L11 - Environmental Accounting

4/17/2016
Environmental Accounting
Environmental
Accounting
By Kendhoo
INTRODUCTION
Economic Activity
Sustainability
Environmental footprint
Social footprint
Issues faced
Carbon Footprint
Impact on Businesses
MANAGING ENVIRONMENTAL COSTS

ACCOUNTING FOR ENVIRONMENTAL COSTS
ENVIRONMENTAL ACCOUNTING SYSTEMS
MNUBS/ACC235/2016-S1/Kendhoo
Introduction
Economic Activity
Environmental issues are becoming increasingly
important in the business world

Firms
have become responsible for the

environmental impacts of their operations and
therefore they are now more aware of problems such
as carbon emissions
Economic activity is only capable of being sustained
where the impact on society and the environment can

also be sustained
The social footprint looks at sustainability in terms of
three aspects of capital social, human and constructed,

and entities need to ensure that their economic activities
are sustainable in all three areas
The environmental footprints is the aspect of ensuring

The growth of environmental issues and regulations
has also brought greater focus on how businesses

manage and account for environmental costs
MNUBS/ACC235/2016S1/Kendhoo
that an entitys use of scarce resource is replenished.

That is, we should leave more natural resources to the
next generation than we ourselves inherited from the
previous generation
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Sustainability
Sustainability can be measured objectively or
subjectively
The objective approach measures sustainability in
terms of actual resources used compared with the

amount of resource available
Subjective approach accepts the inability to measure
resource and concentrates instead on the intentions

of the entity in their attempts to achieve
sustainability goals
Environmental
footprint: the effect on the

environment of today's society and how it will affect the
next generation
Example: consider the sealing of food packages. The
traditional way of sealing these food containers has been

to use glue to stick the see-through cover to the basic
container. A UK entity has recently designed and
patented a method of sealing which uses radio-waves to
effect that seal
THINK of the overall effect of the above example

Social footprint
The overall effect of this is multiple!
It uses less glue and therefore fewer whales need to be killed (from
which the glue is made)
It is more efficient in terms of fewer broken food packages, so less

wastage and therefore fewer animals killed because of less wastage
The entire package is now bio-degradable whereas previously it

wasnt
The equipment necessary for radio-wave sealing can be bought and

used in all the separate food packaging entities, so there is no
increase in the use of fuel to transport the food to the supermarkets
Social footprint looks at the use of capital in the terms of social,
human and constructed capital
Social involves the use of services provided centrally (health,
education, hospitals pension etc). If these services are not maintained

(if money raised by central Government is not sufficient to maintain
the services) then tax rates will need to increase
Human involves the requirement that people should be able to
continue working effectively. This in turn involves the entity taking

steps to help these people look after their personal health, and
improve their knowledge and skills
Constructed involves maintaining the physical structures (roads,
buildings, hospitals etc) that society has built
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Issues faced
Carbon Footprint
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The global profile of environment issues has risen significantly
A carbon footprint is defined as: The total amount of
during the past 20yrs
This is not just due to the reporting of highly publicised disasters
like BP oilrig, Deepwater Horizon in 2010 but also to the

increasing awareness amongst the public at large of the impact
that the human race has had and is having on the planet
Terms like carbon footprint are now used in every day
language and issues like recycling and exploitation of

renewable resources are key elements of government policy in
many countries
Many countries have agreed undertakings to reduce carbon
emissions and within the European union there are various

environmental directives which have an impact on business
greenhouse gases produced to directly and indirectly support

human activities, usually expressed in equivalent tons of carbon
dioxide (CO2)
Your carbon footprint is the sum of all emissions of CO2
(carbon dioxide), which were induced by your activities in

a given time frame. Usually a carbon footprint is calculated for
the time period of a year
Examples:
For each (UK-) gallon of petrol fuel consumed, 10.4 kg carbon dioxide (CO2) is
emitted
For each (US-) gallon of gasoline fuel consumed, 8.7 kg carbon dioxide (CO2) is
emitted
If your car consumes 7.5 liter diesel per 100 km, then a drive of 300 km distance
consumes 3 x 7.5 = 22.5 liter diesel, which adds 22.5 x 2.7 kg = 60.75 kg CO2 to
your personal carbon footprint
Table for the most common used fuels
Carbon Footprint Standard
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4/17/2016
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Why you need the Carbon Footprint Standard

Join hundreds of our clients to achieve the new approval
standard.
Demonstrate your environmental credentials
Enhance your market reputation
Meet increasing supply chain tender needs
Achieve positive PR and create marketing opportunities
Motivate your employees
Engage with your customers, shareholders & other
stakeholders
What is the Carbon Footprint Standard?

Unified and independent
Recognises all stages of carbon management - from
assessment, to carbon reductions and carbon neutrality
Applicable to organisations / businesses
Applicable to products / services
Aligned with international best practice / standards such as
ISO14064, Publicly Available Specification 2050 (PAS2050)
and Publicly Available Specification 2060 (PAS2060)
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How to get the Carbon Footprint Standard

Our straightforward process requires you to demonstrate your
carbon credentials whether you have
Measured & reduced yourself / using a third party
Need us to help you develop your carbon credentials
Businesses have had to become increasingly aware of
the environmental implications of their operations,

products and services. An understanding of
environmental issues is now as much a part of
running a successful business as product design,
marketing, cost effective production and financial
management
Research
has shown that companies tend to

underestimate their environmental costs and
achieving an understanding can improve profitability
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Consequences of poor environmental behaviour
include:
Loss in value of land

Damage to corporate image perhaps leading to loss of sales
due to customer boycotts and inability to secure finance and
insurance cover
Destruction of brand values
Law suits
Punishment (fines, increased liability to environmental taxes,
loss of licenses to operate)
Benefits of good environmental practice include:

Increased appeal to environmentally aware consumers
Lower costs of finance due to lower risk profile
Higher profits due to better cost awareness
Defining Environmental Costs

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Depletion of
natural
resources
Creating
conditions
leading to acid
rain
Adverse visual
and aural
impacts
How organisations affect

the environment
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Air and water

emissions
Contribution to
climate change
If costs cannot be defined then it cannot be identified
and measured
Definition of environment costs is a starting point of the
design of a control system
Definition: US Environmental Agency in 1998:
Waste disposal
Negative health
impacts
Lowering local
quality of life
Conventional costs: raw materials and energy costs having

environmental relevance
Potentially hidden costs: costs captured by accounting systems but
then losing their identity in general overheads
Contingent costs: costs to be incurred at a future date, e.g. clean up
costs
Image and relationship costs: costs that, by their nature, are
intangible, for example, the costs of preparing environmental reports
4/17/2016
Defining Environmental Costs
Identifying environmental costs
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Definition: The UN Division for Sustainable
Development (UNDSD):
Costs incurred to protect the environment, e.g. measures taken

to prevent pollution and
Costs of wasted material, capital and labour, i.e. inefficiencies
in the production process
Since most of the environmental costs are not
separately identified in the ledger accounts

and are often lost in overhead. This makes difficult
to identify and opportunities to cut environmental
costs
Such
costs can only be controlled once the

management accounting system is designed
separately to identify environmental costs so
that they can be measured
Examples of environmental costs
Environmental Management Accounting (EMA)
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Waste management
Remediation
Compliance activities
Permit fees
Environmental training
R&D
Maintenance
Legal costs
Environmental assurance bonds
Environmental certification
Natural resource inputs
Record keeping and reporting
What is Management Accounting?
Management accounting as a discipline is about

providing information that is useful for control,
planning and decision making purposes
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EMA focuses on information required for decision
making within the organisation

EMA is the generation and analysis of both financial
and non-financial information in order to support

internal environmental management processes
UNDSD identified 4 management accounting
techniques for the identification and

allocation of environmental costs:
Input/outflow analysis
Flow cost accounting
Activity-based costing
Lifecycle costing
It is complementary to the conventional management
accounting approach and aims to develop appropriate

mechanisms that assist in the identification and
allocation of environment-related costs
Technique 1:
Technique 2:
Input/outflow analysis
Flow cost accounting
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This technique records inflows and balances them with outflows

The underlying rationale is that comes in must go out
It is known as mass balance. It can be applied to material, water and
This
Example:
Flow cost accounting takes account of the material flows and
is a part of management approach called flow

management. Flow management looks at production costs
energy
Inputs
Outputs
1,000 kg steel
Production 900kg steel

Scrap sold 90kg steel
Unaccounted for 10kg of steel
The outputs would be expressed in monetary terms. In the above example
1,000kg of steel have been bought and processed to achieve 900kg of

production
Management attention might be drawn to improve efficiency and reduce
waste. This would have a positive environmental impact due to reduction in

use of material resource and would improve profitability
the organisational structure of the company. It divides

material flows into three categories and assigns values and
costs to these:
Material
System and delivery; and
Disposal
The use of flow cost accounting is to reduce the quantity of
materials used. This will have a positive effect on the

environment
4/17/2016
Technique 3:
Technique 4:
Activity-based costing
Lifecycle costing
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ABC allocates internal costs to cost centres and
Lifecycle costing takes into account the full costs
cost drivers on the basis of the activities that give

rise to the costs
ABC
can be used to help give insight into

environmental costs
associated with a decision over its entire life time

Part of lifecycle analysis will involve estimating the
environmental costs
associated with a decision
and
consequences
Two broad categories of costs can be identified:

Environmental related costs - can be attributed to joint
cost centres (e.g. water treatment plants); and
Environmental driven costs hidden as general
overheads
Environmental Accounting Systems
EMAS
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Relates to the need to establish and maintain systems for
assessing the impact of the entity on the environment
Eco Management and Audit Scheme (EMAS) and ISO
14000 were both developed in the 1990s, and both relate

to the establishment and maintenance of environmental
accounting systems
Whereas the ISO focuses on internal systems, EMAS
focuses on the standard of good reporting and auditing
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Is a voluntary initiative designed to improve entities environmental performance
Aim is to recognise and reward those entities which consistently go beyond
compliance with minimum standards in their efforts to improve their environmental

performance
Requires entities to produce regular reports about their environmental performance

To become a member of the EMAS practitioners, entities must adopt an Eco
Management System (EMS) which meets the requirements of ISO 14001
Participating entities must show that they understand and can implement all relevant
legislation
The entities must recognise and meet the information needs of the shareholders
Many entities prefer to their compliance within their CSR
Report
Participators are required to improve their environmental performance over time

Employees of the entities must be involved at all levels
4/17/2016
ISO 14000
Advantages of compliance
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Is a series of standards dealing with environmental management together
Compliance with either standard will reduce the cost
with a supporting audit programme
of waste disposal
It designs the specifications for an EMS, give guidance for its use and
establishes the standard against which it can be audited
There will be savings in terms of consumption of
To be registered as ISO 14000 compliant and entity must
energy
Implement, maintain and improve an EMS

Assure itself of its own conformance with its own stated environmental policy
Demonstrate conformance
Ensure compliance with environmental laws and regulations
Have its EMS externally certified
Improved corporate image
An entity should identify elements of its operations which we have an
impact on the environment
Produce plans for its improvement and a management system to monitor
The entity will have a framework to work to in trying
to improve its environmental performance
the improvements
Advantages of Social Auditing
Advantages of Environmental Auditing
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Process
by which an entity can assess and

demonstrate its social, economic and environmental
benefits
Aims to asses the impact of the entity on the
environment
It normally involves the implementation of EMAS or
It also measures the extent to which an entity
achieves its objectives as set out in its mission

statement
In
addition, it establishes
environmental auditing
the
process
ISO 14000
It provides the data for the environmental audit
for
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Advantages of Environmental Accounting

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The development of an environmental accounting
system to support the integration of environmental

performance measures
It provides evidence of the achievements of social
Any Question?
and environmental objectives

Without
social and environmental auditing,

environmental accounting would not be possible
10

L11 - Environmental Accounting

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L11 - Environmental Accounting

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4/17/2016

MANAGING ENVIRONMENTAL COSTS

Environmental issues are becoming increasingly

important in the business world

have become responsible for the

Economic activity is only capable of being sustained

where the impact on society and the environment can

The social footprint looks at sustainability in terms of

three aspects of capital social, human and constructed,

The environmental footprints is the aspect of ensuring

has also brought greater focus on how businesses

that an entitys use of scarce resource is replenished.

Sustainability can be measured objectively or

The objective approach measures sustainability in

terms of actual resources used compared with the

Subjective approach accepts the inability to measure

resource and concentrates instead on the intentions

footprint: the effect on the

Example: consider the sealing of food packages. The

traditional way of sealing these food containers has been

THINK of the overall effect of the above example

The overall effect of this is multiple!

It is more efficient in terms of fewer broken food packages, so less

The entire package is now bio-degradable whereas previously it

The equipment necessary for radio-wave sealing can be bought and

Social footprint looks at the use of capital in the terms of social,

human and constructed capital

Social involves the use of services provided centrally (health,

education, hospitals pension etc). If these services are not maintained

Human involves the requirement that people should be able to

continue working effectively. This in turn involves the entity taking

Constructed involves maintaining the physical structures (roads,

buildings, hospitals etc) that society has built

The global profile of environment issues has risen significantly

A carbon footprint is defined as: The total amount of

during the past 20yrs

This is not just due to the reporting of highly publicised disasters

like BP oilrig, Deepwater Horizon in 2010 but also to the

Terms like carbon footprint are now used in every day

language and issues like recycling and exploitation of

Many countries have agreed undertakings to reduce carbon

emissions and within the European union there are various

greenhouse gases produced to directly and indirectly support

Your carbon footprint is the sum of all emissions of CO2

(carbon dioxide), which were induced by your activities in

Table for the most common used fuels

Carbon Footprint Standard

Carbon Footprint Standard

Carbon Footprint Standard

Why you need the Carbon Footprint Standard

What is the Carbon Footprint Standard?

Carbon Footprint Standard

How to get the Carbon Footprint Standard

Businesses have had to become increasingly aware of

the environmental implications of their operations,

has shown that companies tend to

Consequences of poor environmental behaviour

Loss in value of land

Benefits of good environmental practice include:

Defining Environmental Costs

How organisations affect

Air and water

If costs cannot be defined then it cannot be identified

Conventional costs: raw materials and energy costs having