Waste Management 2015 Annual Report Download - page 144

WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Absent quoted market prices, the estimate of fair value is
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.
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, 2015, 2014 and 2013, we inflated these costs in current dollars until the expected time of payment
using an inflation rate of 2.5%. We discounted 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 each individual asset retirement obligation. The weighted average rate applicable to
our long-term asset retirement obligations at December 31, 2015 is approximately 6.25%. We expect to apply a
credit-adjusted, risk-free discount rate of 4.50% to liabilities incurred in the first quarter of 2016.
We record the estimated fair value of final capping, closure and post-closure liabilities for our landfills
based on the capacity consumed through the current period. The fair value of final capping obligations is
developed based on our estimates of the airspace consumed to date for each final capping event and the expected
timing of each final capping event. The fair value of closure and post-closure obligations is developed based on
our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and
post-closure activity. Because these obligations are measured at estimated fair value using present value
techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities
could result in a material change in these liabilities, related assets and results of operations. We assess the
appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts
change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-
closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset and
(ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the
related discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the
landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in
accordance with our amortization policy, which would generally result in amortization expense being recognized
prospectively over the remaining capacity of the final capping event or the remaining permitted and expansion
airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully
utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding
adjustment to landfill airspace amortization expense.
Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest
method and is recorded as final capping, closure and post-closure expense, which is included in “Operating”
expenses within our Consolidated Statements of Operations.
81