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IFRS and
environmental
accounting
Minga Negash
Department of Accounting, Metropolitan State College of Denver,
Denver, Colorado, USA
577
Abstract
Purpose The purpose of this paper is to examine whether International Financial Reporting
Standards (IFRS) can be used for monitoring environmental degradation. A comprehensive review of
academic and professional literature indicates that the IFRS regime provides useful conceptual and
practical frameworks for monitoring firms that are operating in environmentally sensitive industries.
Design/methodology/approach Using qualitative and case study research methods, the
financial statements of three environmentally sensitive companies were studied.
Findings The sustainability reports produced by the companies contained both information and
propaganda. The credibility of published sustainability reports is unclear. The size and adequacy of
the contributions of the companies towards sharing the costs of decommissioning, rehabilitation and
restoration of the environment are not disclosed. A new statement is proposed.
Practical implications Policy implications at national and international level are many.
Social implications The paper shows that environment has both financial and non-financial
implications. The effects of environmental degradations on the habitat and society are serious.
Originality/value The paper contributes to new knowledge in several ways. There are at least
three major conclusions from this paper, and the ideas are original.
Keywords Financial reporting, International standards, International Financial Reporting Standards,
Globalization, Environmental accounting, Sustainability reports
Paper type Research paper
1. Introduction
Jonas and Jones (2010) reported that by the end of 2009 there were over 3,100 corporate
social and environmental reports that were published in 60 countries. Audit firms
and stock exchange affiliated institutions annually rate sustainability reports and argue
that there is a business case for preparing such reports. The web sites of many
environmentally sensitive companies contain lengthy material about the environment,
society and safety. Parallel to what the business sector is doing, national governments
and the United Nations are also preoccupied with issues of sustainability. Hence,
an interesting financial reporting question arises. Whether International Financial
Reporting Standards (IFRS) and global capital markets can be used as monitoring
institutions (laws, organizations) for policies that are aimed at protecting the environment
is an important and timely research question. Interestingly, when the existing body of
IFRS is examined from an environmental perspective, a number of insights can be made.
The author is grateful to the University of Witwatersrand and the Metropolitan State College of
Denver for enabling him to complete this work during his sabbatical. He also acknowledges the
useful comments of Tsegaye Wolde Georgis, the participants of the American Accounting
Association annual meeting in San Francisco and the reviewers of this journal. Barbara Uliss did
the editorial work.
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First, an accrual accounting based earnings figure does not take cognizance of issues of
sustainability. Similarly, the finance side of the balance sheet does not adequately
provide for liabilities that might arise due to the firms past environmental activities.
Second, even within the current conceptual framework, since IFRS has legal backing in
more than 100 countries, it has a unique advantage of bringing environmental
accountability to the boardroom and the financial market.
The environment is both a complex and an eclectic subject. The contemporary
accounting literature addresses the environmental accounting problem from:
.
the usual rationalist-efficient market-voluntary disclosure perspectives; and
.
from the legitimization, image building (reputation management) and social
contract perspectives.
Within the rationality and market efficiency framework, the discussion of corporate
sustainability reports can be easily linked to the earnings quality and the earnings
sustainability literature. In this respect, Givoy et al. (2009) in their study of ownership
structure, synthesized the earnings quality research into four dimensions.
The four dimensions were the persistence of accruals, estimation errors in the accrual
process, the prevalence of earnings management and the prevalence of conservatism.
Barth et al. (2008), in their study of International Accounting Standards (IAS) adoption
internationally, developed a three dimensional index of accounting quality. The elements
of accounting quality were earnings management (including earnings smoothing),
timely recognition of losses and the value relevance of accrual accounting information.
When one invokes trans-boundary and non-trans-boundary environmental issues into
the earnings quality literature, it is evident that the absence of for example, provisions
for decommissioning and rehabilitations, and reserves set aside for contingent liabilities
for activities that are related to the firms past and present activities, suggests earnings
overstatement and debt understatement. Hence, there is a paucity of research on the link
between accounting quality (earnings) studies and environmental accounting studies.
Furthermore, prior research that attempted to link environmental disclosure with
stock market returns requires some rethinking. The studies followed an instrumentalist
paradigm; and examined either market reaction to the release of environmental news or
whether or not current shareholders are purchasing future earnings at the correct
price. In this respect, Penman and Zhang (2002, p. 3) for example argued that models of
sustainable (maintainable) earnings are also models of price earnings ratios. This
implies that the market distinguishes between reporters of sustainable (maintainable)
earnings from others (reporters of unsustainable) earnings. Based on this premises,
Penman and Zhang (2002) attempted to build a parsimonious model of sustainable
earnings. The model purports to impound social and environmental information, a belief
that emerged from the entrenched efficient market theory that dominates the
mainstream financial reporting research.
In comparison to the rationalist framework, social theorists approach the
environment degradation problem from the perspectives of Marxian political
economy (Tinker and Gray, 2003; Tinker and Sy, 2009) and the legitimization and
reputation management theory of DiMaggio and Powell (1983). Based on Llewelyns
(2003) five levels of theory and theorizing in social sciences, Chen and Chen (2010)
observed that the 50 academic papers they reviewed did not produce enough context free
or grand theories about environmental accounting. The dominant social research
IFRS and
environmental
accounting
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liabilities and clean up costs. Klasson and McLaughlin (1996) used event study
methodology to examine the link between financial performance and environmental
performance. Konar and Cohen (2001) examined whether there is an association between
firm-level environmental performance and intangible assets, and reported that poor
environmental performance has a significant negative effect on the intangible-asset
values of publicly traded firms. Konar and Cohen (2001) argued that major corporations
voluntarily over-comply with environmental regulation, and externally portray positive
images. The authors provide evidence that these images are rewarded. This view was
reflected in a number of papers that appeared in volume 3 of Advances in Environmental
Accounting and Management (Freedman and Jaggi, 2006).
In contrast to the above, empirical studies that examined environmental disclosures in
the USA (Freedman and Wasley, 1990; Walden and Schwartz, 1997) reported that
US companies that were under intense reputation scrutiny because of IPOs, did not
improve the level of environmental disclosure. Furthermore, the association between
financial statement information and security prices (returns) in the USA continues to
send an unclear message. For instance, Ball and Shivakumar (2008) and Berkman and
Koch (2009), though from different angles, provide evidence which shows that in contrast
to established models of uncertainty, corporate information disclosed through the annual
report (quarterly reports) has had no relevance to price formation on NYSE. In a recent
paper, Jonas and Jones (2010), using logit regression, reported that shareholder value
attributes are positively associated with corporate social and environmental disclosures
and negatively associated with political cost attributes. Interestingly, social researchers
have also reached similar conclusions using theories of legitimization, social contract and
reputation risk management (Bebbington et al., 2008). In contrast to the US study,
Durand and Tarca (2008) stated that neither historical cost nor historical cost with
supplementary notes with disclosure, were useful for Australian firms. Durand and
Tarca (2008) reported that specific tangible extractive industry assets are value relevant
while intangible assets are value relevant only in some periods. Cho et al. (2009) examined
potential explanations for corporate choice to disclose environmental capital spending
information. Their overall results suggest that companies use the disclosure of
environmental capital spending as a strategic tool to address their exposures to political
and regulatory restrictions.
Furthermore, cross-country studies suggest mixed results. Most cross-sectional
studies attempt to find an association between an environmental disclosure index and
financial performance. Yusoff and Hehman (2008) for example compared Australian and
Malaysian data using a rating system which is similar to Wiseman (1982) scores[2].
Cormier et al. (2005) analyzed the information dynamics between corporate
environmental disclosure and financial markets (proxy: financial analysts earnings
forecasts) and public pressures (proxy: a firms media exposure). Using information
from print and web sources, and samples from Belgium, France, Germany,
The Netherlands, Canada and the USA, Cormier et al. (2005) concluded that enhanced
environmental disclosure leads to more precise earnings forecasts by analysts especially
in environmentally sensitive industries. They identified the determinants of
environmental disclosure using theories embedded in economic incentives, public
pressure and institutional theory. They find that risk, ownership, fixed assets age and
firms size determined the level of environmental disclosure.
From the review of the relevant literature one observes the following. First, as noted
earlier, environment is a multidisciplinary subject. Hence, financial reporting policy
makers need to note the multidisciplinary nature of the topic. Second, the Burntland
Commissions definition of sustainable development is similar to Hicks definition of
economic profit, which states that income is the maximum amount that an individual
can consume during the current period, and leave the firm well off at the end of the period
as it was at the beginning. Hence, this definition of profit requires consideration of
intergenerational altruism issues. Furthermore, it requires the conversion of the accrual
accounting based net income figure to economic profit. Third, the environment is partly
a private (trade-able) good and partly a public (non-trade-able) good. Fourth, to the
extent trans-boundary emissions and river systems affect the quality and sustainability
of life, the environment is also a global (international) good. Hence, the type of
accounting that is required for the environment needs to combine concepts of REA
accounting (system), SNA and IFRS.
3. Research questions and methodology
The above discussion leads to a number of research questions. In this paper the central
question that needs to be answered is whether the current IASB standards provide
useful instruments for monitoring environmental degradation. The second question is
whether it is possible to define the elements of a separate and auditable statement that
deals with environmental issues, and identify the emerging recognition, measurement
and disclosure problems. If a separate statement is infeasible for one reason or another,
the paper outlines the environmental information that can be produced within the
framework of IFRS.
Both questions require the examination of the existing IASB standards, GRI guidelines,
industry guidelines, national and international information gathering systems, and
company reporting practices. The paper elected a qualitative-case research methodology.
The case method has a number of advantages. It allows the researcher to interrogate
primary information, and enables him/her to examine the research problem(s) from a close
range. It overcomes the sample size requirements of quantitative research. Furthermore,
large sample studies hide issues that can be identified by focused studies (Tinker and
Gray, 2003). Size is also associated with environmental degradation. Large firms are often
considered outliers in many empirical works. Henning (2004, p. 32) also states that social
entities (organizations) can be bounded by parameters that show specific dynamics.
Furthermore, previous research on environmental accounting (Buhr and Reiter, 2006)
used the case study method, and hence the result of this paper can be compared with prior
research. Accordingly, the following steps were followed. First, through a causality
schema, the paper outlines the factors that are associated with environmental degradation
and climate change (Figure 1). Second, the existing IASB standards were analyzed to
identify environment related standards/provisions/paragraphs (Table I). Third, three
global companies that operate in environmentally sensitive sectors were selected
(Table II). The 2008 annual reports, sustainability reports and other reports on the three
companies were condensed and studied. The findings in the 2008 reports were compared
with the 2009 reports. Fourth, the paper examined whether it is feasible to prepare a
standardized and auditable separate statement for the environment (Table III). Finally,
the strengths and limitations of the proposed statement are discussed.
IFRS and
environmental
accounting
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X11
X12
Emissions
X1n
X21
X22
X2n
Production of normal
& toxic waste
584
X31
X32
X3n
Depletion of natural
resources (oil &
minerals) &
environmental
degradations
Policy node
(regulatory &
voluntary
codes)
' ij
Environmental
degradation,
climate change,
major
environmental
accidents
X41
X4n
X51
Figure 1.
Conceptual schema in
a SEM framework
X5n
Urbanization that affects
air, water and land quality
Market forces:
Product markets
Financial markets
Labor markets
Knowledge &
Technology markets
IFRIC 3
(withdrawn)
IFRS 6
IAS 41
Framework
IFRS/IAS
number
Specialized industries
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environmental
accounting
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Table I.
Environment related
financial reporting
standards
Table I.
586
IAS 20
Government grants
IFRS/IAS
number
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IAS 37
IFRS/IAS
number
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Table I.
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Table II.
ADR and non-ADR
companies
Industry code
1010
1020
1021
1030
4010
4015
4030
4040
4060
4070
4080
4090
Aluminum
Gold
Precious metals and minerals
Steel
Oil and gas refining and marketing
Oil and gas storage and transport
Oil domestic and integrated
Integrated oil and gas
Oil and gas exploration and production
Oil and gas equipment and servicing
Oil and gas drilling
Coal and consumable fuels
Total companies
Non-ADR companies
12
69
38
56
39
102
0
34
258
86
20
33
9
61
36
45
38
99
0
18
254
79
20
32
the policy node, h and make financial reporting an instrument of good local and
international environmental governance.
Before we proceed to the examination of mandated financial reporting standards, it is
important to note whether the indices produced by institutions that advance
sustainability ratings are useful. As noted earlier, Freedman and Jaggi (2006) surmise
that it is difficult to decouple a firms propaganda dissemination from genuine corporate
information disclosure. Bebbington et al. (2008, p. 371) also argue that though social and
environmental reporting is widespread, the phenomena under which such reports are
produced remains largely unexplored. Zahller (2010), using trust theory, raises questions
about the credibility of published sustainability reports. Notwithstanding these,
a number of stock exchanges continue to produce sustainability indices/metrics and rate
companies[3]. Given, the conclusions of previous research whether companies that are in
the top/bottom of these ratings are in the Keynesian beauty contest (Gao, 2008) for
reputation risk management or reveal fundamental (intrinsic) attributes remains
unclear.
4.2 Relevant financial reporting standards
As noted earlier, a number of existing standards and interpretations directly and
indirectly deal with environmental issues. For instance, IFRS 6 (implementation
January 2009) directly deals with extractive industries and IFRIC 5 provides the guidance
for decommissioning, rehabilitation and restoration of environment related expenditure.
IFRIC 3 (still under discussion) and IAS 38 (intangibles) deal with government allocated
emission rights, trades in these rights and the impairment of emission allowances.
Furthermore, it is important to note that a number of other standards provide an indirect
support for the recognition, measurement and disclosure of environmental assets and
liabilities. IAS 37 (provisions for contingent liabilities and assets) provides for the
accounting for environmental liabilities. IFRS 3, IAS 27, IAS 28, IAS 31, IAS 24 and
IFRS 8, respectively, deal with business combinations, investments in joint ventures and
associates, related party disclosures, and the specification of the reportable segments of a
geographically dispersed company.
With regard to the enforcement of IFRS, Cabrera (2008) reported that IFRS is
operational in over 100 countries. Listed companies and public interest companies are
required to comply with IFRS. In the USA, where many global companies are listed,
Financial information
Comparative year
Environmental assets
foreign firms can report either using US GAAP or IFRS. The SECs roadmap (work plan)
and FASBs codification project are expected to accelerate the convergence between
IFRS and US GAAP. An environment perspective of financial reporting therefore
provides a new insight into the examination of the gains that may be stemming from
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Table III.
Statement of
environmental assets and
liabilities as of
December 31, 2020
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a treaty (if any) are many. Hence, the interesting question again is whether global
financial reporting standards have a role in periodically providing the financial and
non-financial consequences of environmental degradations.
Rights (allowances) to emit pollutants continue to be treated as intangible assets, to be
accounted for in accordance to IAS 38 (intangible assets). When the rights are allocated
by a government department for amounts less than their fair value, the difference is
recognized as deferred income (liability) in the statement of financial position. When the
firm starts polluting, it records provisions according to IAS 37. Furthermore, according
to www.iasplus.com of Deloitte, in May 2008 the IASB staff defined an emission trading
scheme as:
[. . .] an arrangement designed to improve environment, in which participating entities may be
required to remit to an administrator a quantity of tradable rights that is linked to their direct
or indirect effects on the environment.
In its November 2009 meeting, the IASB attempted to provide for key technical issues.
However, the lesson from this IFRIC is that a number of standards: IAS 38 (impairments),
IAS 20 (government grants), IAS 37 (provisions, contingent liabilities and contingent
assets) and the standards that relate to financial instruments (IAS 32, IFRS 7, IAS 39 and
IFRS 9) will be affected, and require amendments.
IFRIC 5 (decommissioning, restoration, rehabilitation and similar liabilities) deals
with accounting for trust funds set aside for the environment. Paragraph 1 of IFRIC
5 defines the purpose of the fund as:
[. . .] to segregate assets to fund some or all of the costs of decommissioning plants (such as a
nuclear plant) or certain equipment (such as cars) or in undertaking environmental
rehabilitation (such as rectifying the pollution of water, marine life in coastal regions such as
in the Gulf of Mexico, lands adjacent to major ports, or rehabilitating mined lands such as the
ones in the Witwatersrand area), together referred to as decommissioning.
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and the above mentioned standards, the implication for global companies listed on US
stock exchanges becomes serious[7].
IAS 32, IFRS 7 and IAS 39 (IFRS 9), respectively, deal with presentation, disclosure,
and recognition and measurement of financial instruments. Hedge accounting (cash flow
hedge, fair value hedge and hedge of net investment in foreign operations: paragraphs
86 and 87 of IAS 39) require that gains and losses, and effective and non-effective hedges
be reported in the comprehensive statement of income. Given the rise of carbon related
financial instruments, and increases in pending lawsuits against companies; the
combined impacts of IAS 27, IAS 37, IFRS 6, IFRIC 5, IAS 8 and IFRS 8 and standards
that deal with derivative instruments is to strengthen the value attributes and political
cost attributes of global companies that are operating in environmentally sensitive
industries ( Jonas and Jones, 2010).
Table I contains a summary of environment related financial reporting standards.
The table identifies relevant terms, phrases, paragraphs and provides remark(s).
5. Case study and discussion
Financial globalization has accelerated the pace at which multinational companies
diversify the sectors and the regions in which they are operating. Companies from
emerging markets are also routinely getting listed on major American and European
stock exchanges. Information technology has created an enabling environment for
transmitting information at high speed. Previous research that examined financial
globalization has estimated the gains (Stulz, 2005) and country specific studies have also
attempted to show the winners and losers from financial liberalization (Makina and
Negash, 2007). For the purpose of this research, the Compustat Global Vantage database
was used. The case study focused on one of the environmentally sensitive sectors. Using
the data query options of the CD ROM at the Auraria Higher Education Campus Library
of the University of Colorado/Metropolitan State College of Denver, companies were
separated into American Depository Receipts (ADR) and non-ADR companies. ADR
companies are foreign firms listed in the US stock exchanges. The firms that were
operating in the mining and extractive industries are given in Table II. The difference
between the total companies and non-ADR companies gives an estimate of foreign
mining and oil companies listed on US exchanges.
A closer inspection of the list of ADR companies reveals that major foreign mining
and oil companies that either trace their origin to Sub Saharan Africa (SSA) or have
historical (colonial) connections with the region are listed on US stock exchanges[8].
Three global companies that have extensive operations in SSA region were closely
studied. The first is global gold mining company while the second and third are global oil
and gas companies. For legal reasons, the names of the three global companies are not
mentioned in this paper. An interesting question here is whether US financial markets,
laws and IFRS can be used for monitoring the environmental behavior of global
companies operating in the SSA region.
There are a number of reasons for the selection of the three global companies. First,
mining is one of the environmentally sensitive industries and the three companies fairly
represent the sector that they are associated with[9]. Second, mining is an important
growth engine for many SSA economies. Third, mining is often associated with the
resource curse problem in many SSA countries. Fourth, since the companies are global
entities with multiple listings, it might be easier to enforce international environment
standards through the financial market system, and also provide useful information to
the investment community in capital rich regions of the world.
The companies are coded as Company A, Company B and Company C. The financial
statements and sustainability reports were obtained from the web sites of the companies.
To obtain information about environmental lawsuits against each company, a Google
search was done. The following terms were used for the search: lawsuit against Company
A [identity withheld] environment; lawsuit against Company B [identity withheld]
environment and lawsuit against Company C [identity withheld] environment.
Lawsuits filed, fines by State authorities, out of court settlements and the firms alleged
association with conflicts and human/labor rights violations were obtained.
The credibility of these news items were verified by following the lead stories, and by
cross checking the information from additional sources, including Wikipedia. Content
analysis or disclosure indices were not prepared as the research method is qualitative.
The information about each company was condensed. The condensed information
was compiled from Wikipedia, company social responsibility and sustainability reports,
company web sites, various newswires, and the 2008 annual reports of the three global
companies. The 2009 annual reports were compared with the 2008 reports. The analysis
took both non-financial and financial perspectives.
The findings are consistent with the Freedman and Jaggi (2006), Bebbington et al.
(2008) and Zahller (2010) observations in that the analysis revealed that the phenomena
under which the social responsibility and environmental sustainability reports are
prepared, who prepares them and whether the reports are subjected to audits remained
unclear. More specifically, the annual reports rarely contained non-financial quantitative
data. The sustainability reports did not follow a specific standard or format, and the GRI
and other similar guidelines appear to be inadequately complied with. The social
responsibility sections of the reports also appeared to have contained fluff material and
information about philanthropy work. The reports did not indicate the contributions that
accrue to the firm from investments in health and safety. Company B approached the
social and environmental sustainability report from a risk and reputation management
perspective. Its 2008 annual report states that the company faces various challenges in
the over 100 countries that it is currently operating. The section on climate change
indicated that the company continuously monitors progress towards its own voluntary
emission targets. In 2009 it produced a separate sustainability report that included an
opinion from an external entity. Its web site contained lengthy discussion about issues of
environmental degradation and climate change.
In 2008 Company C allocated a greater portion of its rather lengthy separate social
responsibility report to inform its readers that the state owned companys contribution
to statutory and non-statutory welfare fund for its employees were significant. It
extensively reported about its happy workforce. The environment section of the report
dealt with the companys plans and the sponsorship it made for environment related
conferences. In 2009 the report was renamed as sustainability report, but essentially
contained the same information as in the previous year.
In 2008 Company A extensively reported about its distribution of antiretroviral drugs
to its mining work force in Africa while its sustainability report brushed through
key environmental concerns. In contrast to the 2008 report, in 2009 the web site of
Company A was filled with fluff material and contained lengthy discussion about
sustainability. The CEOs letter also contained a paragraph on sustainability.
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In sum almost all of the three global companies disclosed some emission statistics
and described their effort/plans to reduce the emission of harmful gases. However, the
reports were voluntary, unstructured and not confirmed by independent and qualified
(certified/chartered/regulated) environmental auditors. The disclosure style appears to
be self serving, contained an element of propaganda that is aimed at building reputation
or fighting back the adverse publicity that the companies faced in one or more of their
segments. The presentation did not have a REA concept. It did not recognize the public
good nature of the environment. The non-financial review leads to the conclusion that a
clearer and mandatory standard is necessary.
The financial statement section of the annual report is also not very different from
the non-financial information section. The 2008 annual reports of the three companies
were inspected in respect of IFRS 6 (for early adoption), IFRIC 5, IAS 37, IFRS 8, IAS 8,
IAS 32, IFRS 7 and IAS 39. The 2009 annual reports were inspected for changes and
improvements. The findings are as follows:
(1) All three annual reports stated that the 2008 and 2009 financial statements were
prepared in accordance with IFRS (IFRS 1 and IAS 1). Notwithstanding this,
Company C also stated that it has used national (not international) Accounting
Standards, and certain interpretations of the national standard came from a
government department. The global audit firm that audited this company also
stated that the financial statements were audited in accordance with the national
Auditing Standards of the home country. The 2009 financial statements and the
related sustainability report of Company C did not show marked improvements.
(2) In 2008 Company A stated that costs for restoration of site damages were
provided for at their net present values, and charged against profits as extraction
progresses. The changes in the measurement of a liability relating to the
decommissioning or preparation of sites were adjusted to the cost of the related
asset in the current period. If a decrease in the liability exceeded the carrying
amount of the asset, the excess was recognized immediately in the income
statement (p. 90). The company also stated that for its African operations it made
an annual contribution to a dedicated environmental rehabilitation trust fund,
which it controlled and consolidated. It was not clear whether it was doing
the same for its non-African mines. Furthermore, the size and adequacy of the
provision were not disclosed. In 2009 the company disclosed the balance in
the provisions account, but it did not comment whether the amount is adequate
for its past environmental activities.
(3) In its 2008 annual report Company B stated that provisions were recorded at the
balance sheet date at the best estimate, using risk adjusted future cash flows of
the present value of the expenditure required to settle the present obligation.
With regard to decommissioning and restoration costs in respect of hydrocarbon
production facilities, value is determined using discounting methods and liability
is recognized. With regard to provisions for environmental remediation
resulting from ongoing or past operations, events were recognized in the period in
which an obligation, legal or constructive to a third party arises, and amounts
were reasonably estimated. In other words provisions were not disclosed. In 2009
provisions were disclosed. However, it is not clear whether the amounts are
adequate.
(4) In its 2008 annual report Company C stated that there were no material
litigations and arbitration events in respect of the environment during the year.
With regard to IFRIC 5, it stated that when the conditions for provisions were
not met, the expenditures for decommissioning, removal and site clearance got
expensed in the income statement when they occurred. It did not state whether
there were provisions. In 2009 Company C did not improve its disclosure level.
(5) With regard to IAS 32, IFRS 7 and IAS 39, there is little or no disclosure in the
financial statements of the three companies about emission rights and/or carbon
derivatives. As regards IFRS 8 and IAS 27, all three companies were preparing
their consolidated financial statements and mentioned the regions in which they
were operating. However, it was not always clear how many segments were
consolidated.
(6) In 2009 there was some improvement in the level of environmental disclosure.
However, despite the lengthy report and the fluff material, a number of relevant
and required information items remained undisclosed.
The overall conclusion from the three financial statements can be summarized as
follows. First, from a compliance perspective, it is impossible to conclude that the
companies are indeed meeting the requirements of IFRS. Second, all the three global
companies do not disclose the size and the adequacy of the provisions that they had set
aside for normal provisions and contingencies in respect of the environment. Third, the
notes and descriptions appear similar, indicating the global convergence of reporting
practices. In other words, in 2008 the three global companies did not produce a separate
statement on the environment. In 2009 all three companies produced sustainability
reports and their web sites were filled with lengthy environment related materials. This
observation might be better explained by DiMaggio and Powells (1983) institutional
isomorphism imposed by the profession, which puts constraint and pressure on a
reporting firm to imitate others and find legitimacy. Finally, from earnings quality and
earnings sustainability perspectives, the implications of the non-recognition,
non-disclosure and inadequacy of provisions for past and present environmental
responsibilities points to one direction: overstatement of reported earnings and
understatement of contingent liabilities.
A statement of environmental assets and liabilities?
Even though world leaders appear to be concerned about environmental degradation and
climate change, the link between environment and finance has not been adequately
addressed. Notwithstanding this, the IASB has two options. The first option is to consider
a project on a mandated separate statement on the environment. The second option is to
require the inclusion and disclosure of a minimum set of environmental information
within the existing financial reporting framework by introducing minor amendments to
relevant financial reporting (IFRS) standards. The first option suggests a new conceptual
framework or a further improvement on the recently issued statement (Statement of
Financial Accounting Concepts No. 8, issued by FASB, September 2010) and new
definitions for assets, liabilities and earnings (profits). Furthermore, there is a need for the
consolidation of various clauses that are scattered in the current standards (Table I).
Table III contains some of the elements of the proposed separate statement for the
environment.
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The second option does not require a new conceptual framework or a radical overhaul
of the existing standards. The minimum information that ought to be disclosed in the
existing statements can be determined by amending IAS 1 (presentation of financial
statements) and providing a transition clause in IFRS 1 (first time adoption of IFRS). The
standards that deal with provisions (IAS 37), changes in accounting policy (IAS 8),
exploration and evaluation of mineral resources (IFRS 6), specialized industries (IAS 41),
government grants (IAS 20), and intangibles (IAS 38) can be amended so that
environment related liabilities and assets (replacements/impairments) are recognized
and provisions are backed by ring fenced cash or near cash investments. The strengths
and weaknesses of each policy option depend on how one perceives the ideological
differences among policy makers and stakeholders on one hand, and the emerging
technical issues of recognition, measurement and disclosure on the other hand.
6. Concluding remarks, limitations and directions for future research
This paper examined whether global financial reporting standards (the IFRS regime)
can be used as a device for monitoring the environmental behavior of global mining and
oil companies. The paper reviewed the literature in social theory, economics, finance,
environmental accounting, and technology, and examined the voluntary and mandatory
mechanisms of corporate disclosure. I surmise that the voluntary disclosure mechanism
is infeasible for monitoring public goods such as the environment. Mandated
environmental public information therefore cannot be discounted on the grounds of
voluntary disclosure and Keynesian beauty contest type sustainability ratings. Second,
a careful examination of the existing IFRS indicated that it has rich conceptual and
practical frameworks. It provided two useful policy avenues for improving the current
set of financial statements and sustainability reports. The first option is the production
of a mandated separate statement of environmental assets and liabilities. The second
option is to itemize the minimum environmental information that must be included in the
existing set of financial statements.
Furthermore, using qualitative and case research methodology the paper examined
the annual reports of three global companies that are listed on US stock exchanges. The
three companies also operate in the SSA region. The research thus introduces first world
environmental accountability, regulatory and financial reporting regimes to the third
world operations of global companies. On the technical side, I find that the social and
sustainability reports that were studied did not have standard formats, and the GRI
guidelines appear to be inadequate. The 2008 financial statements though claim to
comply with IFRS, specific standards such as IFRS 6 (early adoption), IFRIC 5, IAS 37,
IAS 27, IAS 8 and IFRS 8, they did not enable firms to disclose key environmental
information. In 2009 two of the three annual reports showed some improvement in the
level of disclosure, but the sustainability reports contained lengthy publicity and fluff
material.
The separate statement on the environment that is prepared in accordance with an
enhanced IFRS conceptual framework has a number of advantages. It decouples the
reputation management (propaganda and legitimization) efforts of environmentally
sensitive firms from genuine information disclosure efforts. It improves the quality and
sustainability of reported earnings. The credibility of published sustainability reports
improves if its content is synchronized with financial statement information. The
proposed statement is consistent with the REA concept. It can be linked to the UN
IFRS and
environmental
accounting
597
MRR
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accounting research? A research note on social and environmental accounting literature,
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extractive industry operations, available at: www.business.uwa.edu.au
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environmental disclosure in annual reports and 10Ks, Advances in Public Interest
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quality?, available at: www.ssrn.com
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Maharashta, India, Environment and Development Economics, Vol. 5, pp. 143-56.
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attributes to examine voluntary disclosure motivation, paper presented at American
Accounting Association, San Francisco, CA, August.
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Human Ecology Review, Vol. 11 No. 2.
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environment in developing countries, Sustainable Development, No. 5, pp. 327-42.
IFRS and
environmental
accounting
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MRR
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IFRS and
environmental
accounting
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Further reading
Barth, M., Beaver, W. and Landsman, W. (2001), The relevance of value relevance literature for
financial accounting standards setting: another view, Journal of Accounting and
Economics, Vol. 31, pp. 77-104.
Graham, J., Harvey, C. and Rajgopal, S. (2005), The economic implications of financial
reporting, Journal of Accounting and Economics, Vol. 40, pp. 3-73.
Gray, R., Kouhy, R. and Lavers, S. (1995), Corporate social and environmental reporting: a review
of the literature and a longitudinal study of UK disclosure, Accounting, Auditing
& Accountability Journal, Vol. 8, pp. 47-77.
GRI (n.d.), Global Reporting Initiative, available at: www.globalreporting.org/
Kuosmanen, T. and Kuosmanen, N. (2009), How not to measure sustainable value (and how one
might), Ecological Economics, Vol. 69, pp. 235-43.
Murray, A., Sinclair, D., Power, D. and Gray, R. (2006), Do financial markets care about social
and environmental disclosure?: Further evidence and exploration from the UK,
Accounting, Auditing & Accountability Journal, Vol. 19 No. 2, pp. 228-55.
Yee, K.K. (2006), Earnings quality and the equity risk premium: a benchmark model,
Contemporary Accounting Research, Vol. 23, pp. 833-77.
About the author
Professor Minga Negash is a tenured Professor of Accounting at Metro State College of Denver
Colorado, and a part-time Continuous Personal Professor at the University of the Witwatersrand,
Johannesburg. He has taught a variety of courses at undergraduate and postgraduate level in
many universities. He supervises a number of Doctoral students at the University of the
Witwatersrand. He has published widely and is a recipient of accolades for his contribution to
research. Minga Negash can be contacted at: mnegash@mscd.edu