ACCT20074: Contemporary Accounting - Environmental And Sustainability Reporting - Literature Review Assessment Answer

Contemporary Accounting Assignment

Assignment Task

Environmental and sustainability reporting is now a major issue around the world. There are even global guidelines for sustainability reporting (the Global Reporting Initiative--GRI). However, there is considerable variation in the uptake and implementation of sustainability reporting.

One area of interest for academics is what role (if any) the IFRS can play in supporting sustainability reporting. In the academic literature, there have been several studies that have investigated the possibility of IFRS making a contribution in the future.

Required:

Part A

Provide a brief literature review of what the academic and professional literature (the professional literature can include professional magazines and quality web sites) says about the current and potential usefulness of IFRS for sustainable reporting.

Part B

Building on your answer to Part A, and from the work you have done in your previous assessment item, report on the current or potential use of accounting standards in the country of your choice (from Assessment Item 1) to support sustainability reporting. If you have chosen a country that offers no information in this area, you are free to choose another country or the European Union.

You may focus on specific standards that offer benefit, or focus on accounting standards generally, but your report must be backed by research.

Your report can include articles from the academic literature, as well as commentary from:

• Web sites
• Newspapers
• Regulators
• Financial reports.

Provide your report in the form of a single report, which has:

• Executive summary
• Introduction
• Part A
• Part B
• Conclusion
• References.

Part A

Current and potential usefulness of IFRS for sustainable reporting.

A research was carried by Menga Negash on IFRS and Environmental Accounting, with an objective to evaluate the role of International Financial Reporting Standards (IFRS) for the monitoring and control of environmental degradation. The comprehensive review of academic and professional literature indicated in this respect that IFRS regime is utmost crucial for the development of conceptual and practical frameworks for monitoring and control of companies operating in industries that are sensitive to the environment. The research employed qualitative research methods on the financials of three relevant companies. It was found that the sustainability reports of these companies contained information and propaganda on sustainability with poor credibility and were unclear. The amount and adequacy of the contributions made by these companies towards decommissioning, rehabilitation and restoration of the environment was not disclosed. A new IFRS was concluded to be proposed. The research claims practical implications globally in terms of demonstrating the effects of environmental degradations on the society. (Negash, 2012)

SASB; a registered non-profit organisation in the US, formed with an objective of development and dissemination of industry-specific standards for sustainability issues that are relevant globally for environmental, social and governance (ESG) issues claims on the basis of research on 88 industries in 10 sectors that the IFRS and other standards determine the company’s positioning vis-à-vis sustainability issues and also indicate the long term value creation potential of the company. With regulations stressing on greater integration of financial and non-financial reporting, there is need of Accounting standards for effective and transparent communication of their sustainable performance holistically.

Future usefulness of the initiative by the SASB in conjunction with the IFRS and other standards will be able to fill the vacuum for guidance of companies interested in integrated reporting and will also promote comparability across companies and industries regarding the material issues disclosed. Notwithstanding the fact that the (GRI) guidelines provide guidance on a range of sustainability issues, there is a serious lack of a solid framework for the principles for integrated reporting. To be noted that the framework whether IFRS or U.S. GAAP is focussed on the investors, in respect of nonfinancial material information that is also consistent with G4 Guidelines.

SASB also claims that IFRS as of now only provides principles for Integrated Reporting, with no indicative metrics which undermines the usefulness. It also claims to have developed parameters in this regard for disclosure requirements. The Organization also claims to assist in enhancing the future usefulness of IFRS by providing information on the development of material standards in this regard. (Ey.com, 2016)

The usefulness of IFRS lies in providing the companies with a cost-effective standard on reporting, disclosing and managing sustainability issues and at the same time helping Investors by ensuring the provision of information on Sustainability issues.

A research claiming to discover the quantitative impact of (IFRS) on financial reporting of European countries claims that the Traditional Accounting system is totally unrelated to the impact and the usefulness of IFRS is different for different countries. (Callao et al., 2009) Another European study studying this linkage of International Financial Reporting Standards with accounting quality was carried on listed companies in the European Union (EU). It was claimed that adoption of IFRS generally results in improvement in the accounting quality of discretionary accruals. This finding could be linked to Sustainability reporting indicating that the IFRS have contributed to better improvement in the quality of sustainability disclosure (Chen et al., 2010)

IFRS was developed to ensure Global comparability which is so critical for the development of uniform accounting standards. However United States, Japan and India have still to adopt the IFRS; this renders the whole idea inefficient rendering them non uniform and complex. (Charteredaccountants.com.au, 2016) IFRS are important instruments of integration as claimed in a finding in the London and Pittsburgh summits of G20 leaders in 2009. The United Nations’ summit underscored this link between environment and finance. (Feroz and Ansari, 2010)

Another study investigated the usefulness of the adoption of accounting standards, like IFRS and claimed harmonization of accounting practices locally as well as globally. It was also found that differences in reporting practices do arise due to different reporting regulations and customs. An investigation of the linkage between environmental disclosure as per IFRS and the size of the reporting firm, in relation to the voluntary readiness for disclosure and the impact of regulations in the country of domicile reported better and voluntary environmental disclosures by larger firms. Country of domicile with strict regulations and constraints on environmental disclosure regulations (France and UK) tend to report better on environmental disclosures compared to countries with easy regulations (Germany). This implies that the usefulness of IFRS are impacted by regulations and that IFRS are not applied consistently globally due to difference in reporting traditions and regulations. (Wilkins, 2014)

IFRS 3 clearly establishes that assets and liabilities acquired in a business ought to be evaluated for the environmental impact on their fair value. IFRS 6 established that in cases of Exploration and Evaluation of Mineral Resources being highly environmental sensitive industry; the exploration and evaluation expenditure may be treated as revenue or capital but consistencyis important. IFRS 8 establishes financial and descriptive information requirements on an entity’s reportable segments and disclosures on products and services in the geographical areas of operation. IFRS 8 also mandates reporting of operating segment earning more than 10% revenue implied for segments related to environmental protection like recycling and clean energy etc. (Beerannavar, nd)

Thus, the Current and potential usefulness of IFRS for sustainable reporting and environmental issues cannot be undermined inspire of certain flaws rendering the usefulness limited to the extent of existing reporting practices and regulations. Literature available in this regard clearly hints the usefulness of IFRS lies in providing the companies with a cost-effective standard on reporting, disclosing and managing sustainability issues and at the same time helping Investors by ensuring the provision of information on sustainability issues.

Part B

Report on the current or potential use of accounting standards in the India to support sustainability reporting

The country has a comprehensive Environmental Management System with laws, regulations and Institutional frameworks for the enforcement of environmental objectives contained in Companies Act 1956, Factories Act 1948, Environment Protection Act 1986 and CREP 2003 applicable to resource intensive industries. The Greenock rating system framed by the Confederation of Indian industries in 2011 has been adopted by companies like Godrej, Wipro, Dr Reddy Labs, Mahindra group, Jindal steel and Ambuja cement. Currently, Sustainability reporting is not mandatory in India. However, the Companies Act and other regulations have mandated reporting on environmental matters. Initiation for setting up standards in this respect will enable the country to become environmentally responsible.

Section 217 of the Companies Act mandates information on the steps taken by the company for energy conservations in the Board of Directors Report annexed to the annual report of the company. The information is to include energy conservation measures and investments for energy conservation together with the resultant impact on the energy consumption and cost of production of goods and the total and per unit energy consumption for specified industries. (Shodhganga , 2016)

Research by A Sahay on Indian Corporations reported that Indian Companies are adopting Environmental reporting into their board meetings, factories and businesses clubbed with the economic and social reporting as well. This reporting is used by these companies as a competitive edge apart from the fulfilment of their social responsibility and is also imparting value to these business. However, the Accounting standards and other regulations have not yet produced the expected results in the sense that most of these just resort to minimum disclosures to ensure legal compliance.

The study also found that Environmental reporting in the country was unsystematic and non-comparable. Exceptions are very few in this regard and most of these companies resort to sustainability reporting only for good publicity through providing environmental facts and figures. It is suggested towards the end to enhance the quality of environmental reporting by rewarding it. In India, environmental disclosures are mostly voluntary in nature and are loosely based on corporate social responsibility norms. In this paper, an attempt was made to discuss the theoretical foundation of Environmental accounting. Environmental accounting and awareness is increasing in India, especially in reference to Oil and Petroleum, Cement, Power, Natural gas, and Textile industries. (Sahay, 2006)

Environmental accounting is at the inception stage in the country and does not depend on any mandating in the form of Accounting standards. Environmental disclosures are mostly regulated by The Ministry of Environment and Forests which emphasizes the reporting of proposed and current steps towards pollution control, waste minimization, waste recycling and utilization, and their impact on waste reduction and resources conservation. The Securities and Exchange Board of India requires listed companies to report on Environmental, Social and Governance (ESG) initiatives since 2011. The Companies act 2013 mandates companies with INR 500 crore or more net worth, or INR 1,000 crore or more of turnover to adopt a CSR policy as well as make disclosures on conservation of energy and environmental protection.

The challenges encountered in the country for the adoption of an Accounting standard in this regard are

• Lack of economic value.
• Lack of standard method of social value adoption.
• Change in estimated Social value on environmental goods and services.
• No specific accounting standard for Environmental accounting
• No legal mandating on adoption
• Lack of reliable industry data.

In light of the above, companies in the country normally perform poorly on the environmental performance and lack awareness and commitment on reporting of environmental costs and benefits. Lack of a standard environmental accounting and disclosure norms at international levels further encourages the corporate world to keep shut (Social and Environmental Accounting and Reporting in Emerging and Less Developed Countries, 2010)

In the year 2008, the Accounting Research Foundation of the Institute of Chartered Accountants of India, undertook a project for suggesting a suitable framework for Sustainability reporting in the country with an intention to mandate reporting by Companies on social, environmental and economic considerations. A committee was formed with an intention to standardise the disclosures in this regard. Sustainability reporting has been mandated for companies planning to list abroad.

The Voluntary Corporate Social Responsibility guidelines in 2009 framed in this respect cover elements like Concern for all Stakeholders, Ethical functioning, Respect for Employee rights and Welfare, Respect for Human Rights and Respect for Environment and Social activities for Development. Guidelines for implementation and dissemination of this information were issued in 2011 and cover the Social and Environmental aspects so as to encourage reporting on these issues and promote awareness on sustainable practices. These guidelines embrace diverse industries and business sectors in the country including small, medium and large organizations for comprehensive use of them so as to create value in a sustainable way. The Guideline endeavour business to take responsibility for sustainable growth and economic development. The Indian industry is embracing the concept. (Jain and Winner, 2016)

Proposed usage of the Mandatory Accounting standards will help the companies in the effective and efficient sustainability reporting in the financial statements. Research in India on the current use of the accounting standard has been carried out mostly at the corporate level only. It was found that environmental reporting and disclosure helps the stakeholders as well as the management in better decision-making by indicating the environmental risks and performance. It also aids in gaining competitive advantage by minimum negative environmental impacts through better designs, products and processes. Also, by stressing on these issues, it helps to increase profitability and productivity and long-term sustainability. This results in better performance due to increased awareness and impact on internal and external reporting.

India, in order to take forward the potential use of a separate standard in this respect should take forward the recommendations of the UN ISAR group as the current financial accounting framework in the country is not equipped to indicate the environmental risks and social costs and steps for reduction of global warming. The Accounting profession is yet to play its role in sustainability through the development of a suitable framework that is duly audited. (Shodhganga, 2016)

Literature review also indicated that Environmental Accounting and Auditing research in the country has so far been general lacking specific focus on environmental information, treatment of environmental costs, depreciation of environmental assets, and recognition and measurement of environmental liabilities. These elements are interrelated and conducive to the development of an ideal Environmental Management system. Accounting Standards play a very important role in improving the environmental performance of India’s corporate world.

Current literature review clearly demonstrates that Environmental reporting in India is not only highly deficient but also lacks the ability to meet the information requirements of the users. This imbalance exists due to the differing perceptions of the users and preparers on its importance in the decision making processes.

A study on Senior Executives of 100 Indian large manufacturing companies was done to assimilate information on Environment Accounting and Reporting practices of these companies together with the Chartered Accountants who use these reports as regards their expectations from the report so as to examine the existence of the EAR expectation gap. The questionnaire technique was used and it was found that 'Environment’ accounting is challenging indeed and the companies ought to establish an efficient system of Environmental management so as to ensure a clean and green environment and control of pollution emission from factories. 90% of the examined companies had implemented this.

The CAs and the Executives proposed that the financial accounting framework i.e. Accounting standards ought to be comprehensive and a separate standard on these issue will help in effective Environment accounting. The CAs clarified that lack of mandatory requirement and ignoring the benefits of Environmental accounting were main reasons for companies shirking the ER. Proposed separate standards would take care of these issues and also ensure compliance with relevant legislations. It would also facilitate management decision—making and result in better estimation of the cost of production. 57 % of the researched Companies reported that they generated Environmental cost information for internal decision-making. The study also found that environmental accounting in India was popular at the management accounting level and the respondents did consider environmental cost information as significant for strategic decision making, environmental impact assessment and planning of eco-friendly processes. (Shodhganga, 2016)

A Study to demonstrate the importance of the proposed usage of the Accounting standards on Environmental accounting in India claims that a separate standard on issues like environmental damage, upstream and downstream costs of pollution, Carbon credit and Research and development costs would help commerce teachers and the government in the implementation of environmental accounting in the country. (Sen, Pattanayak and Choubey, 2010)

The Institute of Cost and Works Accountants of India has issued Cost Accounting Standard 6 on Pollution control costs. Developing countries like India require Accounting standards for Environment protection to ensure promotion of economic development. A trade-off between these two elements is the need of the day. An assessment of the costs and benefits of environmental damages is also important for the determination of the safety limits of environmental degradation to achieve development. It is important to note in this regard that the country has limited resources and the environment damage by factories and business enterprises has directly and indirectly contributed to calamities like the Bhopal Chemical Leak in 1984 and Tsunami in 2004.

A proposed Accounting standard covering various issues on Environment accounting will inculcate responsibility for Environmental protection on the Corporate by reflecting the impact of their activities in the accounts. It will also help enterprises in the country to resort to Segment Environmental Accounting and select projects based on environmental impacts so as to support sustainable environmental management and inform the users on environmental liability costs as well as usage of natural resource flows and externality cost, (Goswami, 2014)

In order to encourage environment-friendly production methods, Indian regulators are working on the development of a comprehensive Accounting standard on Environmental reporting. The Standard will mandate reporting on measures for the prevention of environmental damage and will also cover other aspects of environmental sustainability so as to prevent waste of natural resources and ensure scientific treatment of industrial waste. Presently, rules in this regard only urge companies to be environment conscious but do not provide guidance of the steps required in this direction. The Institute of Chartered Accountants of India is working on this. (Causebecause.com, 2016)

A comparative study in this regard between India and Europe found that European Counterparts remarkably report their sustainability practices while Indian companies need drastic improvement in this area, though some companies do report adequately on sustainable practises. The study recommended that Indian companies ought to improve their Environment disclosure practices and the Regulators ought to regularize narrative reporting in this regard. (Mohd Taib and Ameer, nod)

Capital markets development was aided by the Financial Accounting Standards; similarly, Sustainability Accounting Standards will help to shape the desired future of the Corporate in the country. It will also aid in the conduct of audit as the auditors will be able to audit and scrutinize ESG based on auditing standards applicable to them. These developments will in turn ensure the shaping of a Corporate India where Environmental and Financial reporting go hand in hand. (Harvard Business Review, 2015)