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This excerpt taken from the ECOL 10-K filed Mar 9, 2007. Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements require us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates included in our critical
accounting policies discussed below and those accounting
policies and use of estimates discussed in Notes 2 and 3 to
our consolidated financial statements. We base our estimates on
historical experience and on various assumptions and other
factors we believe to be reasonable, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. We make adjustments to judgments and estimates based on
current facts and circumstances on an ongoing basis.
Historically, actual results have not significantly deviated
from those determined using the estimates described below or in
Notes 2 and 3 to the consolidated financial statements.
However, actual amounts could differ materially from those
estimated at the time the consolidated financial statements are
prepared.
We believe the following critical accounting policies are
important to understand our financial condition and results of
operations and require management’s most difficult,
subjective or complex judgments, often as a result of the need
to estimate the effect of matters that are inherently uncertain.
Revenue
Recognition
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the price is fixed or determinable, and collection is reasonably
assured. We recognize revenue from three primary sources:
1) waste disposal revenue, 2) waste treatment revenue
and 3) waste transportation services. Waste treatment and
disposal revenue result primarily from fees charged to customers
for treatment
and/or
disposal services. Transportation revenue results from fees
charged to customers for the cost of delivering waste in
possession of a customer to one of our disposal facilities for
treatment
and/or
disposal. Revenue is generally charged on a per-ton or per-yard
basis based on contracted prices and recognized as services are
performed and the waste is disposed of in our landfills. Burial
fees collected from customers and paid to the respective states
are not included in revenue. Revenue and associated cost from
waste that have been received but not yet treated and disposed
of in our landfills are deferred until disposal occurs.
Our Richland, Washington disposal facility is regulated by the
Washington Utilities and Transportation Commission
(“WUTC”), which sets and regulates rates for its
disposal of LLRW. Annual revenue levels are established based on
an agreement with the WUTC at amounts sufficient to cover the
costs of operation and provide us with a reasonable profit.
Per-unit
rates charged to LLRW customers during the year are based on
disposal volumes and radioactivity projections submitted by us
and approved by the WUTC. If annual revenue exceeds the approved
levels set by the WUTC, we are required to refund the excess
collections to facility users on a pro-rata basis. Our current
rate agreement expires in 2007. A new rate agreement is expected
to be in place for 2008 rates.
Table of Contents
Disposal
Facility Accounting
In general terms, a cell development asset exists for the cost
of building usable disposal space and a closure liability exists
for closing, maintaining and monitoring the disposal unit once
this space is filled. Major assumptions and judgments used to
calculate cell development assets and closure liabilities are as
follows:
Share
Based Payments
We grant stock options to purchase our common stock to certain
employees under the 1992 Employee Stock Option Plan. We also
grant directors and certain employees restricted stock awards
under the 2005 Director Stock Plan and the 2006 Employee
Stock Plan. Additionally, we have outstanding options that were
granted under option plans from which we no longer make grants.
The benefits provided under all of these plans are subject to
the provisions of revised SFAS No. 123 (SFAS 123
R), Share-Based Payment, which we adopted effective
January 1, 2006. We elected to use the modified prospective
application in adopting SFAS 123 R and, therefore, have not
restated our results for prior periods. The valuation provisions
of SFAS 123 R apply to new awards and to awards that are
outstanding on the adoption date and subsequently modified or
cancelled. Our results of operations for 2006 were impacted by
the recognition of non-cash expense related to the fair value of
our share-based compensation awards. Share-based compensation
expense recognized under SFAS 123 R for the year ended
December 31, 2006 was $392,400.
The determination of fair value of stock option awards on the
date of grant using the Black-Scholes model is affected by our
stock price and subjective assumptions. These assumptions
include, but are not limited to, the expected term of stock
options and expected stock price volatility over the term of the
awards. Our stock options have characteristics significantly
different from those of traded options, and changes in the
assumptions can materially affect the fair value estimates.
SFAS 123 R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. When actual
forfeitures vary from our estimates, we recognize the difference
in compensation expense in the period the actual forfeitures
occur or when options vest.
Table of Contents
Income
Taxes
Income taxes are accounted for using an asset and liability
approach using SFAS No. 109, Accounting for Income
Taxes, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the financial statement and tax
basis of assets and liabilities at the applicable tax rates.
Deferred tax assets are required to be evaluated for the
likelihood of use in future periods. A valuation allowance is
recorded against deferred tax assets if, based on the weight of
the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. The
determination of the need for a valuation allowance, if any,
requires management’s judgment and the use of estimates.
During 2003, we did not have tax or book income due to the
write-off of the Ward Valley facility development asset and did
not utilize the deferred tax asset. In evaluating the
$24.3 million of deferred tax assets, we determined that a
valuation account totaling $15.9 million was required. At
June 30, 2004, we reassessed the valuation allowance based
on the sale of our Oak Ridge assets,
2004 year-to-date
pretax income and projections of continued profitability, and
reversed $14.1 million of the valuation allowance. This
resulted in a tax benefit approximating $8.8 million. As of
December 31, 2006, we have net deferred tax assets totaling
$5.3 million which are net of a $2.3 million valuation
allowance. Such valuation allowance relates to state NOLs that
we do not expect to utilize prior to their expiration.
Litigation
We have been involved in litigation requiring estimates of
timing and loss potential whose timing and ultimate disposition
is controlled by the judicial process. During 2003, we recorded
a $21.0 million loss following an adverse trial court
ruling in California that cast significant doubt on our ability
to recover our investment in the formerly proposed Ward Valley
LLRW disposal site. Conversely, until August 2005 we held a
$6.5 million deferred site development asset for a share of
the monetary damages specified in an August 2004 settlement
agreement between the Central Interstate Compact Commission
(“CIC”) and the State of Nebraska. In August 2005, the
State of Nebraska paid the CIC and the CIC paid us
$11.8 million fully resolving our claim. The decision to
accrue costs or write off assets is based on the pertinent facts
and our evaluation of present circumstances. As of
December 31, 2006, we are not aware of any legal actions,
asserted or unasserted, against us that would be material to the
consolidated financial statements.
Accounting
for the 2004 Texas Fire
On July 1, 2004, a fire in the Robstown, Texas
facility’s waste treatment building resulted in a property
claim for property and equipment damage as well as lost revenue
from business interruption. As a result, we recognized an
impairment charge of $679,000 for the book value of assets
damaged in the fire and recognized $905,000 of property
insurance proceeds in 2004. During 2006, we reached final
settlement on our business interruption insurance claim. The
total claim was for approximately $2.1 million of which we
had previously recognized $1.3 million in our statement of
operations. The remaining $704,000, after deducting
approximately $34,000 in additional expenses related to the
claim preparation, was recognized in our statement of operations
in 2006. As of September 30, 2006, we had collected the
full settlement amount from the insurance company.
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