conceptual framework of environmental accounting …epratrust.com/articles/upload/6.srinivasa...

ISSN : 2347 - 9671

www.epratrust.com February 2014 Vol - 2 Issue- 2

CONCEPTUAL FRAMEWORK OF ENVIRONMENTALACCOUNTING AND REPORTING: AN OVERVIEW

Srinivasa Murthy M D*

*Assistant Professor in Commerce, University College of Arts, Tumkur University,Tumkur, Karnataka.

ABSTRACT

In the 21st years we have a pressing need of defending our natural environment,because the natural environment is to blame for the survival of human beings. Due toignorance of natural environment Problems such as Global heating fast changes in weather,glacier Meltdown, dirt erosion, land degradation, deforestation, and loss of biodiversityand contamination of all types such as water, air, marine, noise, lightweight etc. areroutinely knowledge in the present century for which both evolved of developing territorymay be held responsible. We know that there are restricted assets available for the use ofall species of the soil and the enormous damage is cadged to the ecological due to theactivities of the enterprise enterprises. In detail the industrial and enterprise undertakingsare exactly or inexactly to blame for birth to the amazing incidence of the Bhopal chemicalleak (1984), Tsunami in India (2004). So, the issue of environmental blame and thesustainable developed development has granted to the birth of a new branch of accounting,i.e. ecological Accounting and describing.

Ecological Accounting and describing endows associations to pathway theirgreenhouse gas (GHG) emissions and other ecological data against decrease targets, andfacilitates ecological describing for both voluntary and legislated emissions describingdesigns. Environmental Accounting & Reporting expands the capabilities of both enterpriseFinancials and Enterprise One family of applications. The importance of environmentalaccounting& reporting is expanding because of expanding of environmental problems,economic, communal and technological expansion. Ecological accounting which is forsustainable development is required.

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February 2014 Vol - 2 Issue- 2

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EPRA International Journal of Economic and Business Review ISSN : 2347 - 9671


KEY WORDS: Environment, Accounting & Reporting, Objectives, History.

INTRODUCTION

Ecological accounting is a periodwith a kind of meanings. In numerouscontexts, ecological accounting is taken tomean the identification and description ofenvironment exact costs, such as liabilitycharges or waste disposal charges. For thereasons of this investigation, a much moregeneral delineation is utilized.“Environmental accounting” is more thanaccounting for ecological benefits andcharges.

It is accounting for any charges andbenefits that arise from changes to a firm’sgoods or methods, where the change alsoinvolves a change in ecological influences.As will be shown, advanced accounting fornon-environmental costs and advantagesinput prices, consumer demand, etc. canlead to changes in decision-making that haveecological consequences.

According to the Author, Seakle KBGodschalk in its work “ecologicalManagement” interprets: ecologicalaccounting is an administration tool thatintegrates the financial significances of

environmental matters in the financialadministration systems of associations toenhance most productive decision-makingin order to encourage ecological andfinancial sustainability.

According to Bennett and James, It iscomplementaryadministration accountableapproach to the economic accountingapproach. Key submission fields for EA areassessment of annual ecological costs/expenditures, merchandise charge,budgeting, buying into an appraisal,assessing charges and savings ofenvironmental tasks, or setting quantifiedpresentation targets, to title only a coupleof. Environmental accounting provides astructure for coordinating data on the rank,use, and worth of natural assets andecological assets including fisheries andplantation anecdotes, amidst other ones aswell as expenditures on environmentaldefense and asset management.

The diagram presents the general scheme ofthe environmental accounting.

External Benefits

2. AssumedEconomic Benefits

3. Benefits for theClients

(Consumption ofelectrical energy)Environmentalmanagement

4. Benefits from theprevention of risks

(respecting theregulations, ecological

structures)

1. EffectiveEconomic Benefits

Ecological Risk Competitive advantages

Internal benefits44

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Environmental reporting is thecommunication of environmentalperformance information by an organizationto its stakeholders.Information on environmental performanceincludes among others:

Impacts on the environment, Performance in managing those

impacts, and Contribution to ecological and

sustainable development.

the disclosure of information about acompany’s environmental activities withoutits permission and against its will.

Examples of involuntary disclosuresare environmental campaigns, press andmedia exposes and court investigations.

Environmental reports can beconsidered a sort of small world wheremany crucial points in the relationshipbetween a company and its stakeholdersmeet together.

There can be said to be three categories ofenvironmental disclosures:

1.Involuntary disclosure-

the disclosure of information about acompany’s environmental activities that isrequired by law.

2. Mandatory disclosure -

3. Voluntary disclosure - the disclosure ofinformation on a voluntary basis.

There are two types of voluntarydisclosures:

1. Confidential and

2. Non-confidential.

Confidential voluntary disclosures are those required by banks, insurers, customers andjoint venture partners that are not publiclyavailable.

disclosures Nonconfidential voluntary environmental

Include improving the company imageand building better relations with relevantstakeholder groups.

1. Strategic-Potential2. Strategic benefits

are

HISTORY OF THE DEVELOPMENT OFENVIRONMENTAL ACCOUNTING

Environment accounting may betraced to the ‘Rig Veda’, According to HinduPhilosophy “sky is like a father, earth is likea mother, a space as their children”. Thus,the Rig Veda ordains that environment is tobe valued like parents and loved likechildren. The concept of environmentaccounting may be new for westernaccounting thinkers.

Mathews (1997), as well as Ienciu and Matis(2010), described the development ofenvironmental accounting in four stages, asfollows:

1970-1980: represents the beginning of thefirst researches in the area of environmentalaccounting, which had a more descriptivecharacter.

1981-1994: there are debates regarding therole of accounting in the disclosure ofinformation regarding environmentalactivities. During this period, the interest ofresearchers for this area increases; themanagers and even accountants start to paymore attention to the issue of environmentalaccounting. The number of researchers ofenvironmental accounting is also increasingat the expense of researches regarding socialaccounting.

1995-2001: the maturation of environmentalaccounting; environmental information isstarting to be taken into consideration,

Srinivasa Murthy M D

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environmental audit is launched;environmental accounting, boththeoretically and practically, is beginning tobe widely discussed, especially in developedcountries. The studies from this period arestarting to grow, this period being namedthe “cornerstone” of environmentalaccounting. The researchers of this area arestarting to pay increased attention to thisfield, the number of studies is beginning togrow considerably, and the environmentalreports remain the main sub-fieldapproached by researchers. These sub- fieldsstarting to gain interest due to theimplementation of standards regardingenvironmental management, standards thatalso include a part of audit or verification

2002-2010: guides regarding the reportingof environmental information andregulations about environmental accountingare issued. The number and quality ofarticles about environmental accountingcontinue to grow. The studies in this fieldare more numerous, more ample, and bringimportant contributions to the developmentof this research area

The conclusion that may be drawn is thatresearches in environmental accountinghave grown considerably due to theimportance that environmental issuesstarted to have over entities and oversociety. New sub-fields of environmentalaccounting are developing, namelyenvironmental audit and environmentalmanagement accounting.

OBJECTIVES OF ENVIRONMENTALACCOUNTING & REPORTING

There are following objectives ofenvironmental accounting and Reporting:

1. Segregating and collaboration allenvironment related flows and stocksof assets or resources.

2. Taking the total stock of assets orreserves related to environmentalissues, and changes, there in.

3. Minimizing environmental impactsthrough improved product & processdesign.

4. Estimation of the total expenditureon protection or enhancement ofenvironment.

5. Assessing changes of environment interms of costs and benefits.

6. To identify that part of GrossDomestic Product this reflects thecosts necessary to compensate for thenegative impact of economic growth.

7. Reducing costs through resourcecooperation &management.

8. Realizing organizationalaccountability and increasingenvironmental transparency.

9. Elaboration and measurement ofindicators, relating toenvironmentally adjusted productand income.

10. Ensuring effective and efficientmanagement of natural resources.

11. Aiding strategic decision processregarding continuing or abandoninga particular product or process.

12. Linking physical resource accountingwith monetary accounting.

SCOPE OF ENVIRONMENTALACCOUNTING

The scope of EnvironmentalAccounting is very broad. It includescorporate level, national & internationallevel. The following aspects are included inEA (Chauhan, 2005:721):

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1. From Internal point of viewinvestment made by the businesssector for minimization of losses toenvironment. It includes investmentmade into the environment savingequipment/devices. This type ofaccounting is easy as Moneymeasurement is possible.

Degradation and destruction likesoil erosion, loss of bio diversity,air pollution, water pollution,voice pollution, problem of solidwaste, coastal & marine pollution.

2. From external point of view all typesof loss indirectly due to businessoperation/activities. It mainlyincludes:

Deforestation and Land uses. Thistype of accounting is not easy, aslosses to environment cannot bemeasured exactly in monetaryvalue.

Depletion of nonrenewable naturalresources i.e. loss emerged due toover exploitation of nonrenewablnatural resources like minerals,water, gas, etc

APPROACHES AND CLASSIFICATION OF ENVIRONMENTAL ACCOUNTING

Monetary Approach

Further, it is very hard to decide thathow much loss was occurred to theenvironment due to a particular industry.For this purpose approx idea can be givenor other measurement of loss like quantityof non-renewable natural re-sources used,how much Sq. meter area deforested andtotal area used for business purposeincluding residential quarters area foremployees etc., how much solid wasteproduced by the factory, how much wastefulair pass through chimney in air and whattypes of elements are included in a standardquantity of wasteful air, type and degree ofnoise made by the factory, etc. can be used.

Physical Approach

Environmental or Green Accounting

Macro Level Local Administration Level Micro Level

NaturalResource

Accounting

EcologicalAccounting

EnvironmentalAccounting

To be used foradjusting System ofNational Accounts

To be used for adjusting theAccounts at the level of

LocalAdministration

To be used foradjusting Accounts at

Micro Level

One Approach or Both

FinancialAccounting

CostAccounting

ManagerialAccounting

For Proper disclosure of endof year Results of operations

For Proper CostAllocation and Control

For different managerial decisions: Investment Product Design Pricing Performance Evaluation


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FORMS OF ENVIRONMENTALACCOUNTING

EFA, ECA, and EMA are related tocorporate (business) accounting.

There are four form of environmentalaccounting. These are;

a) Environmental Financial Accounting(EFA).

b) Environmental Cost Accounting(ECA)

c) Environmental ManagementAccounting (EMA)&

d) Environmental Nation Accounting(ENA).

1.Environmental ManagementAccounting (EMA):

EMA is amply defined to be theidentification, assemblage, analysis and useof two kinds of information for internaldecision making (UN, 2001:7-10):

*Personal data on the use, flows anddestinies of energy, water and materials(including trashes) and

*Monetary data on environment-relatedcosts, profits and savings.

Management accounting with a particularaim on material and power flow data andenvironmental cost data. This type ofaccounting can be further classified in thefollowing subsystems:A) Segment Environmental Accounting:This is an internal ecological accountingdevice to choose an investment undertaking,or a task, associated with ecologicalconservation from amidst all methods ofprocedures, and to assess the ecologicalconsequences for a certain period.

B) Eco Balance Environmental Accounting:This is an interior ecological accounting tool

to support for sustainable ecologicaladministration activities.

C) Business ecological Accounting: This is adevice to inform the public of applicableinformation compiled in agreement with theEnvironmental Accounting. It should becalled as Corporate ecological Reporting.For this reason the cost and the effect (inamount and monetary worth) of itsenvironmental conservation undertakingsare used

2. Environmental Financial Accounting(EFA):

Financial Accounting with a specificfocuses on reporting environmental liabilitycosts and other important environmentalcharges. EFA, data about financial eventassembles, investigates, records andaccounts. Data of EFA make up usuallyenvironmental cost. Ecological data ofbusiness are shown in financial statementsby means of EFA economic Accounting witha specific aim on describing ecologicalliability charges and other significantenvironmental charges (Chauhan, 2005:721).Ecological accounting, financial accounting,estimation procedures is requestedcarefully(Gray & Bebbyngton& Walters,1993:7).

3. Environmental Cost Accounting(ECA):

A sophisticated step of developmentof environmental accounting isdevelopment of ecological cost accounting(ECA). Cost accounting is characterized asthe use of the accounting record to directlyconsider the charges to products andmethods. In this approach, charges areaccounted for by their specific determinants.Ecological costs accounting directlylocations a cost on every ecological facet, and

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Ecological costs comprise bothinterior and external costs and relate to allcosts appeared in relative to environmentalimpairment and defense. EnvironmentalDefense costs encompass costs forprevention, disposal, designing, command,moving actions and impairment repair thatcan happen at companies and swayauthorities or persons (United Nations,2001:11).

The IFAC (2005) categorizedenvironment-related charges into four kindsas follows, asserting that this categorizationis founded on broadly accepted worldwideperform and best perform (IFAC, 2005:12-13):

1. Environmental activity type costssuch as waste prevention and control.

2. Costs that represent traditionalaccounting such as labour andmaterials.

determines the cost of all kinds of theassociated action. Environmental activitiesinclude contamination prevention,ecological conceive and ecologicaladministration. Past advances on ecologicalimpacts were found mostly on ecologicalcleanup charges and past product disposal(Yakhou&Dorweiler, 2004:68).

3. Environmental domain type costssuch as land, air or water. and

4. Costs which reflect data visibility inthe accounting records such ashidden and obvious costs.

4. Environmental National Accounting(ENA):

National Level Accounting with aparticular focus on natural resources stocks& flows, environmental costs & externalitycosts etc.

An advanced step of development ofenvironmental accounting is developmentof environmental cost accounting (ECA).Cost accounting is defined as use of theaccounting record to directly assess costs toproducts and processes. In this approach,costs are accounted for by their specificcauses. Environmental cost accountingdirectly places a cost on everyenvironmental aspect, and determines thecost of all types of related action.Environmental actions include pollutionprevention, environmental design andenvironmental management. Pastapproaches on environmental impacts werebased mainly on environmental cleanupcosts and past product disposal(Yakhou&Dorweiler, 2004:68).

NEED OF ENVIRONMENTALACCOUNTING AT CORPORATELEVEL

It helps to know whether corporation hasbeen discharging its responsibilities towardsenvironment or not. Basically, a companyhas to fulfill following environmentalresponsibilities.

a) Meeting regulatory requirements orexceeding that expectation.

b) Cleaning up pollution that alreadyexists and properly disposing of thehazardous material.

c) Disclosing to the investors bothpotential & current, the amount andnature of the preventative measurestaken by the management (disclosurerequired if the estimated liability isgreater than a certain percent say 10per cent of the company’s net worth).

d) Operating in a way that thoseenvironmental damages do notoccur.


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e) Promoting a company having wideenvironmental attitude.

f) Control over operational & materialefficiency gains driven by thecompetitive global market.

g) Control over increases in costs forraw materials, waste managementand potential liability

ADVANTAGE OF ENVIRONMENTALACCOUNTING AND REPORTING

The association that opts to revealecological issues in their statements getsdiverse advantages as given underneath:

1. It improves likeness of themerchandise or business whichdirects to improvement in sales andultimately profitability.

2. Likely competitive advantages ascustomers may favourenvironmentally amicable goods andservices.

3. Better scrounging access from theshareholders/bankers/creditors.

4. Improvement in the wellbeing safetyof the employees which will helpincreasing productivity.

5. Smaller work turnover ratio, therebydecreasing employing charges.

6. Enhanced likeness with in the eyesof stake holders because theassociation will get the exceptionalrank.

7. Build up believe and confidenceinside the community.

8. An advanced environmentalpresentation which may have aaffirmative impact on human healthand enterprise achievement.

9. It is furthermore helpful consideringpricing policy decision making sincethis accounting scheme provisiondata regarding particular casts whichare usually obscured by theadministration, a large-scale lacunaon the part of administration.

10. Ecological accounting not onlyrecognized or recognizes environ-mental associated costs butfurthermore endeavors decreasethose which in turn help every gradeof the association.

11. It supplies results in moreunquestionable costing or charge ofgoods and more eco-friendlyprocesses.

The major Obstacles & Limitation ofenvironmental accounting and reporting areas follows:

1. Environmental accountings have noeconomic value.

2. The method of estimating the socialvalue of environmental goods andservices are imperfect, oftenmisleading and construers.

3. Estimated values for environmentalgoods quantified or qualified interms which have no fixedconversion into money.

4. On account of unrecordedenvironmental costs and difficulty inextracting and separatingenvironmental cost the industry datais virally unreliable.

5. Social value placed on environmentalgoods and services are changing so

LIMITATIONS AND OBSTACLESThough environmental accounting is

being attempted by many countries, theconcept is not without some limitations andobstacles.

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fast that the estimates are likely to beobsolete before they are available foruse.

6. Lack of accounting standards forenvironmental accounting

7. Inapplicable assumption.8. Environmental accounting is not a

legal obligation in most of the casesin India.

9. Lack of reliable industry data.10. Estimated values for environmental

goods quantified or qualified interms which have no fixedconversion into money.

CONCLUSIONEnvironmental Accounting is in

preliminary stage in India. These are thefollowing practices of environmentalaccounting & reporting:

1. The environment Ministry has issuedinstruction has in this regard toprepare environment statement. Itcan be observed through theiraccounts that mainly the followingtypes of information are given:What types of devices installed forpollution control?

a) Steps taken for energyconservation.

b) Steps taken for raw materialproduction conservation.

c) Step taken for waste waterand production process waste.

d) Step taken for improvement ofquality of product andservices,process of productionetc.

Very few corporations give adequateinformation regardingenvironmentalissue. If as per requirement ofapplicable law they have to prepareand submit any information relevantto environment they do so.

2. A study was conducted amongexecutives of different industrieswhich revealed that corporate worldis fully aware of the requirements ofenvironmental reporting. They arealso aware of environmental issue.The corporate executives have alsoexpressed their views in favors ofenvironment reporting by theindustries. Despite their awarenessand consent over environmentalreporting industries is it very poor.It is so inadequate that very littleinformation is found in the annualreport.

It was also revealed that most of thecompanies disclose the environmentinformation in descriptive manner ratherthan to financial type i.e. no account is madefor the degradation of natural capital whencalculating corporate profits.REFERENCES1) Freedman, M., and Jaggi, M., (1988) An analysis of

the association between pollution disclosure andeconomic performance, Accounting, Auditing &Accountability Journal, 1(2), pp.43-58.

2) Frost, G. R., (1999) Environmental reporting: Ananalysis of company annual reports of the Australianextractive industries 1985-1994, University of NewEngland.

3) Frost, G. R., and Wilmshurst, T. D., (2000) theAdoption of Environmental-Related ManagementAccounting: An Analysis of CorporateEnvironmental Sensitivity. Accounting Forum.24(4): [[. 344-365.

4) Gupta, P., Nayar, N., (2007) Information content ofcontrol deficiency disclosures under the Sarbanes-Oxley Act: an empirical investigation, InternationalJournal of Disclosure and Governance, 4(1), pp.3-23

5) Sharma, S., (2000) Managerial interpretations andorganizational context as predictors of corporatechoice of environmental strategy, Academy ofManagement Journal, 43, pp. 681-697.

6) Singh, G., Joshi, M., (2009) Environmentmanagement and disclosure practices of Indiancompanies, International Journal of BusinessResearch.

7) Smith, M., Khadijah, Y., Amiruddin, A.M., (2007)Environmental disclosure and performance reportingin Malaysia, Asian Review of Accounting, 15 (2)pp.185-199,


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