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Analyzing and estimating environmental liabilities

Merck & Co. included the following footnote in its 2011 annual report:

Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at a few of its sites. Expenditures for remediation and environmental liabilities were $25 million in 2011, $16 million in 2010 and $17 million in 2009, and are estimated at $93 million in the aggregate for the years 2012 through 2016. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in management's opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $171 million at December 31, 2011. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $133 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company's financial position, results of operations, liquidity, or capital resources for any year.

Please answer:
a) How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2011, how much were these liabilities?

b) How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2011, how much were these liabilities?

c) The footnote mentions $171 million and $93 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.

Solution Preview

a. How does Merck account for environmental liabilities that are probable and reasonably estimable? The company takes an active role in identifying and providing these costs. At December 31, 2011, how much were these liabilities? Merck accrued and totaled $171 million for the probable and reasonably estimable.

b. How does Merck account for environmental liabilities that are reasonably ...

Solution Summary

The expert examines analyzing and estimating environmental liabilities. Merck accounts for environmental liabilities that are probable and reasonly estimable are determined.

$2.19