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The Trend Toward Environmental Accounting

10/11/2010


​While the concept of environmental accounting is widely supported, it is not necessarily easy to know where to go for guidance as there is no comprehensive set of environmental accounting standards at this time. In Canada, environmental accounting guidelines are often addressed by regulatory agencies (such as the provincial securities commissions) within the broader context of corporate sustainability reporting. The idea is that an entity’s stakeholder reporting is enhanced by providing additional voluntary disclosures – typically addressing an entity’s environmental record, social responsibility and sustainability.

So what is environmental accounting?

The premise behind environmental accounting is to incorporate the impacts of an entity’s operations on the environment into its accounting and financial reporting and other non-financial information. Corporate environmental accounting focuses on transparency in corporate reporting through disclosure of environmental related costs and revenue. Its application includes the evaluation and assessment of the value of unused environmental resources and accrual for the environmental effect of anticipated and unforeseen events giving a more accurate account of the economic value of an entity. This information may be presented in an entity’s financial statements, MD&A or separate environmental reports; however, it is important to keep in mind that if you apply environmental accounting in your entity’s annual audited financial statements, any recorded amounts must still comply with Canadian generally accepted accounting principles.

Why apply environmental accounting?

The application of environmental accounting has a number of advantages for an entity:

  • As investors are placing an increased emphasis on consideration of an entity’s environmental history and reputation when making investing decisions, there is an increased demand for entities to demonstrate that they are environmentally responsible.
  • A report issued by an environmental assessor provides those investors with more comprehensive information on which they can assess the entity’s overall health and base investment decisions.
  • Environmental reporting helps an entity assess any potential problems it may face as a result of circumstances beyond their control, either through consideration and reporting of unforeseen circumstances (for example, the potential cost to a forestry company due to a forest fire in their logging area) or through the aggregation of environmental information from existing data for reporting (for example, by showing how an entity is spending money to dispose of a by-product that could actually be sold). Such information aids an entity in making appropriate management decisions to address any such problems proactively, thereby reducing the effects of any incident that might occur.

What does environmental accounting look like in application?

As an example, consider a rail company that has an accident where cars containing toxic materials leak. Under traditional accounting, this event would be accounted for in the period in which it occurs, by recording the expenses related to the clean up. However, if the company had applied environmental accounting principles, it might have foreseen the possibility of such an accident and made provisions to mitigate likely environmental and financial effects. The company, knowing the potential for a contingent liability relating to the cost of a cleanup, could have set aside a sinking fund in anticipation. The company could have also set up cleaning materials close to the area given its probability for an incident, thereby reducing the immediate costs of cleanup as the needed materials were pre-purchased and available. If the incident did in fact take place, having the contingent liability already recorded would reduce the severity of the impact on the income for the company in that period.

How might environmental accounting impact you?

Environmental accounting is becoming more and more prevalent world-wide; a trend that is expected to continue. Given the growing demand for such information we encourage you to consider whether environmental accounting is right for your business and its stakeholders.

If you have had an environmental assessment and are looking to assess the financial implications of the recommendations, or for more information about environmental accounting and how it can help your business succeed, please contact myself or your local MNP advisor.

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