Module II· EV-Equity BridgeAdvanced
Question
How do you treat environmental liabilities in the bridge?
Answer
Mechanics
Environmental reserves (site cleanup, decommissioning, asbestos) are debt-like and are deducted after-tax from EV. At industrials they are often significant − legacy contamination risks from historical sites (chemical sites, former gasworks, mining).
IFRS accounting
"Probable" reserves land on the balance sheet; "possible" risks appear only in the notes as contingent liabilities.
Treatment
- Deduct reserved amounts × (1 − t) from EV.
- Disclosed-but-not-reserved risks as a sensitivity item.
- In capital-intensive sectors (mining, energy, old industrials), decommissioning reserves are often 5–15% of EV.
Deep diveShow more details
Pitch tip
'Environmental reserves $60m on the balance sheet, an additional $40m disclosed in the notes − base-case bridge $42m after-tax; sensitivity adds $28m if disclosed-but-not-reserved items materialize.'