CPA AFR: Environmental accounting
ADVANCED FINANCIAL REPORTING
Environmental accounting is a subset of accounting proper, its target being to incorporate both economic and environmental information. It can be conducted at the corporate level or at the level of a national economy through the System of Integrated Environmental and Economic Accounting, a satellite system to the National Accounts of Countries (among other things, the National Accounts produce the estimates of Gross Domestic Product otherwise known as GDP).
Environmental accounting is a field that identifies resource use, measures and communicates costs of a company’s or national economic impact on the environment. Costs include costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs.
An environmental accounting system consists of environmentally differentiated conventional accounting and ecological accounting. Environmentally differentiated accounting measures effects of the natural environment on a company in monetary terms. Ecological accounting measures the influence a company has on the environment, but in physical measurements.
What is environmental accounting?
The following list encompasses the major aspects of environmental accounting.
(a) Recognising and seeking to mitigate the negative environmental effects of conventional accounting practice.
(b) Separately identifying environmentally related costs and revenues within the conventional accounting systems.
(c) Devising new forms of financial and non-financial accounting systems, information systems and control systems to encourage more environmentally benign management decisions.
(d) Developing new forms of performance measurement, reporting and appraisal for both internal and external purposes.
(e) Identifying, examining and seeking to rectify areas in which conventional (financial) criteria and environmental criteria are in conflict.
(f) Experimenting with ways in which, sustainability may be assessed and incorporated into organisational orthodoxy.’
Environmental accounting is organized in three sub-disciplines: global, national, and corporate environmental accounting, respectively. Corporate environmental accounting can be further sub-divided into environmental management accounting and environmental financial accounting.
- Global environmental accountingis an accounting methodology that deals areas includes energetics, ecology and economics at a worldwide level.
- National environmental accountingis an accounting approach that deals with economics on a country’s level.
- Corporate environmental accountingfocuses on the cost structure and environmental performance of a company.
- Environmental management accountingfocuses on making internal business strategy decisions. It can be defined as: “..the identification, collection, analysis, and use of two types of information for internal decision making:
- Physical information on the use, flows and fates of energy, water and materials (including wastes) and
- Monetary information on environmentally related costs, earnings and savings.
- Environmental financial accountingis used to provide information needed by external stakeholders on a company’s financial performance. This type of accounting allows companies to prepare financial reports for investors, lenders and other interested parties
Let us consider the major areas of impact on (any) accountant’s job caused by consideration of
(a) Management accountant
(i) Investment appraisal: evaluation of environmental costs and benefits
(ii) Incorporating new costs, capital expenditure and so on, into budgets and business plans
(iii) Undertake cost/benefit analysis of any environmental improvements
(b) Financial accountant
(i) The effect of revenue costs: site clean up costs, waste disposal or waste treatment costs and so on, which will affect the statement of profit or loss and other comprehensive income
(ii) Gauging impacts on the statement of financial position, particularly liabilities, contingencies,provisions and valuation of assets.
(iii) The effect of environmental matters, and particularly potential liabilities, on a company’s relationship with bankers, insurers and major shareholders (institutional shareholders)
(iv) Environmental performance evaluation in annual reports
(c) Project accountant
(i) Environmental audit of proposed takeovers, mergers and other planning matters
(ii) Investment appraisal
(d) Internal auditor: environmental audit
(e) Systems accountant: effect on, and required changes to management and financial information systems Financial reporting
There are no disclosure requirements relating to environmental matters under IFRSs, so any disclosures tend to be voluntary unless environmental matters happen to fall under standard accounting principles (eg recognising liabilities).
(a) In most cases disclosure is descriptive and unquantified.
(b) There is little motivation to produce environmental information and many reasons for not doing so, including secrecy.
(c) The main factor seems to be apathy on the part of businesses but more particularly on the part of shareholders and investors. The information is not demanded, so it is not provided.
Environmental matters may be reported in the accounts of companies in the following areas:
- Contingent liabilities
- Exceptional charges
- Operating and financial review comments
- Profit and capital expenditure forecasts
The voluntary approach contrasts with the position in the United States, where the SEC/FASB accounting standards are obligatory.
While nothing is compulsory, there are a number of published guidelines and codes of practice, including:
- The Confederation of British Industry’s guideline Introducing Environmental Reporting
- The ACCA’s Guide to Environment and Energy Reporting
- The Coalition of Environmentally Responsible Economies (CERES) formats for environmental reports
- The Friends of the Earth Environmental Charter for Local Government
- The Eco Management and Audit Scheme Code of Practice