Globalization of Environmental Accounting

Globalization of Environmental Accounting
Jingyi Wang (MAcc)
December 1st, 2010
Abstract
As environmental issues have received much concern, more and more companies realize the importance of environment-related financial issues, especially environmental accounting. Many countries like US and Japan have made significant progress in this field, while China is facing difficulty in the development of environmental accounting.
The objective of this essay is to discuss the international trend of the application of environmental accounting and to give recommendations to China’s construction of an environmental accounting system. The essay first gives introduction of the definition and background of the environmental accounting. Then, based on a comparative analysis of the guidelines under US-GAAP and IFRS about environmental accounting’s development, system and information disclosure, the essay discusses the globalization trend of environmental accounting. And lastly, the paper emphasizes the necessity for Chinese companies to move ahead in this area and provides some advice for an environmental accounting application for Chinese companies.

Key Words: Environmental accounting, US-GAAP, IFRS, Environmental accounting application 1. Introduction of Environmental Accounting
Traditionally, companies believe that environment protection activities will only increase cost. In fact, it can help companies to operate sustainably. Companies have found that the traditional methods of accounting--financial accounting, cost accounting and management accounting--are not giving them the flexibility needed for disclosure in the area of environmental protection costs. A new type of accounting has been developed: Environmental accounting. 2.1 Definition of Environmental Accounting
“Environmental accounting” is used for more than environmental benefits and costs. At micro level it means the entire domain of accounting for the environment including: financial accounting, reporting and auditing, and environmental management accounting.” (1) It is an accounting system for any costs and benefits that arise from changes to a firm 's products or processes, where the change also involves environmental impacts.
According to the United States Environment Protection Agency (US EPA):
“An important function of environmental accounting is to bring environmental costs to the attention of corporate stakeholders who may be able and motivated to identify ways of reducing or avoiding those costs while at the same time improving environmental quality.” (1) US Environmental Protection Agency (EPA). “An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts And Terms” 2.2 Background of Environmental Accounting’s Development
Environmental problems led by rapid economic growth have become more and more prominent. Environmental pollution, ecological imbalance and a series of environmental problems have intensified companies’ environmental risks. Companies are increasingly aware of the need to correct their attitude to environmental protection, to reflect the true operational matters related to the environment in order to prevent and control environmental pollution.
Researches about environmental accounting began in the 20th century after Floyd A. Beams first published the “Pollution Control through Social Cost Conversion" in 1971. Since then, Western countries began to build accounting theories and form some preliminary theoretical frameworks. In 1990, Rob Grany’s report on green accounting was a milestone in environmental accounting research which indicated that environmental accounting has become a central issue of global concern. 2.3 Benefits of Environmental Accounting
Environmental accounting aims at achieving sustainable development, maintaining a favorable relationship with the community, and pursuing effective and efficient environmental conservation activities. The environmental accounting procedures allow companies to identify the cost of environmental conservation during the normal course of business, identify benefit gained from such activities, provide the best possible means of quantitative measurement and support the communication of their results. The benefits of using environmental accounting are summarized bellow:
(1) It can promote better corporate environmental cost management.
The environmental accounting enables enterprises to minimize their raw materials and energy consumption, to enhance their productivity as well as their quality of service. So the use of natural resources and energy can be more reasonable. Environmental accounting approaches and information can be used not only to help assess particular investment projects, but also to help assess the environmental and related cost implications of particular types of materials and products.
(2) It can reach better management decision-making by taking into account the environmental and social issues.
Environmental accounting application reflects the strategy of sustainable development of accounting in decision-making, which can mobilize the enthusiasm of enterprises for environmental protection to ensure the optimum environmental and economic benefits.
(3) It helps investors and creditors understand the companies’ environmental condition and supports the environmental image. Investors can make a better investment decisions by understanding their companies’ environment-related information. 2. Environmental Accounting Standards under US-GAAP and IFRS
For many companies, especially in high-polluting industries, environmental issues significantly impact their business performance and financial profitability. Environmental liabilities are financial obligations that companies have to provide for, incur, and disclose. Industry accountants must ensure that their companies are in compliance with accounting standards. Both US-GAAP and IFRS have established several rules governing environmental disclosures. 3.4 Environmental Accounting and US-GAAP
Accounting for environmental exposure is one of the six issues considered tremendously important to the SEC. Currently the major financial accounting issue in environmental accounting is estimating and recording environmental liabilities in the financial statements. Treating environmental costs as loss contingencies is the most common practice.. Accountants rely on generally accepted accounting principles (GAAP) (FASB #5, FIN #14) to account for environmental issues. FASB #5 provides guidance in defining and determining how to report loss contingencies, and FIN #14 provides guidance in estimating them.
GAAP requires companies to report environmental liabilities if occurrence is “probable” and their amounts are “reasonably estimable.” A liability is reasonably estimable if company’s management can develop a point estimate or determine that the amount falls within a particular dollar range. Even if the liability fails to meet one or both of these criteria, it must be disclosed in the footnotes of the financial statement if it is “reasonably possible.” “Reasonably possible” is defined as a range of possible outcomes that have a greater then remote chance of occurring. If no single estimate is better than the others, GAAP specifies that the company use the lowest estimate and disclose the potential for additional liability in the footnotes.
Recent changes in GAAP governing asset retirement obligations, particularly with respect to environmental legal obligations, have put the spotlight on environmental disclosure. The FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) in 2005. FIN 47 focuses on whether there is a “legal obligation” to incur environmental costs at the end of a facility’s economic life. It requires a company to calculate a conditional asset retirement value even when it believes a regulator (or contract counterparty) is unlikely to require cleanup at some point in the future. This could significantly expand accounting for and disclosure of environmental exit costs associated with industrial property, plants and equipment. 3.5 Environmental Accounting and IFRS
The International Accounting Standards Board (IASB) has covered environmental and social accounting financial reporting issues in its mainstream standards. IAS 36 (impairment of assets) and IAS 37 (provisions and contingent liabilities) refer to environmental issues.
Several standards reflecting environmental (and other sustainability-related liabilities and costs) in financial statements prepared under IFRS are listed below:
IAS 37 on Provisions, Contingent Liabilities and Contingent Assets: It is highly relevant to environmental issues and some social issues, covering contingent liabilities as possible obligations that arise from past events, or present obligations that arise from past events, but were not previously recognized. The standard defines provisions as liabilities of uncertain timing or amount, and gives guidance on when to raise a provision.
IAS 38 on Intangible Assets: Includes greenhouse gas emission allowances, which are subject to a test that measures impairment of their carrying value if they exceed the amount recoverable from use or realization.
IFRS 3 on Business combinations: Covers fair values in acquisition accounting which require identifiable assets or liabilities acquired in a business combination to be measured at their fair value at the date of acquisition, which may need to reflect environmental impacts.
With the widespread adoption of IFRS, there is a hope that a single set of globally accepted frameworks for environmental and sustainability accounting will emerge, which will tie information on environmental costs and benefits, and sustainability to the financial statements. 3. Globalization of Environmental Accounting
Through accounting standards, regulations and guidelines for environmental accounting, the US, Canada, Japan and many other developed countries have seriously taken into account the environmental information disclosure. By simultaneously carrying on environmental cost control methods, these countries have made significant development in the environmental accounting field. 4.6 Environmental Accounting Applications in the US and Canada
In the environmental accounting study domain, Canada is the most advanced country. In Canada 's environmental accounting research, the Canadian Institute of Chartered Accountants plays an essential role. This association focuses on two aspects of environmental accountancy: 1) the environmental accounting and auditing research; 2) the environmental accounting and auditing rule making. Canada 's environmental accounting study obtains the actual effect not only in the research of environmental accounting itself, but also in the thorough research with its related domain auditing.
In the United States, environmental accounting applications began in 1992, in response to concerns from outside stakeholders. These stakeholders believed that pollution prevention would not be adopted as the first choice of environmental management by industry until the environmental costs of non-prevention approaches and the economic benefits of pollution prevention could be seen by managers making business decisions. International ISO 14000 since 1995 has also motivated corporations to adopt environmental accounting practices.
The U.S. study of environmental accounting focuses on environmental costs and environmental liabilities. The center of its theory is that, under the law, companies have to pay the price as long as they previously or currently caused some damage to the environment, and thus the financial position and operating results have a huge impact. Therefore, timely recognition of environmental liabilities and environmental costs will help investors, creditors and other interested parties keep abreast of business activities and allow them to make better decisions by knowing the environmental damage and related impact. 4.7 International Trends of Environmental Accounting
3.2.1 Denmark
Denmark is the first country that implemented environmental accounting. In June 1995, the Danish parliament adopted the Green Accounts Act. Under this Act 1200 companies were required to publish their environmental accounting reports. These companies were of high-polluting industries which used to be subject to the Environmental Protection Act. In addition, 200 companies have voluntarily submitted their environmental accounting reports. According to a survey organized by Danish EPA in 1999, five-sixths of environmental accounting reports meet the information required by law, and 40% of the companies said they achieved environmental improvements. The survey also found that investors began to use accounting reports to assess the companies.
3.2.2 Holland
The Dutch government has modified the Environmental Management Act to limit serious impact on the environment caused by enterprises. Some companies need to meet the increased mandatory requirements for environmental reporting. This amendment applies to 260 companies mainly belonging to industries inchemistry, steel and iron, electrical engineering, rubber and papermaking, petroleum, electric power, airplane manufacturing as well as the waste processing industry. The Act recommends enterprises to provide two types of reports: A government report and a public report. Content of the government report is more stringent and detailed, and the public report gives companies the freedom to decide environmental disclosure.
3.2.3 UK
The UK currently follows the rules made by “the Department for Environment, Food & Rural Affairs”: a) General Guidelines on Environmental Reporting
b) Environmental Reporting: Guidelines for Company Reporting on Greenhouse Gas Emissions
c) Environmental Reporting: Guidelines for Company Reporting on Waste
d) Environmental Reporting: Guidelines for Company Reporting on Water
3.2.4 Japan
After announcing its first edition of environmental accounting guidelines in 2000, Japan immediately published the revision edition in 2002. At present Japan is using the newest edition of guidelines published in 2005. Under Japanese government 's great efforts, many Japanese enterprises have already implemented the environmental accounting system, and completed the rule-making of their environmental accounting disclosure. 4. Environmental Accounting Applications for Chinese Companies
China 's environmental accounting has not even begun; neither does it have any accounting standards related to environmental accounting. China has not realized the necessity of establishing an environmental accounting system. The summary of foreign experiences in the development of environmental accounting, along with the overview of China’s own environmental accounting issues, has practical significance to help apply an environmental accounting system to Chinese companies. 5.8 Environmental Accounting issues for Chinese Companies
China’s foreign trade has been driven rapidly by reform and open policy, but many issues such as anti-dumping have also been intensified. In recent years, the absence of environmental accounting pushed Chinese enterprises to an increasingly passive position in international trading.
Under the problems of China 's environmental resources and the implementation of the strategy of sustainable development, the application of environmental accounting is unavoidable. Inquiry of the environmental accounting application in this emerging field will help solve environmental problems. At the same time, Chinese enterprises with international standards would have access to more foreign trade initiatives on the road of sustainable development. 5.9 Application of Environmental Accounting for Chinese Companies
It is important for Chinese companies, especially multicultural companies to apply an environmental accounting system into their daily operation. Merely adding items into cost accounting or management accounting will not help companies to achieve much improvement. According to developed countries’ experience, once companies decide to use environmental accounting, they should consider the application as an entire process implementation control. They should make plans in advance, control their environmental costs by monitoring their whole business process, dispose properly afterwards, and evaluate their results for future plans in order to minimize the cost of environmental damage. By proper application of environmental accounting, companies would pay more attention to the improvement of corporate environmental image and the achievement of sustainable development. 4.2.1 Strengthen environmental costs ' calculation
Enterprises can add some items based on their current accounts to disclose specifically environment-related subjects, such as environmental assets, environmental costs, and environmental liabilities. This will reflect companies’ business environment, natural resources and related damage, which will help improve their safety in production and social benefits. Different accounts should be dealt with different methods according to their nature. 4.2.2 Environmental accounting application to entire process
(1) Plan in advance
Enterprises should make overall evaluation of production or other operation in anticipation, and design proper environmental cost control plans.
(2) Monitor during entire process
During companies’ daily business, monitoring during the entire process is key to ensure clean production and “the three wastes” processing. It will help management to minimize the environmental risk.
(3) Control afterwards After pollution occurs, companies should try to minimize damage. After disposal, companies should also pay attention to actively implementing green marketing and green services. 5. Conclusion
Environmental accounting research and its innovative practices have great significance regarding enterprise 's sustainable development. Solving the problem of the absence of environmental accounting and strengthening of enterprises’ environmental awareness will have positive significance in furthering improvement of China Accounting Standards.
The environmental accounting application becomes an international issue, and this requires coordinated action of different countries. Environmental accounting and the information disclosure is also an emerging consideration, which needs to be addressed by establishing systematic theory and a series of technical methods. This work can become quite troublesome due to various countries ' experience, differing environmental issues, and various accounting systems. Each country has its strong points, so if environmental accounting professionals around the world continue to conduct exchanges and cooperation is encouraged; it is bound to accelerate the development of an environmental accounting process.
References
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Brooks, P.L., L.J. Davidson and J. H. Palamides. (1993). Environmental Compliance: You Better Know Your ABCs. (pp. 41-46). Occupational Hazards.
FASB Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" . (1975). (par. 1).
Horngren, C.T., G. Foster, S. M. Datar. (1994). Cost Accounting : A Managerial Emphasis. Prentice-Hall.
Kreuze, J., G. Newell. 1994. ABC and Life Cycle Costing for Environmental Expenditures. (pp. 38-42). Management Accounting.
Darlene T. Marsh, Robert Lipscomb. (2004). Environmental Accounting. Retrieved from http://library.findlaw.com/2004/Aug/30/133558.html
Jeffrey B. Gracer. (2006). Changes in GAAP Put Spotlight on Environmental Disclosure. Retrieved from http://library.findlaw.com/2006/May/5/246516.html
Sustainability Framework/ Financial Investors. International Federation of Accountants. Retrieved from
http://web.ifac.org/sustainability-framework/ip-impact-on-financial-statements

References: Environmental accounting and environmental management accounting. (2006). Environment Protection Authority Victoria. Retrieved February 20, 2006, from http://www.epa.vic.gov.au/bus/accounting/whatisema.asp Brooks, P.L., L.J. Davidson and J. H. Palamides. (1993). Environmental Compliance: You Better Know Your ABCs. (pp. 41-46). Occupational Hazards. FASB Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" . (1975). (par. 1). Horngren, C.T., G. Foster, S. M. Datar. (1994). Cost Accounting : A Managerial Emphasis. Prentice-Hall. Kreuze, J., G. Newell. 1994. ABC and Life Cycle Costing for Environmental Expenditures. (pp. 38-42). Management Accounting. Darlene T. Marsh, Robert Lipscomb. (2004). Environmental Accounting. Retrieved from http://library.findlaw.com/2004/Aug/30/133558.html Jeffrey B. Gracer. (2006). Changes in GAAP Put Spotlight on Environmental Disclosure. Retrieved from http://library.findlaw.com/2006/May/5/246516.html Sustainability Framework/ Financial Investors. International Federation of Accountants. Retrieved from http://web.ifac.org/sustainability-framework/ip-impact-on-financial-statements