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 managements most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain.
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.
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.
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 managements 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.
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 facilitys 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.