BAO2203: Financial Reporting Standards and Environmental Disclosures - Corporate Accounting Assessment Answers

Topic:Financial Reporting Standards and Environmental Disclosures

“Currently, most companies that report on sustainability publish stand-alone reports. However, a trend toward integrating sustainability reporting with financial results is emerging and is supported by the International Integrated Reporting Council’s (IIRC) efforts to develop a global integrated reporting framework. Both stand-alone and integrated sustainability reporting require the involvement of accounting professionals. Accounting majors, many of whom have grown up in an environment that strongly values ecologically, ethically, and socially responsible corporate behavior, represent the future accounting professionals” (James 2015, p.1). Disclosures on organisational behaviour in relation to the natural environment form an essential component of integrated sustainability reporting. This assignment would assist you to explore the ability of the current international financial reporting standards (IFRS) in monitoring the impacts of organisational operations on the natural environment.

(Reference: James, ML 2015, 'The benefits of sustainability and integrated reporting: an investigation of accounting majors' perceptions', Journal of Legal, Ethical & Regulatory Issues, vol. 18, no. 1, pp. 1-20.,)

1. What is environmental reporting? Explain how reporting on environmental issues could be related to the objectives of general purpose financial reports (GPFR).
2. Identify two accounting standards (IAS/IFRS) that are relevant to environmental impacts of an organisational operation. Explain the relevance of these accounting standards with environmental issues related to business activities.
3. Select the most recently published annual report of a company from an environmentally sensitive sector. Provide a critical discussion of the environmental disclosures in relation to financial accounting reported by the company you selected.

ABSTRACTEnvironmental accounting is providing accurate information about an organization by presenting correct data in the financial statements relating to the environmental costs incurred in terms of estimations and exact expenditures and how the difference between social cost and private marginal cost of a firm has been bridged. The aim of this study is to determine the relationship between financial reporting standards and environmental disclosure and how these standards are made important to improve an organization’s performance and the state’s economy as a whole.

1. INTRODUCTION

Today, research studies show that the environment has found its way into accounts and reports presented annually. However, people should not show self-satisfaction as there is still a long way to go. Valid facts in theory and numerically obtained are quite few and most annual reports and accounts are yet to be applicable and prove relevancy in comparing figures in which decision makers base their certainty.

2. ENVIRONMENTAL REPORTING

Environmental reporting is disclosing, presenting and examining the condition and scientific tendency facts assembled and analyzed, reporting socio-economic and managerial performance information needed in an organization’s environment, and providing stipulated rules and regulatory information set in that environment.

Relating Environmental Reporting to General Purpose Financial Reporting Objectives

Eccles & Krzus, 2015 submit that the objective of GPFR is to give information of a reporting organization’s financials that can be put to use by potential and upcoming investors, suppliers and lenders in decision making and availing resources to that particular organization.

Environmental reporting is gainful to an organization as this will help to publicize an organization’s financial information and, how the information was given is influenced by the environment in which it operates thereby pulling investors, customers, lenders, suppliers and the government both locally and internationally depending on the positivity of the information (Busco, et al. 2014; Chatterjee, 2005) . This may promote the organization’s growth and development as all these groups will inject different kinds of resources into the organization e.g. capital in both monetary terms and physical assets, and financial securities (Department for Environment, Food & Rural Affairs, United Kingdom (2013)).

Benefits of Environmental Reporting

Chatterjee, 2005; Environmental Responsibility Report, 2016 & Kamal, 2016 all argue that there are several benefits pegged to environmental reporting. They are namely:

1. Reports made about the financial condition of an organization internally to its managerial superiors is very important to that organization as it will help the managers to review and supervise the performance and position of the company; thereby making a future program, taking effective control and planning decisions to increase its operating profits.
2. This reporting would attract more customers locally and globally, creating a wider customer base and potentiality of improved liquidity state of the organization increasing its revenues.

• Most suppliers would opt for knowing the capability of their customer’s financial position together will all the available and required information that would affect or stimulate their performance. This is to enable them assess the customer’s ability to pay its short-term financial obligations when due. Similarly, lenders and providers, on the other hand, would like to be assured by their client that it can repay the loan principal amount advanced plus interest accrued when due. Lenders and suppliers both will help boost the organization’s asset base through the resources they will inject into the business and services they will render to their customer.

1. It can promote a competitive edge and marketing advantage as it indicates the organization is aware of its environmental duties. This can show it is good at innovation and leadership, thus a higher bargaining power towards investment attraction and is always ready to initiate new ideas, contract negotiating, and getting into new markets. Investors may thus be attracted to the organization helping in raising its share price.
2. The government expects organizations to adhere to environmental regulations both socially, economically and financially; in terms of pollution issues, creating employment opportunities and honoring taxation obligations. These are legal requirements that an organization must and/or should perform. In turn, such an organization may receive tax incentives and discounts which will help to increase its revenues.

 

3. ACCOUNTING STANDARDS RELEVANT TO ENVIRONMENTAL IMPACTS OF AN ORGANIZATIONAL OPERATION

In reality, no international accounting standards have been put in place to ultimately deal with the issues relating to the environment in reports compiled annually for an organization (Ministry of the Environment, Japan Government. (2004)). However, IAS/IFRS analysis has been directly and indirectly applied to dedicate remarks on environmental accounting topic in the various accounting standards (Barbu, et al. (2012). Like the issue of rights relating to emission of pollutants to the environment is highly tackled in the both International Accounting Standards and International Financial Reporting Standards (Goyal, 2013 & Khuntai, 2014).

The relevance of IAS with environmental issues related to business activities.

1. IAS 1’s aim is to provide a room for presenting a general purpose financial statement, to be able to compare with an organization’s financial statements showing its financial history and with those statements of other organizations. The standard, therefore, put in place the required procedures and instructions needed to be followed by organizations while making their financial statements presentation highlighting their structural guidelines and the content shown with minimum requirements as possible.
2. IAS 1 requires that all risks relating to an organization’s financials be put in light to the general public. Therefore, environmental risks should and must be noted and highlighted and be tackled in the same manner as with all the other incomes and profits, expenses, assets, and liabilities. Here, organizations according to IAS 1 are heartened to provide other related knowledge concerning their financials and those that are non-finance related together with their financial statements. This information can always be presented through environmental reports or other valuable reports if an organization believes that this information provided are valuable to users in economic decision making.
3. Errors and provisions in accounting, as required IAS 8, should always made relevant when selecting accounting policies and showing the revisions and changes made in approximation for the errors that were previously recorded. Such predictions concerning might be needed to correct environmental issues like provisions of expenditures related to the environment, e.g. expenses due to noise pollution, air pollution, emission of dangerous and deadly gases, harmful waste materials, and provision for buying pollution control equipment.
4. IAS 16, on the other hand, gives direction on how to treat environmental spending associated with the acquisition of items of property, plant and equipment and that such items shall only be taken as capital if there is a probability that they will benefit the organization economically, exceeding the previous levels of production of that particular asset flowing to the organization. Equipment obtained for pollution control purposes may be seen to be bringing economic benefits to the organization and as such will be classified as an asset as it is necessary for the continued operations of the organization.

The elevance of IFRS with environmental issues related to business activities.

1. IFRS 8 oblige reporting entities to give financial information and other detailed information that can be disclosed about their other sectors, revealing their products and services, and the geographical areas in which they conduct their activities (Khuntai, 2014). The standard needs entities to report their sectors of operation that gain 10% or more of their operating revenues joined together. Organizations with environmental protection and service sectors e.g. green technology, recycling, and clean energy are affected (Goyal, 2013).
2. When it comes to mergers and acquisition, IFRS 3 give advice and instruction to organizations on contingent liabilities that were present as at the amalgamation time, and that assets and liabilities that can be identified to have been obtained during the joining of the businesses be assessed and rated at their fair value, and this may be coupled with the environmental effects of such principles. This fair value provided in respect of the matters relating to the environment need to be identified and costs of repair evaluated.
3. ENVIRONMENTAL DISCLOSURES IN RELATION TO FINANCIAL ACCOUNTING REPORTED BY APPLE

The environmental issues of Apple that can be could be considered are in the manufacturing sector, carbon footprint, natural facilities and the use of the product.

Under carbon footprint, Apple has worked towards reducing carbon emission as reported in their “Environmental Responsibility Report, 2016 Progress Report, Covering Fiscal Year 2015”, by working on their own Carbon Footprint. The company argues that their measurement of carbon footprint include hundreds of millions of devices, hundreds of suppliers, and millions of customers. They, therefore, design every product they manufacture to be highly energy efficient as much as they can by sourcing materials with lower carbon to make their devices. Apple partners with suppliers to bring in more clean energy to their facilities, thus enabling them to procure and produce clean renewable energy to power their data centers, offices, and retail stores all over the world. They have tried to reduce carbon emission per every manufactured product yearly since 2011.

Apple’s manufacturing include a huge piece of greenhouse gas, and has established areas and ways through which they can minimize the production of raw materials and the amount of electricity used during manufacturing. They have therefore partnered with suppliers to reduce emission by reducing their energy use, build renewable energy of high quality and powering their facilities with clean energy which have been achieved by creating projects to help promote improve continually; and increasing environmental and financial benefits of energy efficiency awareness. This has earned them a lot of cash in opportunities for savings. They are building solar projects and installing more new clean energy that has helped in the reduction of carbon pollution. This, in turn, has earned the company good working conditions and an increase in production of quality products that have fewer carbon footprints in their aluminum enclosure, making them sleek and light and hence more attractive to their customers leading to an increase in the number of sales.

Moreover, most customers like to buy and use good quality products that are energy efficient, and are durable; a quality exhibited by apple products since during manufacturing, carbon-intensive sources like gas or coal are included in the energy it takes to charge the devices, saving their power even when one is typing as in the cases of a Mac book. The report shows that today’s apple products use a lesser percentage of energy than the models produced previously. Some devices too exhibit a consumption of less percentage of power when inactive as compared to those of previous generations. As of 2008, overall average power consumption by apple products have been minimized, slowing their carbon footprint altogether and customers’ electric expenses at the same time.

Apple’s data centers function on 100% renewable energy such that when your device tries to communicate with their servers, energy used by Apple has no effect on the changes in the climate.

Apple uses different sources of power e.g. wind, water, and Sun, to power their office facilities like servers, lighting and even in making coffee for their employees. They have connected new solar energy to the national grid of China giving out more than enough electricity to their power all their offices and retail shops in that country. Due to the use of renewable energy in their facilities, they have reduced the emission of huge amounts of carbon dioxide into the atmosphere hence increasing a percentage of energy saving by over 20% through energy efficiency in all assessed buildings (Parker, 1997).

Effects of disclosure to the financial performance and position of the company

These disclosures have benefitted the company by attracting more suppliers of renewable energy and enabling them to work together to ensure a conducive, clean healthy environment free of air and noise pollution as well as producing high-quality products (Wright & Hobbs, 2010). The good quality products produced in turn act as a competitive edge for apple products to other firms producing similar electronic products and hence bringing in more customers and an overall increase in sales compared to other companies.

Apple products have less carbon in their footprint making them become goods of high quality and durable. Such products are always in high demand thus, Apple products will have a marketing advantage over other electronic products as they will attract high demand in the market and consequently an increase in their sales.

CONCLUSION

Environmental disclosure could improve the perspective of decision usefulness and accountability in the sense that an organization will be required to adhere to the set rules and regulations relating to the standards put in place to help regulate the environment.

These disclosures can enable shareholders to work hand in hand with their managers to ensure proper decision making within the organization to attain maximum profits at the end of a particular financial year. Furthermore, it will enhance accountability of the firm controllers and decision makers by showing their responsibility to the company upon the measures taken to facilitate the running of the organization.

The disclosures should be improved so as to ensure a clean pollution free environment by ensuring decision makers put in place conditions and policies; and the use of right equipment to avoid and control environmental pollution at all cost in the future. Moreover, it should enable consistent use of procedures used before in making and presenting previous reports in the future analysis and presentation of such financial environmental statements.