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GREEN ACCOUNTING: INTEGRATING ENVIRONMENTAL IMPACT TO FINANCIAL

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

GREEN ACCOUNTING: INTEGRATING ENVIRONMENTAL IMPACT

TO FINANCIAL REPORTING FRAMEWORK

Fe R. Ochotorena

ABSTRACT

This study attempted to examine the environmental compliance of selected

Philippine mining, oil and power generation sectors as viewed by auditing practitioners
and to discover what these companies have been doing about this matter for the purpose
of corporate financial reporting. These sectors were chosen because of their undoubted
environmental impacts.

To achieve the objectives of this paper, purposive sampling and qualitative

research method was utilized by documentary analysis and conducting interviews among
directors and associates of the Big four Auditing Firms that are considered conversant
about the topic and generally contemplate on the significance of environmental issues.

Due to non-existent of specific accounting standards and since

green/environmental reporting is technically voluntary, companies can theoretically
adopt any approach to environmental reporting that they like. However, it was revealed
that in practice, a number of voluntary reporting frameworks have been implemented.

Keywords: Decommissioning Cost, Environmental Cost, Financial Reporting, Green

accounting
---------------------------------------------------------------------------------------------------------------------

INTRODUCTION
An enterprise is a corporate citizen and like a citizen, it is regarded and judged by

its actions in relation to the community of which it is a member as well as by its

economic performance. Relative to this, environmental protection has become a global

issue. Responsibility towards environment has become one of the most crucial areas of

social responsibility. And “green accounting” is often championed as a component of

corporate social responsibility. Currently, the Accounting Standards handle the

environmental issues at minimum level (Van, 2016). Due to lack of clear cut guidelines

to support the financial presentation, the treatment becomes subjective and is usually

based on the industry practice. In this paper, the main focus falls on analyzing the

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

accounting principles that support green accounting and how green accounting affects the

corporate financial reporting.

History of Green Accounting

The increasing difficulties deriving from environmental problems must trigger

answers in all walks of life, also including accounting. Environmental accounting

occurred in the 80s and 90s when companies‟ environmental responsibility came to the

foreground and focus shifted from environmental damages caused by large companies

and combating pollution to prevention – all of these factors contributing to the

development of environmental accounting (Csutora, 2001).

Sustainability is a hot item. In today’s society, environmental concerns are at the

forefront of entrepreneurial decision-making and planning. It is a fact that products and

services have not only a monetary value, but also have a valuable impact on the

environment. Thus, a new system of sustainable accounting, known as Green Accounting

or Environmental Accounting, has emerged. Management seldom tries to make proper

arrangement to save the environment unless it is required by law as there is no direct

relationship between investment and benefits. Corporate enterprises are facing the

challenges to determine their true profits, which are environmentally sustainable ones.

For this, companies need to account for the environment. They should take account of its

most significant external environmental impacts and in effect, to determine what profit

level would be left if they attempted to leave the planet in the same state at the end of the

accounting period as it was in the beginning. Simply stated, how green accounting affects

the corporate financial reporting. This is the idea that this paper sought to explore.

Definition of Green Accounting

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

Green or Environmental accounting is a term with a variety of meanings. In many

contexts, environmental accounting is taken to mean the identification and reporting of

environment specific costs, such as liability costs or waste disposal costs (Boyd, 1998).

Green accounting is a term used since 1980 that was defined as a method of measuring

,in economic terms, the performance of any type of organization in relation to the

environment. Green Accounting or Environmental accounting aims at achieving

sustainable development, maintaining a favorable relationship with the community, and

pursuing effective and efficient environmental conservation activities. The accounting

procedures allow a company to identify the cost of environmental conservation during the

normal course of business, identify benefit gained from such activities, and provide the

best possible means of quantitative measurement, in monetary value or physical units,

and support the communication of its results. Also, environmental conservation is defined

as the prevention, reduction, and/or avoidance of environmental impact, removal of such

impact, restoration following the occurrence of a disaster, and other activities. The

environmental impacts are the burden on the environment from business operations or

other human activities and potential obstacles which may hinder the preservation of a

favorable environment (Ministry of Environment, 2002).

Green Accounting is a type of accounting that attempts to incorporate

environmental costs into the financial results of operations (Rewadikar, 2014). It is

accounting for any costs and benefits that arise from change to a firm's, products and

processes where the change also involves a change in environmental impact. It is also

referred to “Environmental Accounting” “Resource Accounting”, and “Integrated

Environmental and Economic Accounting.” It refers to the compilation of data relating to

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

the environment into an accounting framework organized in terms of stocks and flows,

and the interpretation and reporting of these data. Environmental accounting is a

relatively new concept which aims to include in the traditional measurement of economic

development the cost for using the environment as inputs to production and as a sink for

wastes. From the point of view of green accounting, land, water, and other natural

resources are treated as inputs and assets in the production of goods and services of an

entity (Virola, De Perio & Angeles, 2000). Green accounting or environmental

accounting is the practice of incorporating principles of environmental management and

conservation into reporting practices and cost/benefit analyses (Rewadikar, 2014).

Environmental accounting allows a business to see the impact of economically

sustainable practices in everything. It allows accountants to report on the economic

impact of those decisions to stakeholders so as to allow for proactive decision making

about processes that simultaneously meet environmental regulations while adding to the

bottomline.( http://www.ukessays.com/dissertation/topics/accounting.php#ixzz42

Inhrukd, 2016)

Forms of Green Accounting

There are five forms of Environmental Accounting – Environmental Financial

Accounting, Environmental Cost Accounting, Environmental Management Accounting,

Ecological Accounting and Natural Resource Accounting. Environmental Financial

Accounting aims to the true disclosure in financial statements in the end of period. That is

including environmental dimension in the published sheets of operations. Environmental

Management Accounting means the management of environmental and economic

performance through the development and implementation of appropriate environment

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

related accounting systems and practices. While this may include reporting and auditing

in some companies, environmental management accounting typically involves life-cycle

costing, benefits assessment, and strategic planning for environmental management.

Environmental Cost Accounting deals with environmental costs in order to reach the full

cost accounting, i.e. the identification, evaluation, and allocation of conventional costs,

environmental costs, and social costs to processes, products, activities, or budgets.

Accounting Polluter Pays Principle (PPP)requires each polluter to pay for the costs for

dealing with the pollution resulting from operation. Failure to bear these costs by the

polluter will mean that some other party (a third party) will have to shoulder them-

external environmental costs. The term Ecological Accounting is used to refer to the

preparation of accounts according to physical data only. In addition, Ecological

accounting is the type of Environmental Accounting (a dedicated type of Natural

Resource Accounting at local administration level). In this respect, Ecological accounting

is mainly used to prepare an asset management plans at local administration level. Such

plans provide a tool to evaluate the condition and life cycle of any particular physical

asset. The term Natural Resource Accounting is called after inclusion of environmental

aspects into the system of national accounts. Emphasis is given to natural assets,

deterioration in its quality in order to get an environmentally adjusted economic indicator

such as environmental gross national income (Rewadikar, 2014).

Scope of Green Accounting

There are many aspects comprising Green Accounting. One is the direct

investment made by a corporate for minimization of losses to environment. It includes

investment made into the equipment/devices that help in reducing potential losses to the

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

environment. This can be easily monetized. Second, it includes indirect losses due to

business operation. It mainly includes degradation and destruction such as loss of

biodiversity, air and water pollution, hazardous waste including bio medical waste,

coastal marine pollution, depletion of non-renewable and natural resources, deforestation

etc. (Rewadikar, 2014). In examining the role of the auditor, it is important to understand

that environmental auditing has been changing over the years (Figure 1). Environmental

auditing originally focused on technical issues and legal compliance, and was generally

undertaken by external professionals outside both the accounting arena and the

organization itself. Generally, environmental scientists audited the site and identified

whether the organization complied with legislation or not. As environmental auditing has

progressed, there has been recognition that the role of an environmental auditor extends

beyond compliance, to the management controls in place in an organization, and there is

now a growing pressure for these to be internally reviewed on a regular basis. There are a

number of organizations that have started to educate, train and use their own internal

financial auditors to conduct environmental audits of their facilities as an extension of the

annual operational audits.

There are many issues in green financial accounting that had been written but no

particular study focused on how financial environmental reporting is done for mining, oil

and gas, and energy companies. Lack of cognizance on the issue and the impact of

environmental matters on the financial statements have tended to provide impetus for this

study. Thereby, this paper examined what financial statements might look like if they

were to reflect the environmental issues. More specifically, it aimed to answer the

following questions:

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

1. How are environmental data calculated and presented in the financial

statements?

2. What are the shortcomings of the existing accounting standards that deal with

green accounting?

3. How does an auditor decide whether environmental issues are significant to

the financial statements?

4. Should the auditor obtain additional representations from management about

the effect of environmental matters on the financial statements?

Methodology

This study is intended to examine the impact of green accounting to the financial

reporting of selected mining, oil and power generation sectors. The paper elected a

qualitative research methodology supported by existing literature. It allows the researcher

to interrogate primary information and enables her to examine the research problems

from a close range. It also 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). For qualitative reasoning, purposive/judgmental

sampling technique was utilized. Interviews were conducted among the respondents

consists of Directors and Associates from the “Big Four” auditing firms namely: Sycip,

Gorres & Velayo (SGV), Klynveld Peat Marwick Goerdeler( KPMG), Price Waterhouse

Coopers (PWC) & Deloitte knowledgeable in the operational audit of mining, oil and gas,

and energy companies.

Results and Discussion

1. How are environmental data calculated and presented in the financial statements?

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

Mining companies usually engage to professionals in setting up a provision for

the assessment of the rehabilitation costs based on specific rehabilitation program.

Annual review of the provision is undertaken. If there are changes in the program and

the initial estimates are no longer applicable, the provision is revised. In case there are no

significant changes, the typical reason for the changes in the provision is caused by time

value of money at year-end. There are some companies that establish a separate entity

(specialization-related segment) that actually perform the rehabilitation projects. The

standard practice for rehabilitation work is carried out throughout the life of the mine.

Rehabilitation takes place, especially during the production stage, for the area/portion

that can already be rehabilitated. Common rehabilitation work usually involves

reforestation (Montoya, PwC Senior Associate, personal communication, July 24, 2016).

Likewise, (Rivera, former PwC Assurance Associate, personal communication,

July 20, 2016) cited that in mining companies, provision for liability is based on current

legal and constructive requirements. Technology and price levels are also considered in

the calculation of the provision. Provision for environmental remediation account is being

created as part of liability allotted for pollution such as sewage treatment, hazardous

waste treatment, and landfill waste. Moreover, these mining companies have a Financial

and Technical Assistance (FTAA) agreement with the Department of Environment and

Natural Resources. Usually, compliance with environmental laws is disclosed in their

significant contracts and agreements. Similarly, (Madlangbayan, SGV Assurance

Director, personal communication, July 21, 2016) mentioned that pollution and hazards

costs are not factored. These accounts are neither recognized nor disclosed in the

financial statements. These accounts are expensed outright when actually incurred.

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

However, a provision account is set up for mine rehabilitation. This is the accrued

liability account for restoration of the mine site once the mining activity is completed. All

other expenses related to environmental disturbance or hazard is factored in this account.

By the same token, (Valdemoro, PWC Senior Associate, personal communication, July

23, 2016) said that the useful life of the mine and the provision for environmental

remediation cost to restore the land are estimated by professionals like mining engineers

or geologist. Since the amount of provision is relatively based on estimates, the amount

varies. It was mentioned that the bigger the land size, the higher the provision. If the

company is already experienced, new projects are usually estimated by their professionals

using their previous projects as leverage. Besides, (Sirad,Deloitte Audit Associate,

personal communication, July 19, 2016) cited that there is a hierarchy being followed in

the computation of provision: first, it is based on historical cost; second, it is based on

highest and lowest value available divided by two; and third, asking for valuation of an

expert. Companies use 20-25 years if it is estimated that there are many mineral reserves.

But every now and then, at least an annual review or assessment of the provision is done

for impairment especially if gold and other metals or minerals are progressively

exhausted.

With regard to energy/power generation plant, (Garcia, KPMG Assurance

Associate II, personal communication, July 25, 2016) explained that provision relative to

decommissioning liability is established, where factoring of environmental compliance

and other costs are included. Decommissioning refers to the dismantling of the power

plant after 25 years as prescribed by the Department of Energy (DOE). Furthermore,

environmental compliance is disclosed. All the required compliance is enumerated and

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

defined whether the company comply with these laws. The compliance with applicable

environmental rules and industry requirements are contained in their significant loan

covenant and other special agreement.

On the other hand, (Valdemoro, personal communication, July 23, 2016) stated

that the environmental accounting treatment for oil companies is basically similar with

mining except for the account used. At times, decommissioning cost is initially

capitalized and then subject to annual depreciation and impairment assessment. While,

remediation cost is treated as an outright expense.

2. What are the shortcomings of the existing accounting standards that deal with green

accounting?

One of the challenges of green accounting compliance is that there are no clear-

cut guidelines or there is no specific standard accounting method because neither

effective PASs nor new PFRSs include any standard dealing fundamentally with

environmental issues. Nevertheless, it is recognized that businesses employ varied

generally accepted methods to implement green accounting.

PAS 1 which involves presentation of financial statements does not include any

criterion concerning the presentation of environmental costs and liabilities; therefore, it is

not obligatory to handle environmental costs separate from other costs. This raises the

question of how much actual information analyses and reports include. The shortcomings

of the current standard include requirements for separate disclosure of environmental

costs and liabilities especially in the case where it affects the financial situation and

performance and influences the decision makers who rely on the information content of

the financial statements considerably (Langford 1998). Where environmental costs are

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

separately disclosed, the accounting policies should state what these costs represent, the

accounting treatment adopted and whether the amount concerned is derived from an

allocation of total costs, or is restricted to those costs that relate wholly to environmental

liabilities. Harmonization is needed also in this area in order to make accounts and

reports comparable.

As regards liabilities arising from past events, PAS 37 deals with provisions,

contingent liabilities and state-contingent assets. The standard requires that a provision

should be recognized only when there is a present obligation as a result of a past event, if

an outflow of resources embodying economic benefits will be required to settle the

obligation and its amount can be reliably estimated. Concerning environmental issues, it

is outstanding that the standard defines that future events include legal and technological

changes if there is adequate evidence to prove that these will occur (IASCF 2006).

Financial provisions could be required for liabilities arising from costs of waste disposal,

pollution, decommissioning and environmental contamination, and wildlife habitat

restoration. However, the shortcomings related to the PAS 37 include the fact that it

provides a rather narrow interpretation of environmental considerations. More special

guidelines should be provided that recognize the growth of environmental liabilities

depending on a future event and explore the presence and amount of liabilities wherever

it is impossible to estimate these.

PAS16 aims at the presentation of accounting for property, plant and equipment.

A smaller or larger part of the plant machinery and equipment are purchased due to

environmental reasons. These investments may not directly increase economic benefits,

although according to the basic requirement it is capitalized in the assets if it will produce

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economic benefit for the company in the future. PAS 16 allows such investments to be

recognized as tangible assets, since later on economic benefits may exceed what could

have been realized without the environmental investment (IASCF 2006). The reduction

of environmental damages may represent a form of future benefits, since it can help avoid

potential suspension of operations. This does not increase benefits directly, but ensures

future operations and allows for maintaining further benefits. According to the principle

of the enterprise’s continued operations, the standard makes a stand for the latter one,

since although the environmental investment may not increase economic benefits

considerably, the activity could not be continued without it. The shortcoming of the

standard is that it should clarify whether an increase in expected economic benefits rather

than continued benefits, is required.

PAS 36 defines the processes applied “to ensure that assets are carried at no more

than their recoverable amount. An asset is carried at a higher amount than its recoverable

amount if its balance-sheet amount is in excess of its value in use or net selling price. In

such cases impairment must be accounted for the asset” (IASCF 2006, p. 1502.). PAS 36

includes indications of impairment and states that “the economic organization may also

identify other indications of potential impairment” (IASCF 2006, p. 1507.). For example,

such an environmental factor may be a polluting unit within the company. The

recommendation should be improved in this area because, for example, the impact of

environmental factors on assets is not defined. The measurement of environmentally

impaired assets may be affected by uncertainties deriving from the possibility of

improvement in related technology or changes in legislation. The stigma effect must also

be mentioned here (Langford 1998). This effect may deter potential purchasing power or

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

limit market opportunities in other ways. Stigma is an aspect of asset contamination, in

the case of which the impairment of the asset may be regarded as the extent to which

diminution in value of an asset attributable to the existence of contamination exceeds the

costs attributable to remediation of the asset, the prevention of future contamination, and

any fees, penalties or insurance. In practice, the “stigma effect” occurs if a further

discount is applied to the values of an asset after allowing for all expected remediation

costs. This standard raises the problems of measuring impairment of assets due to

environmental factors, the difficulties of determining the recoverable amount and the

uncertainties as regards the timing involved. The standard does not include any rules

concerning this, which means that wherever the effect cannot be measured reliably and

there have been no disposals of comparable contaminated sites, the problem cannot be

handled adequately. PAS 38 comprises the regulations on handling intangible assets in

accounting. In relation to this standard, this concerns pollution permits and emission

rights that are subject to increasing use in the environmental area, and increasing use in

terms of accounting, these rights should be recognised according to the criteria of

intangible assets (Langford 1998).

IFRIC 5 provides for rights to interests arising from decommissioning, restoration

and environmental rehabilitation funds. IFRIC 5 is used if a fund being set-up. Once

actual expense is incurred, right to receive reimbursement from the fund is capitalized.

To date, no client has structured a fund for rehabilitation. Lastly, IFRIC 1 addresses

changes in existing decommissioning, restoration, rehabilitation and similar liabilities

3. How does an auditor decide whether environmental issues are significant to the

financial statements?

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

There is a need to recognize a provision for remediation costs and disclose the

data especially if the company’s activity will definitely cause damage to the environment.

Auditors consider the assessment of the legal counsel and the Board of Directors as well

as the materiality of the effect of the environmental issue. It is essential for companies to

provide for environmental remediation cost and recognize asset retirement obligation

over the years of usage. The computation should at least cover the number of years land

will be exploited. The existence of provision usually facilitates the adjustment in case of

any legal action and penalty. Auditors usually consult the legal experts especially if there

are pending cases. In the event that there is already a probability related to environmental

issues, liability is recognized. It is a common practice among clients that as long as there

is no final judgment or court ruling, they do not recognize the liability. In case of

pending case, there is a contingency disclosure indicating the assessment of the

management and the current status of the case.

4. Should the auditor obtain additional representations from management about the

effect of environmental matters on the financial statements?

The auditor definitely needs a clear representation from the management

regarding material estimates and judgment. In fact, if the auditor is prudent, this must be

included in the representation letter (Arca, SGV Associated Director, personal

communication, July 26, 2016). On the other hand, Valdemoro underscored that

additional management representation must be obtained if the company/client does not

agree on a different accounting treatment suggested by the auditor. The accounting

treatment will always depend on the management as long as the treatment is supported

and justified. Thus, the management will still be accountable for the consequences. The

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

impact of rehabilitation costs can be estimated by an internal professional, third party

professional hired by management or third party professional hired by external auditor.

The first two are subject to testing of auditor for the reliability of the data and

competitiveness of the professionals hired.

Conclusion

The amount of environmental legislation is increasing rapidly, and legislators are

using this mechanism to ensure that we have a “cleaner, greener world”. There are

currently only limited requirements for any formal identification or reporting with regard

to environmental assets, liabilities or contingencies. The key problem is that there are few

formalized definitions of what environmental assets or environmental contingencies are,

although some progress has been made in this area. PASs and PFRSs do not set the

stipulation of environmental issues in standards as a basic requirement, since no such

specific standard exists, and the present standards include minimal guidelines concerning

environmental issues. This implies the problem of such comparison among the reports,

inadequate management of environmental costs, different calculating methods, and so on.

The findings suggest this type of accounting is not easy, as losses to environment cannot

be measured exactly in monetary value. Further, it is very hard to decide that how much

loss has occurred to the environment due to a particular industry.

FRSC already has the basis on which environmental information at the corporate

level can be reported. But, the absence of clear environmental accounting standards

makes comparison between firms not possible because method of accounting is different.

Results suggest that the accounting treatment with regard to this matter is subjective and

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

usually based on industry practice. Accordingly, an accountant or auditor does a lot of

adjustments to reflect more accurate costs of the transactions and future obligations.

Auditors believed that organization is required and made accountable for the costs

of the activity’s adverse effects towards the environment. Where environmental issues

have a material impact, specific provision and disclosures may be necessary. Some

environmental items may require special treatment due to their harmful impact.

Irrespective of the size and value of an environmental item, its nature, societal

importance, and impact on a company’s reputation might be sufficient to be regarded as

financially material; especially now that the country is moving towards a stricter

regulatory environment for the extractive industries such as mining, energy, and oil

industries. The environment is an opportunity for the accounting profession to

demonstrate that it is on top of contemporary issues and that the profession can grasp new

opportunities and run with modern issues. The environment will be a challenge, but it is a

challenge that accountants are well able to deal with, well able to run with, and well able

to demonstrate that it is an issue that they can truly grasp.

Therefore, it is imperative that corporation prepare a firm’s environmental policy,

take steps for pollution control, comply with the related rules and regulations, and

mention adequate details of environmental aspects in the financial statements. For

sustainable development of country, a well-defined environmental policy as well as

proper accounting procedure is a must for all companies.

Recommendations

Accountants must consider the environment relevant to their profession since

there is a growing interest in the environment within the profession both locally and

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

internationally. The environment is clearly something that accountants need to be aware

of, and be involved in. There are many compelling reasons why accountants should

consider further change. Moreover, the number of environmental pressures that face

organizations today is increasing in both number and frequency.

Standard setting bodies should consider whether independent environmental

standards are needed and if it is necessary to amend the relative PASs and PFRSs

concerning environmental issues because the players in the national economy need

information on environmental issues. Furthermore, the standards introduced above

concern big companies, while these regulations may be exaggerated for small and

medium sized companies. Additionally, there is a need for the development of a

comprehensive standard that would facilitate unified interpretation; the consideration of

the aspects of environmental costs that do not just increase costs, and help with the

harmonization of reports and the follow up of enterprises’ sensitivity related to

environmental issues would offer a solution to this problem.

Environmental laws and regulation should be implemented more effectively to

ensure and validate the existence of environmental accounting and also help reduce

environmental problems in the long term.

REFERENCES

Boyd, James (1998) Discussion Paper 98-49, September © Resources for the Future.

Csutora, M. 2001: Vállalati környezetvédelmi költségek számbavétele (Review of

company‟s environmental costs). Tisztább Termelés Kiskönyvtár III.kötet,Budapest.

Hardeman, F. W. J. (2012) Applying green accounting with the support of ICT, Master
Thesis 310997fh, Erasmus University Rotterdam

Horngren, C.T., Datar S.M., Foster, G., Rajan, M. and Ittner, C. (2011), Cost Accounting:

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

A Managerial Emphasis, Australian revised ed., Pearson Education, Frenchs

Forest, NSW.

http://www.ukessays.com/dissertation/topics/accounting.php#ixzz42InHRUkd, 2016

IASCF, 2006: International Financial Reporting Standards (IFRSs) 2006 including

International Accounting Standards (IASs) and Interpretations. 1 January,
IASCF Publications Department, United Kingdom.

Langford, R. 1998: Global accounting rules on green issues - Review of

international accounting standards for environmental issues. Downloaded:
15/10/2007., http://www.p2pays.org/ref/26/25602.pdf.

Medley, P. (1997) Environmental accounting – what does it mean to professional

accountants? Coopers & Lybrand Consultants, Sydney, Australia

Ministry of Environment (2002) Environmental Accounting Guidelines, March@

environmental accounting eag02.pdf

Rewadikar, B. (2014) IRJA-Indian Research Journal, Volume: 1, Series:2. Issue: March,

Online Available at www.indianresearchjournal.com

Tinker, T., and Sy, A. (2009), “No David to battle Goliath or analyzing accounting for
climate change”, International Journal of Critical Accounting, Vol. 1 No. 3, pp.
177-81.

Van, H. (2011), Studies in International Economics and Finance. Farkas, B. ed)

JATEPress, Szeged, pp.181–191.

Virola,R. A., De Perio, S. M., and Angeles, E. T. (2000)Paper Presentation Users’

Forum on Environmental Accounting, Skytop, Hotel Intercontinental Makati City
29 June

APPENDIX A
KPMG Sample Disclosure – Power Generation

Decommissioning Liability

The decommissioning liability arising from PPC, TPC, GPRI, PEDC and
CEDC’s obligations under their Environmental Compliance Certificate, to decommission
or dismantle their power plant complex at the end of its useful life. A corresponding
asset is recognized as part of property, plant and equipment. Decommissioning costs are
provided at the present value of expected costs to settle the obligation using estimated
cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks

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DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

specific to the decommissioning liability. The unwinding of the discount is expensed as

incurred and recognized in the consolidated statement of comprehensive income as an
accretion of decommissioning liability under the “ Finance Cost – net “account. The
estimated future costs of decommission in are reviewed annually and adjusted
prospectively. Changes in the estimated future costs or in the discount rate applied are
added or deducted from the cost of the power plant complex. The amount deducted from
the cost of the power plant complex shall not exceed its carrying amount. If the decrease
in the liability exceeds the carrying amount of the power plant complex , the excess shall
be recognized immediately in the consolidated statements of comprehensive income.

APPENDIX B
PAS 37, IFRIC 5,

In accordance with PAS 37 Provisions, contingent liabilities and contingent

assets, an entity recognizes any obligations for removal and restoration that are incurred
during a particular period as a consequence of having undertaken the exploration for
and evaluation of mineral resources. Furthermore, paragraph 3 of PAS 37 defines
provisions as “liabilities of uncertain timing or amount”; and contingent liability is
defined as: [. . .] a liability that arises from past events, and its existence will be
confirmed only by the occurrence and non-occurrence of one or more of uncertain future
events that are not wholly within the control of the entity. Paragraph 14 of PAS 37
requires that provision should be recognized when: (a) an entity has a present obligation
(legal or constructive) as a result of a past event; (b) it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligations; and (c)
a reliable estimate can be made of the amount of the obligation. Paragraph 17 further
defines an obligating event as a past event that leads to present obligation. It states that
for an event to be an obligating event, it is necessary that the entity has no realistic
alternative to settling the obligation created by the event. Finally, paragraph 27 of PAS

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 DEVOTIO: Journal of Business & Economic Studies, Volume 11, No.1, January – June 2017

37 deals with the disclosure conditions for contingent liabilities. If the liability is not
expected to lead to an outflow of resources and where an entity is jointly and severally
liable for an obligation, that part of the obligation that is expected to be met by other
parties is treated as contingent liability. The standard therefore leaves the application to
the management, the audit committee and the external auditors. In other words, even
though the two standards do not define the time limit or the size (amount) of the event or
what construes a “constructive” obligating event, they provide the technical ground for
the recognition of environmental liabilities that might arise from past events (activities).
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”. Paragraph 2 states
that contributions to this fund may be voluntary or required by regulation or law, and the
fund might be established by a single contributor or multiple contributors for individual
or joint decommissioning costs.

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