility large enough to affect the environment and therefore require a cleanup contract before receiving siting permits.

Nevertheless, Reynolds points out that any company with an official pact obligating it to clean up before shuttering a site could be affected, including tiny neighborhood dry cleaners or home-heating-oil companies with oil storage tanks.

Further, financially troubled companies may not fare well under FIN 47 unless they have already recognized the risk. For example, booking a significant liability could tip the balance sheet of a distressed company into bankruptcy, Rogers contends.

At the same time, companies' ability — or inability — to estimate their liabilities remains a major bone of contention. Estimating the future cost is complicated by unclear accounting rules, changing environmental laws, lack of accurate data about remediation fees, and new discoveries of polluted sites, according to companies that have filed comment letters on the subject with FASB. In other words, says McGladrey's Hanson, some companies may claim that they have no idea of how to accurately estimate their future environmental liabilities.

Under the new regime, however, those companies must disclose to shareholders that estimating future clean-up liabilities is virtually impossible for them. The upside to such a statement is that the charge, if there's any, could likely be low-balled. The downside is that admitting that future liabilities are unknown might be an open invitation to investor criticism, scrutiny into controls weaknesses, or a shareholder lawsuit.

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