Alaa Aliasrei ‫فيس‬ @Aliasrei ‫تلكرام‬ ‫عالء هحسن شحن‬

Solution Manual
to accompany

Contemporary Issues in
Accounting
Michaela Rankin, Patricia
Stanton, Susan McGowan,
Kimberly Ferlauto & Matt Tilling
PREPARED BY:

Michaela Rankin

John Wiley & Sons Australia, Ltd 2012

© John Wiley and Sons Australia, Ltd 2012 11.0

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CHAPTER 11
SUSTAINABILITY AND ENVIRONENTAL
ACCOUNTING

Contemporary Issue 11.1: Perfect timing for world’s first: Carbon

Neutral Winery

1. Outline the potential costs and benefits of making moves towards carbon
neutrality. (J)
Costs would include putting a system in place to measure greenhouse gas emissions
before they can be managed and mitigated; changing practices and training of staff to
mitigate emissions; the cost of changing agricultural practices; changing transport
used; costs of certification etc.
Benefits would include an increase in sales, particularly to customers specifically
interested in the origin of their products; increasing marketing opportunities to
different retailers, such as supermarkets signing up to a food miles program; energy
savings, and therefore reduction in energy costs.

2. The ‘food miles’ movement is increasing in strength in the United Kingdom,

with some major retailers, for example Tesco, asking suppliers to label
products with their carbon footprint. Evaluate what impact this move could
have on the New Zealand wine industry. (J)
New Zealand wineries that embrace the carbon neutral concept and seek certification
are likely to increase their market share in the United Kingdom, as they are meeting
their requirements for labeling. They are likely to take market share from wineries in
other countries, which are not considering these moves. It is likely to act as a
marketing opportunity and increase the industry’s exposure to different markets and
customers.

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Review questions

1. Explain the meaning of sustainability and outline why corporations might

consider it in their business operations.

Sustainability, or sustainable development, is concerned with development that meets

the needs of the present without compromising the ability of future generations to
meet their own needs. It refers to three main areas – economic development,
environmental development and social development.
Corporations might consider their effect on sustainability as they are in control of the
majority of the earth’s resources so any moves towards sustainability cannot occur
without the support of business. Figure 11.1 presents reasons that BHP Billiton
embraces sustainable development. These include: to reduce business risk and
enhance business opportunities; to gain an maintain their ‘licence to operate’ – which
is also referred to as a social contract; to improve operational performance and
efficiency; improved attraction and retention of its workforce; maintain security of
operations; enhanced brand recognition and reputation and to enhance their ability to
strategically plan for the longer-term.

2. Explain the difference between eco-justice and eco-efficiency, and explain how
both might relate to business activities.

Eco-justice considers the ability to meet the needs of the current inhabitants, including
strategies to alleviate poverty, access to basic water, food and shelter. It also takes a
long-term focus where it recognizes that consumption of resources today needs to
consider the effect this will have on the quality of life of future inhabitants. These
two aspects of eco-justice are referred to as intragenerational equity and
intergenerational equity respectively. Eco-efficiency, on the other hand, focuses on
how efficiently resources are used to minimize the impact on the environment.
Some businesses are larger than some governments. As such, they have a great deal of
power over resources. Given businesses control the majority of the world’s resources,
entities can put systems in place to contribute to the efficient use of these resources to
meet eco-efficiency demands. They also have control over the extent to which
resources are depleted to avoid eco-justice considerations relating to intergenerational
equity. Many businesses operate globally, so are in a position to be able to assist to
alleviate poverty, and ensure their employees in developing countries, and their
communities have access to food, clean water and shelter.

3. What reasons can an entity provide for adopting sustainable development?

There are a number of reasons that businesses can provide for adopting sustainable
development. A good discussion is provided in Figure 11.1, which presents reasons
that BHP Billiton embraces sustainable development. These include: to reduce
business risk and enhance business opportunities; to gain an maintain their ‘licence to

© John Wiley and Sons Australia, Ltd 2012 11.2

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operate’ – which is also referred to as a social contract; to improve operational
performance and efficiency; improved attraction and retention of its workforce;
maintain security of operations; enhanced brand recognition and reputation and to
enhance their ability to strategically plan for the longer-term.

4. Identify what information entities are likely to provide if they use triple
bottom line reporting.

Triple bottom line reporting is also referred to as environmental, social and

governance reporting and sustainability reporting. Companies are likely to provide
information about their financial performance, their environmental performance and
their social performance.

5. Explain the difference between sustainability reporting and traditional

financial reporting.

Traditional financial reporting focuses on recognising the financial effects of an

entity’s transactions. It follows generally accepted accounting principles and
accounting standards and is audited by an external auditor. The financial report is
limited to transactions that have a financial impact. Sustainability reporting however
goes beyond this. It includes reporting on the environmental activities and of the
entity as well as its social impacts. These are combined with financial information.

6. What benefits should entities expect from preparing sustainability reports?

The following benefits can be gained from preparing sustainability reports:

 Embedding sound corporate governance and ethics systems throughout the
organisation
 Improved management of risk through enhanced management systems and
performance monitoring
 Formalising and enhancing communication with key stakeholders
 Attracting and retaining competent staff
 Ability to benchmark performance with other entities.

7. What is international integrated reporting and how does it differ from the
current financial reporting system we have?

Integrated reporting is designed to improve sustainability reporting and integrate it

more closely with financial and governance reporting. It is designed to bring together
financial, environmental, social and governance information in a clear, concise,
consistent and comparable format. It differs from our current financial reporting
system as it goes beyond the financial impact of activities, and a general disclosure of

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governance to include a framework to integrate environmental and social reporting
together in an integrated way.

8. What is the Global Reporting Initiative, and what is its purpose?

The Global Reporting Initiative was launched in 1997 as an initiative to develop a

globally accepted reporting framework to enhance the quality of sustainability
reporting. It provides a framework of principles and performance indicators that
organisations can use to measure and report their social and environmental
performance. Its purpose is to enhance the transparency, comparability and clarity of
sustainability reports.

9. Identify four corporate stakeholders and explain how they affect a business’s
operations.

Table 11.3 provides examples of a range of stakeholders. These can include:

Shareholders – provide funds to the entity. Their support is essential for continued
success of the entity, as their support affects share price and corporate value.
Customers – major users of the entity’s products and services. A continued and
growing supply of customers is essential to the continued success of the entity.
Fund investors – like shareholders, they buy shares in the company and support
companies for which they see opportunities for growth in value.
Community groups – may supply labour to the entity, but need to support the entity’s
operations if the entity and community are to exist harmoniously.
Media – can impact the views of other stakeholders by voicing concerns and making
other groups aware of the businesses operations and activities
Government and regulators – monitor mandatory reporting, impose taxes and charges
and uphold legislation that the entity needs to follow.

10. For the four corporate stakeholders you have identified above, document
how an organisation might engage with them about sustainability issues.

Entities can engage with these stakeholders in the following ways:

Shareholders – direct emails, provide information in annual reports and stand-alone
sustainability reports, website.
Customers – directly through email and other written communication. The media and
the corporate website would also be useful.
Fund investors – direct communication through email, phone, meetings with fund
managers, and through providing sustainability information in written form, for
example the sustainability report.

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Community groups – can use the media, company website, attending community
meetings, and through local government
Media – media releases, direct communication through email, phone and by providing
copies of sustainability reports.
Government and regulators – direct reporting to show are compliant with regulations,
email and phone.

11. Identify how ethical investment can affect corporate decision making
regarding sustainable business operations.

Ethical investment and the growth in ethical funds pose an increasing influence on
entities’ corporate sustainability performance and reporting. Increasing demands for
social and environmental performance information means that companies are seeking
to satisfy their needs to attract funds and support. Being listed on a sustainability
index such as one of the Dow Jones Sustainability Indexes means companies can also
attract investment and support from fund managers and small investors who are
driven in their investment choice by ethical, social and/or environmental
considerations.

12. Explain what an environmental management system is and how it can be

used to improve environmental performance.

An environmental management system (EMS)is a system that organisations

implement to measure, record and manage their environmental performance. It is
useful to assist in improving environmental performance because it allows entities to
measure and record their performance, set benchmarks or key performance indicators,
and put in place mechanisms to meet these benchmarks. It is often said you can’t
control what you can’t measure. An EMS allows an entity to measure its
environmental outputs in order to look towards controlling and reducing them, thus
improving performance.

13. Explain how emissions trading schemes are likely to affect financial
reporting.

An emissions trading schemes is a system designed to control emissions by allowing

participants to trade excess emissions permits. This is likely to affect financial
reporting because it will require companies to measure and report emissions permits it
holds, through grants from government and those it purchases. There are also likely to
be financial implications from the trade of permits. While there are currently no
financial reporting guidelines around the operation of an emissions trading scheme it
is likely that emissions permits are likely to be reported as either financial instruments
or intangible assets, and both are used in jurisdictions which currently have an
emissions trading scheme in place.

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Application questions

11.1 There are currently no formal accounting standards for the reporting of
social and environmental activities. Evaluate what issues this has for
preparation of financial reports. (J, K)

Given there are currently no formal accounting standards for the reporting of social
and environmental activities this means that these activities are not going to be
included in the transactions reflected in the financial statements. For example, an
entity’s impact on the environment, in terms of pollution is not costed and included as
an expense. While entities are required to account for the present value of future
cleanup costs of contaminated sites, they do not have to account for the ongoing
impact of this contamination on the environment. Similarly, entities are not currently
required to account for any social cost which does not have a direct financial impact..
While some disclosures are required concerning employee benefits,

11.2 In this chapter a range of stakeholders have been identified that managers
should consider when determining their sustainability performance and
reporting. Determine how managers should engage with each one of these
stakeholders and document what sustainability issues they would be likely
to discuss during this engagement process. (J, K)
Shareholders – direct emails, provide information in annual reports and stand-alone
sustainability reports, website. The entity would be likely to discuss their sustainable
business activities and how these will add to firm value. This might also include how
it is addressing legislation on carbon emissions.
Customers – directly through email and other written communication. The media and
the corporate website would also be useful. Customers may be interested in the source
of products, with some actively seeking green or fair trade products. Consequently
entities will communicate the environmental credentials of products including the
extent to which they are sourced from sustainable sources.
Fund investors – direct communication through email, phone, meetings with fund
managers and through providing sustainability information in written form, for
example the sustainability report. Some investors search out socially responsible
companies to invest in. Entities will report their social and environmental activities to
attract ethical fund investors. Managers will also discuss how the entity is addressing
issues such as carbon emissions disclosure and reduction requirements.
Community groups – can use the media, company website, attending community
meetings, and through local government. Entities will discuss facilities and services
provided to local community groups, and issues such as job creation, health, and
emissions information relating to the local environment.
Media – media releases, direct communication through email, phone and by providing
copies of sustainability reports. Given the media acts as a voice that sets the agenda
relating to many issues an entity will wish to advise any positive social and
environmental activities.

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Government and regulators – direct reporting to show are compliant with regulations,
email and phone. The entity will discuss the potential impacts of legislative changes
relating to social and/or environmental activities.

11.3 Obtain the 2011 Sustainability Report for Toyota Ltd. Prepare a report
that addresses the following issues:(J, K, CT)

The 2011 Sustainability Report for Toyota Ltd is presented for the first time online.

(a) Document Toyota’s vision and mission statement, and articulate how these
might relate to sustainability, if at all.
Our vision
Most respected and admired company.
Our mission
We deliver outstanding automotive products and services to our customers, and enrich
our community, partners and environment.
Our four core values
Customer first
Respect for people
International focus
Continuous improvement and innovation.

While the vision does not specifically relate to sustainability, the mission and core
values do. In Toyota Ltd’s mission they discuss enriching the community and
environment. This will lead to organizational strategies to address these sustainability
issues. In addition one of the company’s four core values is respect for people,
implying a social focus beyond a profit motive.
The company also has a separate environment vision and action plan.

(b) Outline Toyota’s stakeholders and explain how they have engaged each of
these stakeholder groups.
In its sustainability report under ‘Stakeholder Engagement’ the following table
highlights stakeholders groups the company engages with and how:

Stakeholder Key Issues Response and Engagement in 2010/11

Group

Employees Employee Working at Toyota, communication broadcasts

satisfaction and job and employment programs
security

Career and Learning and development programs via Toyota

professional Institute Australia. Read about our Employees
development

Customers Customer service Customer satisfaction surveys

Product quality Interaction via dealerships

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Customer Experience Program

Business Effects of Great East Dealer support during natural disasters

partners - Japan Earthquake and
dealers natural disasters in
Australia

Environmental Dealer Environmental Risk Audit Program and

impacts Toyota Environmental Dealership Program

Ongoing Dealer training

development

Business Effects of Great East Annual Supplier conference

partners - Japan Earthquake and
suppliers natural disasters in
Australia

Self-reliance Supplier Development Programs

Community Contribution to local Local and national community partnerships

community
Community sponsorships

Government Ongoing viability of Regular interaction on key issues such as

Australian production of next generation engine at Altona
automotive market plant
Written submissions including NPI, EEO and
NGERS

Toyota Motor Efficient operations Regular liaison on operating issues including

Corporation product quality, sales and marketing

The company also discusses a Community Liaison Committee under its

Altona Environmental Improvement Plan and a Stakeholder Engagement
Survey.

(c) Outline governance mechanisms in place on the Board of Directors to

address sustainability.
Under the ‘Governance’ section of the report the company reports that the board has
an Environment Committee and a Health and Safety Committee. Both of these would
address sustainability issues.

(d) Articulate how Toyota Ltd links sustainability to its risk management
systems.
Toyota Ltd does not disclose information in its 2011 report on how it links
sustainability to its risk management system. A perusal of the 2010 report, however,
discussed the Enterprise Risk Management process that is used to develop a risk
profile for each business unit, which is then used for planning yearly objectives. The
organization was in the process of integrating the risk management process into other
business planning and management systems at that time.

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(e) Outline any guidance Toyota Ltd used in implementing environmental and
social performance and reporting systems.
The company has gained ISO14001 certification for its environmental management
system so has used the guidance of the quality system in its implementation. The
company also uses the Global Reporting Index (GRI) to develop and present its
sustainability report. It has been assessed by the GRI as meeting level A.

11.4 You are the accountant of a company that is considering expanding its
operations to a country in the developing world. You are to prepare a
report to the CEO outlining what issues the company should consider from
a sustainability perspective when making this decision. (J, CT)
There are a range of issues the CEO needs to consider from a sustainability
perspective. These include but are not limited to:
 Environmental impacts of the activities
 Access to resources using sustainable transport methods
 Depletion of resources to the detriment of the local community
 Providing appropriate wages and facilities for employees. It is likely that the
company will need to provide additional support in the form of shelter, food
and water to employees and their families
 Government regulations

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Case Study Questions

Case study 11.1: Turning the heat on

1. Outline how climate change is likely to affect Sewell’s business operations in
developing countries. (J, K)
Climate change affects developing countries arguably more than in developed
countries for a number of reasons. Poor infrastructure is one major factor, as is a lack
of resources. A lack of government regulation over business and infrastructure
development means emissions are not measured or controlled. Developing countries
seeking investment from foreign organisations are likely to not pay attention to the
systems put in place to minimize emissions.

2. Evaluate the social issues likely to impact on a business operating in a

developing country. (J, K)
Limited education is likely to affect the skills of potential employees. Employees are
also likely in many cases to be malnourished and lack transportation to get to work.
This is also likely to lead to higher levels of illness amongst employees than would be
the case in developed countries. Businesses are likely to have to consider supporting
staff and their families through the provision of basic needs such as food, water and
shelter. They are also likely to need to build infrastructure to support the local
community as well as the business.

3. Evaluate what role accountants can play in addressing climate change in a

business environment. (J, K)
To manage climate change and carbon emissions entities need to be able to measure
their outputs. Accountants work with the major information systems of the
organization and so are in a position to contribute to the development of an
information system that can measure and record emissions as a first step to managing
and reducing them. They can also attempt to measure the cost to the business of
incurring these emissions, particularly when an emissions trading scheme is used.

Case study 11.2: Dutch group seeks to tie executive bonuses to social
responsibility
1. The company that employs you is a manufacturing firm. It is considering
following the lead of DSM and developing some performance indicators to tie
executive bonuses to environmental performance. Outline what some of these
might be. (J, K)
A company wishing to tie executive bonuses to environmental performance could
consider the following indicators, amongst others:
 Energy usage and savings
 Greenhouse gas emissions
 Reduction in waste
 Product development that minimizes environmental impacts

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2. Document measures of performance relating to social issues, such as employee

and consumer relations that should also be considered. Explain your answer.
(J,K)
Measures of performance relating to social issues could consider:
 Employee injury rates
 Employee satisfaction
 Investments in community activities
 Stakeholder management indicators
 Consumer complaints

Case study 11.3: Super funds set to track down carbon footprints

1. Identify why you would expect the finance sector, and investment funds in
particular, to have an interest in climate change. (J, K)
Climate change and greenhouse gas emissions are becoming an increasing area of risk
and associated costs for corporations. How companies manage these risks is important
to the finance sector, and investment funds in particular as investors are likely to wear
the cost of significant changes an entity needs to make to reduce its carbon emissions
in the future. This will lead to ongoing reduction in income and firm value.

2. Outline potential sources of information that superannuation funds could use

to gather data about a company’s sustainability operations. (J, K)
Superannuation fund managers could contact the company directly in the first
instance. They can rely on publicly available information such as the annual report,
sustainability report or the corporate website. They could also seek access to
government data from the National Pollutant Inventory. Superannuation fund
investor could also become signatories to the Carbon Disclosure Project and access
information about carbon emissions about the top 200 Australian and top 50 New
Zealand companies, together with firms from a large number of other countries. They
could also seek information about how a company compares to those listed on an
index such as the Dow Jones Sustainability Indexes.

3. Outline methods superannuation funds could use to encourage companies to

take a more active role in managing climate change. (J, K)
Superannuation funds could take a number of different approaches. This can include
lobbying the company to seek a change in their performance, or join the CDP and
seek change through this group. They could raise the issue of climate change at
general meetings. They could also choose to boycott investment in companies that do
not put in place mechanisms to manage climate change.

© John Wiley and Sons Australia, Ltd 2012 11.11