Waste Management 2007 Annual Report Download - page 98

Final Capping, Closure and Post-Closure Costs — Following is a description of our asset retirement activities
and our related accounting:
•Final Capping — Involves the installation of flexible membrane liners and geosynthetic clay liners,
drainage and compacted soil layers and topsoil over areas of a landfill where total airspace capacity has
been consumed. Final capping asset retirement obligations are recorded on a units-of-consumption basis as
airspace is consumed related to the specific final capping event with a corresponding increase in the landfill
asset. Each final capping event is accounted for as a discrete obligation and recorded as an asset and a
liability based on estimates of the discounted cash flows and capacity associated with each final capping
event.
•Closure — Includes the construction of the final portion of methane gas collection systems (when required),
demobilization and routine maintenance costs. These are costs incurred after the site ceases to accept waste,
but before the landfill is certified as closed by the applicable state regulatory agency. These costs are accrued
as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding
increase in the landfill asset. Closure obligations are accrued over the life of the landfill based on estimates of
the discounted cash flows associated with performing closure activities.
•Post-Closure — Involves the maintenance and monitoring of a landfill site that has been certified closed by
the applicable regulatory agency. Generally, we are required to maintain and monitor landfill sites for a
30-year period. These maintenance and monitoring costs are accrued as an asset retirement obligation as
airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Post-
closure obligations are accrued over the life of the landfill based on estimates of the discounted cash flows
associated with performing post-closure activities.
We develop our estimates of these obligations using input from our operations personnel, engineers and
accountants. Our estimates are based on our interpretation of current requirements and proposed regulatory changes
and are intended to approximate fair value under the provisions of SFAS No. 143. Absent quoted market prices, the
estimate of fair value should be based on the best available information, including the results of present value
techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post-
closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for
similar work to determine the fair value of these obligations. We are required to recognize these obligations at
market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where
we perform the work with internal resources, the incremental profit margin realized is recognized as a component of
operating income when the work is performed.
Additionally, an estimate of fair value should also include the price that marketplace participants are able to
receive for bearing the uncertainties inherent in these cash flows. However, when using discounted cash flow
techniques, reliable estimates of market premiums may not be obtainable. In the waste industry, there is generally
not a market for selling the responsibility for final capping, closure and post-closure obligations independent of
selling the landfill in its entirety. Accordingly, we do not believe that it is possible to develop a methodology to
reliably estimate a market risk premium. We have excluded any such market risk premium from our determination
of expected cash flows for landfill asset retirement obligations.
Once we have determined the final capping, closure and post-closure costs, we inflate those costs to the
expected time of payment and discount those expected future costs back to present value. During the years ended
December 31, 2007 and 2006, we inflated these costs in current dollars until the expected time of payment using an
inflation rate of 2.5%. We discount these costs to present value using the credit-adjusted, risk-free rate effective at
the time an obligation is incurred consistent with the expected cash flow approach. Any changes in expectations that
result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current
rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As
a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to
63
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)