Landfill Development Costs

3 Months Ended

Jun. 30, 2011

NOTE 4. LANDFILL DEVELOPMENT COSTS

Landfill development costs consisted of the following:

	June 30, 2011			December 31, 2010

Machinery and equipment	$	1,223,124		$	1,197,396
Landfill		2,389,999			2,339,725
Construction in progress		3,819,768			3,689,304
Advances to suppliers		4,315,946			4,215,693
Subtotal		11,748,837			11,442,118
Less: accumulated depreciation		(4,575,241	)		(3,814,934	)
Total Landfill development costs, net	$	7,173,596		$	7,627,184

Landfill development costs represent the capitalized expenses attributable to the construction of the Harbin landfill. Landfill development costs are amortized using a units of measure method over the contract term, commencing when the landfill was first put into use. The Company amortizes estimated total landfill development costs (currently estimated at $17.2 million), using the ratio of actual tonnage disposed in the landfill in proportion to the total anticipated capacity of the landfill, based on the Company’s assessment that it is probable that the Company will continue to utilize the Harbin landfill for the full term of the Build-Operate-Transfer (“BOT”) agreement and that, in that period, the landfill will be filled to capacity. The Company determined that the units of measure method of accounting for landfill development costs more accurately correlates the cost of building the landfill with the revenue recognized with each ton of waste disposed of in the landfill over the life of the landfill.

Landfill development costs also include advances to suppliers representing payments made for machinery, supplies and equipment related to the construction of the landfill. The Company made a determination that it would not establish a reserve against the advances to suppliers that are included in landfill development costs on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010. The determination was based on the continuance of operations at the Landfill, and the probability that the advances will be utilized for purchase of construction materials and equipment during the next two years. The Company also determined that depreciation of equipment over the life of the landfill was appropriate, as the equipment is, for the most part, heavy earth-moving equipment with a useful life approximately equal to the term of the BOT Agreement. In addition, the BOT Agreement provides that equipment used at the landfill will be surrendered to HMUAB upon termination of the BOT Agreement.

The Company has no obligations relating to capping, closure or other post-closure obligations; accordingly no reserve for post-closure activities has been established.

The landfill will be constructed over a period of years as one (1) whole unit. However, the construction will be completed in different stages in order to comply with certain structural requirements. In order to start the next phase of construction, the prior phase must be completed. The Company anticipates the total landfill capacity of approximately 7.8 million tons. That estimate is made on a gross basis, however. The tonnage actually deposited should exceed the estimate, due to (a) the fact that we reduce the space used by removing recyclables, and (b) the fact that organic material included in the tonnage degrades and uses a reduced space.

The build outs to accommodate the gross estimate are as follows;

	●	Phase 1 totals approximately 1.60 mil tons (below ground and 20.51% of total tonnage)
	●	Phase 2 totals approximately 0.67 mil tons (below ground and 8.59% of total tonnage)
	●	Phase 3 totals approximately 1.00 mil tons (below ground and 12.82% of total tonnage)
	●	Phase 4 totals approximately 4.53 mil tons (above ground and 58.08% of total tonnage)

Each earlier phase acts to support the later phases, meaning the next phase cannot commence until the prior phase is constructed and filled with waste. Moreover, the revenue generation is for the entire period of landfill operations. Since the Company believes the cost structure should mirror the fundamental interrelationship of all four phases, the Company has evaluated the total cost of completing the full construction of the landfill and viewed the landfill as one (1) unit for accounting purposes.

Interest expense in the amount of $37,290 was capitalized for the three months ended June 30, 2010, and in the amount of $78,059 was capitalized for the six months ended June 30, 2010. The capitalized interest is amortized as landfill development costs. No interest expense was capitalized during the six months ended June 30, 2011 because the Company has completed the Phase 1 construction and has not started the Phase 2 construction.

The Company reviews its estimate of the total construction cost of the landfill at the end of each quarter. The estimate, revised if necessary, is then converted from RMB to dollars based on the historical conversion rate for previously capitalized costs and the current conversion rate for estimated future costs. As of June 30, 2011, the Company estimated that the total construction for the landfill will be $17,235,000, which was consistent with the Company’s estimate as of December 31, 2010. These costs are for the completion of the three underground phases with minimal costs expected for the 4th phase above ground.

Landfill amortization expense for the three months ended June 30, 2011 and 2010 was $338,250 and $316,09, respectively. Landfill amortization expense for the six months ended June 30, 2011and 2010 was $669,152 and $617,236,respectively. During the six months ended June 30, 2011 and 2010, the Company disposed of 270,787 tons of waste and 260,356 tons of waste, respectively, in the landfill.

The following table shows landfill usage during the three and six month periods ended June 30, 2011 and 2010:

	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30,2011			Six Months Ended June 30, 2010
Estimated total landfill capacity (tons)		7,800,000			7,800,000			7,800,000			7,800,000
Total cumulative tons disposed in landfill		1,826,406			1,282,991			1,826,406			1,282,991
Percentage of landfill used		23.4	%		16.4	%		23.4	%		16.4	%

Total tons disposed during period		136,335			133,501			270,787			260,356
Percentage of landfill used		1.75	%		1.71	%		3.47	%		3.34	%

Eastern Environment Solutions Corp. 10-Q