Financial Reporting and Environment:
regulatory practices in Europe
Daniela Rupo
Extended abstract
Euroconference project
Financial Reporting and Regulatory practice in Europe
Palermo, Italy, May 20-23, 2001
University of Messina, “Dipartimento di Discipline Economico-Aziendali” - Piazza Pugliatti, 98100, Messina. Tel. 090.719578 - Fax 090.672502, e-mail: ,
There is a growing theoretical and practical body of work on the topic of relation between Environmental Management Accounting and Financial Reporting.
There is also a great interest towards integration of regulation and practice among different countries.
The need of integration, therefore, can be observed at different levels:
- the first, with respect of the study (and measurement) of the relations between environmental and economic performance, that justify the interest in this field of Management Accounting;
- the second, with respect to “disclosure” of environmental aspects in Financial Reporting, in a way that provides stakeholders with information that are relevant to their interests and needs, in accordance with external reporting principles;
- the third, with respect to the need of standardised reporting in different countries, in order to allow the comparability and the understandability of financial data in a global perspective .
It is however difficult to examine each of these topics without taking into consideration the others. So, if the general objective of this work is to understand how regulatory prescriptions and voluntary practice in Financial Reporting can support a more comprehensive disclosure of environmental impact from a company, nevertheless we must pay attention to other levels of the analysis described above.
Such information are very useful for those stakeholders which can support the company’s activity by financial resources, particularly banks and shareholders.
For each investor, the financial disclosure (true and fair view) is useful because it can help identify ways to improve performance and cut costs.
It is wellknown that for the shareholders the environment is not an issue in itself. Environmental awareness is just another reason to avoid losing money, so that the attention on the green reporting lies on the bottom line.
At the same time, financial reporting provides information about the liquidity, viability and financial adaptability for all creditors, and especially for banks.
Financial Reporting can support the investors information in order to assess the savings being pursued and the costs involved in a strongly environmentally aware corporate policy.
For the investor’s point of view, the rationale behind conducting an environmental analysis is that the environmental concerns of any operating business are quantifiable.
The information included in Financial Reporting must show the current and future impacts on the bottom line related to environmental policy.
The research intends to examine how Green Accounting can affect Financial Statements both in:
Balance sheet issues (valuation, liabilities, contingencies, provisions);
and Profit and Loss issues (environmental costs).
The methodology is based on the study of the theoretical framework and the comparison of the current practices in different countries, through the analysis of the accounting standards issued by different boards on the topic of environmental financial reporting.
One of the most controversial issue in the field research is the determination of what can be considered as an “environmental cost”.
First of all, many companies don’t know how much their environmental costs are or what cause those costs. This is the reason because appropriate costing systems must be installed in organisations to identify, measure and manage environmental costs.
For the The Canadian Institute of Chartered Accountants” “Environmental costs” include: a) the costs of environmental measures; b) environmental losses.
a) “Environmental measures” are steps taken by an entity or, on its behalf by others, to prevent, abate or remediate damage to the environment or to deal with the conservation of renewable and non-renewable resources.
b) “Environmental losses” are costs that have been incurred by an entity with respect to the environment for which there is no return or benefit, for example, fines or penalties for non-compliance with environmental regulations, “damages” paid by others for environmental damage done, or assets of the entity that have to be written off because their costs cannot be recovered due to environmental concerns[1].
According to the Fédération des Experts Comptables Européens[2] environmental costs include only the first of those categories, because environmental losses are not the expression of environmental commitment but, probably, the consequence of pollution caused in the past for non-compliance with environmental regulations.
Another important issue concerns the evaluation of environmental costs.
The CICA has identified two approaches to whether environmental costs related to a capital asset that are incurred after the asset is acquired, constructed or developed can be associated with future benefits and capitalized.
Under the “increased-future-benefits approach”, such environmental costs must result in an increase in expected future economic benefits from the asset if such costs are to be capitalized.
Under the “additional-cost-of-future-benefits approach, such environmental costs can be capitalized if they are considered to be a cost of the expected future benefits from the asset, irrespective of whether there are any increased economic benefits[3].
Those approaches are considered also by the Fédération des Experts Comptables Européens, with a distinction between voluntary and compulsory costs.
The example described above shows how useful is to identify the current practices in presenting environmental information, in different countries, which depends on two factors:
1) Compulsory rules (Regulatory framework for financial disclosure)
2) Forms of self-regulation (Standards and guidelines).
The methodology of the research is based on the study of the theoretic and regulatory framework for financial reporting in different countries and on the issue of accounting standard and guidelines for environmental information.
References
Canadian Institute of Chartered Accountants, Environmental Costs and Liabilities: Accounting and Financial Reporting Issues, 1993
Consiglio Nazionale Dottori Commercialisti, Documento 19 della Commissione per la Statuizione dei Principi Contabili, Milano Giuffrè.
EPA, An Introduction to Environmental Accounting as a Management Tool, Key Concept and Terms, EPA 742-R95, Washington D.C.
Epstein M., Measuring corporate environmental perfomance, Best Practices for Costing and Managing an Effective Environmental Strategy, IMA, 1996.
FEE, Fédération des Experts Comptables Européens, “Environmental Accounting, reporting and auditing: survey of current activity and developments within the accountancy profession, Bruxelles, 1995.
GEMI, Global Reporting Management Initiative, Environmental Reporting and Third Party Statements, Washington, 1996.
Gray R., Bebbington J.& Walters D., Accounting for the Environment, ACCA, 1993.
IASC (International Accounting Standards Commitee), Framework for the Presentation of Financial Statementc.
Owen D. (edited by), Accountancy and the challenge of the nineties, Champman & Hall.
[1] Canadian Institute of Chartered Accountants, Environmental Costs and Liabilities: Accounting and Financial Reporting Issues, 1993
[2] FEE, Fédération des Experts Comptables Européens, “Environmental Accounting, reporting and auditing: survey of current activity and developments within the accountancy profession, Bruxelles, 1995.
[3] Canadian Institute of Chartered Accountants, Environmental Costs and Liabilities: Accounting and Financial Reporting Issues, 1993