Impact on Financial Statements

Establishing how to reflect environmental (and other sustainability-related liabilities and costs) in financial statements prepared under IFRSs:

• IAS 37 on Provisions, Contingent Liabilities and Contingent Assets: This standard is highly relevant to environmental issues and some social issues, covering contingent liabilities as possible obligations that arise from past events, or present obligations that arise from past events, but were not previously recognized. The standard defines provisions as liabilities of uncertain timing or amount, and gives guidance on when to raise a provision. It is currently subject to review by the IASB - an update can be found at IAS PLUS.
• IAS 2 on Inventories: Companies in some industries such as mining may regard their infrastructure and waste materials as assets with a residual value. However, IAS 2 does not allow this, and a waste site should not be accounted for as an asset unless additional costs were incurred to convert the waste into a commercial item.
• IAS 16 on Property, Plant and Equipment: This standard addresses rehabilitation by stating that the cost of an item of property, plant, or equipment includes "the estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognized as a provision under the statement on provisions, contingent liabilities, and contingent assets." Rehabilitation costs include the cost of rehabilitating damage that incurred on initial acquisition and set-up of an asset, as well as damage incurred over the life of the asset. To the extent that damage is incurred in the initial set-up of an asset, the anticipated cost of restoring the site and removing the asset should be recognized as a provision, and as part of the cost of the asset. A provision for environmental rehabilitation costs resulting from damage caused during operation of the asset should be raised as the damage is incurred. For tangible fixed assets such as land, plant, and machinery, impairment may arise from an incident of contamination, physical damage, or non-compliance with environmental regulation. In such circumstances, IAS 16 allows reduction of the carrying amounts to the value in use or realizable value.
• IAS 10 on Events after the Balance Sheet Date: Subsequent events may also be relevant to environmental issues. IAS 10 states that subsequent events cover both favorable and unfavorable events, including (a) those that provide evidence of conditions that existed at the balance sheet date, and (b) those that indicate conditions that arose after the balance sheet date.
• IAS 36 on Impairment of Assets: Where initial set-up and dismantling costs are included as part of the cost of an asset, and there is an indication that the asset may be impaired, the recoverable amount of the asset should be calculated under IAS 36.
• IAS 38 on Intangible Assets: includes greenhouse gas emission allowances, which are subject to a test that measures impairment of their carrying value if they exceed the amount recoverable from use or realization.
• Accounting policies: An entity should disclose the accounting policy adopted in respect of provisions for site restoration and environmental rehabilitation.
• IFRS 3 on Business combinations: covers fair values in acquisition accounting which require identifiable assets or liabilities acquired in a business combination to be measured at their fair value at the date of acquisition, which may need to reflect environmental impacts.
• IFRIC 1 (international interpretation) on Changes in Existing Decommissioning, Restoration and Similar Liabilities: contains guidance on accounting for changes in decommissioning, restoration, and similar liabilities that have previously been recognized both as part of the cost of an item of property, plant, and equipment under IAS 16, and as a provision (liability) under IAS 37.
• IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment: clarifies when certain producers of electrical goods are required to recognize a liability under IAS 37 for the cost of waste management relating to the decommissioning of waste electrical and electronic equipment supplied to private households.

ACCA and KPMG's 2003 publication Environmental Liabilities: Paying for the Past, Providing for the Future, considers some of the guidance that has emerged from the accounting profession, through International Accounting Standards, and provides some examples of these standards that can extend to cover environmental liabilities. This report also refers to jurisdictional initiatives by accounting institutes and environmental agencies that have produced standards, legislation, or guidance on environmental liabilities.

For updates on the IASB's agenda in relation to Emissions Trading (and other general developments related to the IASB's work plan), IAS PLUS is a useful resource. The IAS PLUS update on the IASB's agenda to deal with emissions trading also comprehensively explains the history of IASB's discussions on emissions rights and trading, including a discussion on IFRIC 3 on Emission Rights, which was withdrawn in 2005.

Looking to the future, it's clear that in many jurisdictions specific programs to reduce greenhouse gases, for example the Carbon Disclosure Project and programs established by the Carbon Disclosure Standards Board in the UK, will also stimulate investor appetite for much fuller disclosure of carbon issues by organizations deemed to be carbon-intensive. The Carbon Disclosure Project (a voluntary disclosure scheme) is an independent not-for-profit organization that collects climate change data, including business risks and opportunities presented by climate change, from the world's largest corporations. The data is obtained from responses to CDP's annual Information Request, sent on behalf of institutional investors and purchasing organizations. Climate change reporting is covered at Climate Change Reporting although it should be noted that it is also important for many investors.

Determining requirements under national securities regulations and Generally Accepted Accounted Principles:

Many jurisdictions have specific requirements for disclosing environmental information. For example, the US Securities regulations require registered companies to disclose:

• The material costs of complying with environmental regulations in future years;
• The costs of remediating contaminated sites if a liability is likely to have been incurred, and its magnitude can be approximately estimated;
• Other contingent liabilities arising from environmental exposures;
• Involvement as a party to a legal proceeding about an environmental issue, especially with an agency of government; and
• Any known trend or uncertainty involving environmental issues, including pending regulation that would materially affect the company's business.

US GAAP offers an accounting framework for dealing with contingent liabilities arising from environmental contamination. FASB's Financial Accounting Standard No.5, Accounting for Contingencies, stipulates the criteria for determining whether to accrue a contingent liability. This application of this standard is supported by Financial Interpretation No.14, Reasonable Estimation of the Amount of a Loss, which states that if a probable range of loss can be determined, the accrual should be for the most likely amount within the range (unless no amount is more likely than another, in which case the low end of the range can be used).

In 2005, FASB considered whether to add to its technical agenda a project on accounting and reporting for contingent environmental liabilities. Specifically, the Board considered whether (a) contingent environmental liabilities that meet the recognition criteria in paragraph 8 of FASB Statement No. 5 should be recognized at expected value, and (b) contingent environmental liabilities of a similar nature should be aggregated in assessing materiality. At that time, FASB decided not to add the project, primarily because its project to reconsider the conceptual framework may result in changes to the accounting and reporting of contingent liabilities. FASB's consideration of the issue is recorded at click here. FASB's Emerging Issues Task Force (EITF) has also dealt with a number of issues relating to accounting for environmental liabilities. For example, EITF Issue No. 90-8 discusses the capitalization of costs to treat environmental contamination.

Considering separate financial statements to reflect environmental performance:

Some organizations have further improved their reporting on environmental performance by voluntarily disclosing a broader set of financial performance information. The presentation can take various formats. For example, Baxter Healthcare produces environmental financial statements that provide a better picture of environmental performance than the balance sheet or income statement. Baxter's Environment, Health and Safety (EHS) function pioneered its Environmental Financial Statement in 1993 to demonstrate the value of proactive environmental management to senior leadership and external stakeholders - see Caption 32.

In Japan, the Environmental Accounting Guidelines issued by Ministry of the Environment, for which the Japanese Institute of Certified Public Accountants offered support in the process of development and revision, encourage companies to include separate statements to reflect environmental cost and environmental performance in their sustainability reports. For example, Ricoh presents a table showing monetary amounts of effect on environmental conservation and environmental impact as well as environmental costs and revenues in its sustainability report. For details, see p57-58 of Ricoh Group Sustainability Report 2007.