An environmental liability exists when there is a requirement, based on statute, regulation, or legal agreement to perform cleanup (i.e., removal, containment, disposal) from federal operations that resulted in hazardous waste. Environmental liabilities must be recognized on the financial statement for probable and measurable future outflows or expenditure of resources for environmental cleanup, closure, and/or disposal actions, in accordance with Technical Release Number 2. A probable environmental liability exists when it is more likely than not that hazardous waste resulted from operations where the Department of Defense (DoD) was likely involved. A measurable environmental liability exists when a dollar value can be estimated for the cleanup costs or study needed to define further cleanup parameters.

Accounting definitions for common environmental terms are established by the Federal Accounting Standards Advisory Board (FASAB) based on Generally Accepted Accounting Principles. The following definitions from the FASAB Standards and the DoD Financial Management Regulations (FMR) must be followed to correctly report environmental liabilities:

Environmental Liability: For financial reporting purposes, a DoD environmental liability is a future outflow or expenditure of resources that exists as of the financial reporting date for environmental cleanup, closure, and/or disposal costs resulting from past transactions or events. A DoD environmental liability exists when:

• Contamination is present or likely to be present;
• Environmental cleanup, closure, and/or disposal is required by lease contracts, federal, state, and/or local statute, regulation, or other legal agreement; and
• The operations that created the liability are DoD related.

An environmental liability may also exist if environmental contamination is not DoD related, but DoD enters into a binding agreement that formally accepts financial responsibility for cleanup, closure, and/or disposal.

Environmental Cleanup, Closure, and/or Disposal Costs: For financial statement reporting purposes, the term "environmental cleanup costs" includes costs associated with environmental restoration of environmental sites funded under the DERP, corrective actions, and environmental costs associated with the future closure of operations, including closure and disposal of property, plant, and equipment (PP&E). These costs include the costs of researching and determining the existence of hazardous waste, removing, containing, and/or disposing of hazardous waste from personal or real property, and/or personal or real property that consist of hazardous waste at the time of shutdown or disposal. Cleanup costs may include, but are not limited to, decontamination, decommissioning, site restoration, site monitoring, closure, and post closure costs related to DoD operations that result in hazardous waste. This is consistent with the definition of environmental cleanup costs per the Statement of Federal Financial Accounting Standards (SFFAS) No. 6.

Hazardous Waste: Per SFFAS Number 6 the definition of hazardous waste used in conjunction with environmental cleanup costs defined above, is a solid, liquid, or gaseous waste, or combination of these wastes, which because of its quantity, concentration, or physical, chemical, or infectious characteristics, may cause or significantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness or pose a substantial present or potential threat to human health or the environment when improperly treated, stored, transported, disposed of, or otherwise managed. As noted in Technical Bulletin 2006-1 the term "hazardous waste" as defined in SFFAS Number 6 was developed by consulting environmental laws such as the Resource Conservation Recovery Act (RCRA), however the general use of the term in federal accounting standards should not be construed as limiting the application of the standards solely to those materials meeting the definition of "hazardous waste" under RCRA.

DoD accounting policy for environmental liability is contained in the DoD FMR Volume 4, Chapter 13. This guidance must be used in conjunction with the Army's accounting policy.

The 1990 Chief Financial Officers (CFO) Act requires DoD to report liabilities, including environmental liabilities, in financial statements as is done in the private sector. These requirements were expanded through subsequent legislation including the Government Performance and Results Act (GPRA), the Government Management Reform Act (GMRA), and the Federal Financial Management Improvement Act (FFMIA). These statutes require the federal government to make financial management more effective, improve financial management systems, and provide accurate, complete, reliable, timely, and auditable information for managerial and congressional reporting.

In addition to meeting legal requirements, the Federal Accounting Standards Advisory Board states the objectives of federal financial reporting to be budgetary integrity, operating performance, stewardship, and systems and control. As in the private sector, financial statements provide readers, such as Congress and the public, with a picture of the financial position of the federal government. In addition, environmental liabilities associated with life-cycle cleanup and disposals provide input to programmatic decision-making.

All DoD Components must report their environmental liabilities. At Joint Bases and other cases on host/tenant arrangements, environmental restoration liabilities should be estimated and reported by the Component with responsibility for management and reporting of the associated property, plant and equipment, normally the supporting Component. Exceptions may occur and are defined in the Financial Management Regulations and other DoD policy.

Once the environmental liabilities for restoration, corrective actions and closures are identified, association with a real property asset must be completed. Efforts are underway to meet this requirement.

The Office of the Deputy Undersecretary of Defense, Installations and Environment, Management Guidance for Recognizing, Measuring, and Reporting Non-DERP Environmental Disposal and Closure Liabilities dated November 2005 provides information on reporting for Non-Defense Environmental Restoration Program (DERP) environmental liabilities. The DoD Financial Improvement and Audit Readiness (FIAR) Plan establishes a schedule for achieving an unqualified audit opinion for environmental liabilities that will be sustainable through business process improvement initiatives. The Components are required to meet the key milestones established in the FIAR Plan's Key Milestone Plan.

Cleanup and Closure Environmental Liabilities related to environmental sites and permitted activities
The U.S. Army Environmental Command (USAEC) established and maintains databases, Army Environmental Data Base – Restoration (AEDB-R) and Army Environmental Data Base – Compliance-related Cleanup (AEDB-CC) for use by Army Commands and Direct Reporting Units to track cleanup program requirements used for reporting environmental liabilities as well as other reporting. The AEDB-R is used by USAEC and ACSIM BRAC Division to track and report environmental liabilities associated with the Defense Environmental Restoration Program. The AEDB-CC is used by Army Commands and Direct Reporting Units to track and report environmental liabilities associated with the Compliance-related Cleanup Program. No current data collection system is available for tracking and reporting closure costs that are reported as environmental liabilities.

Environmental Liabilities associated with Property, Plant, and Equipment
The Assistant Secretary of the Army, Acquisition, Logistics, and Technology is the lead agency for providing guidance for the tracking and reporting of environmental liabilities associated with general and military equipment, chemical weapons disposal, and weapons systems disposal.