ACCOUNTANCY 45 (MANAGEMENT CONSULTANCY)

ENVIRONMENTAL ACCOUNTING
SY 2017-18

ENVIRONMENTAL ACCOUNTING: ENVIRONMENTAL MANAGEMENT ACCOUNTING AND ,

ENVIRONMENTAL FINANCIAL ACCOUNTING

Environmental Accounting
practice of incorporating principles of environmental management and conservation Into reporting
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practices and cost/benefit analyses.
allows a business to see the impact of ecologically sustainable practices in everything from their
supply chain to facility expansion.
allows accountants to report on the economic Impact of those decisions to stakeholders so as to
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allow for proactive decision making about processes that simultaneously meet environmental
regulatlons while adding to the bottom line.
There are three dlsclplines: global, national and corporate environmental accounting. Corporate
environmental accounting encompasses 'both environmental management accounting and
environmental financial accounting.

Environmental Managemeot Accounting (EMA)

Accounting approach that considers the financial impacts of environmentally related activities
(implementat,ion of environmental protection expenditure, costs of legislative compliance and
investment, etc.). The costs are allocated and tracked to meet the organization's own business
needs, mirroring the traditional management accounting techniques.
aimed at enabling organizations to take corrective management actions to reduce environmental
Impacts and costs, and Is therefore a tool for environmental cost control and management In order
to positively correlate economic and environmental' performance.
the Identification, collection, analysis, and use of two types of Information for internal decision
making:
1. Physical information on the use, flows and fates of energy, water and materials (including
wastes) and
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Monetary information on environmentally related costs, earnings and savings."

Environmental Financial Accountln1 (EFA}

provides financial information and reports needed by external stakeholders on a company's financial
performance;
aimed at external reporting of environmental and financial benefits In corporate environmental
reports or published annli'al reports.
partly governed by accounting standards issued by different professional bodies. For Instance,
traditional corporate financial statements usually Include environmental remediation and liability
Issues linked to a company's activity.

ENVIRONMENTAL COSTS, INCLUDING GREY AREA COSTS.

Environmental cost associated with financial accounting:

costs connected with the actual or potential deterioration of natural assets due to economic
activities
Categories:
1. Internal costs - these are costs that directly impact on the income statement of a company, e.g.:
Improved systems and checks in order to regulatory costs such as taxes
avoid penalties/fines upfront costs such as obtaining permits
waste disposal costs back-end costs such as decommissioning
product take back costs costs on project completion
2. External costs - these are costs that are imposed on society at large, but not borne by the company
that generates the cost In thefirst instance e.g.:
carbon emissions health care costs
usage of energy and water social welfare costs
forest degradation
Governments are now becoming increasingly aware of these external costs and are using taxes and
regulations to convert them to internal costs. For example, companies might have to have a tree
replacement program if they cause forest degradation, or they receive lower tax allowances on vehicles
that cause a high ~egree of harm to the environment.

Environmental cost associated with management accountiJ1g:

costs connected to the implementation of environment protection, leglslative compliance and
investment.
Categories:
1. Conventional costs - Direct costs associated with capital expenditures, raw materials, and other
operating and maintenance costs,
E.g. raw material and energy costs. Costs are not prioritized by management and are often hidden
within overhead.
2. Contingent costs - future compliance costs or remediation costs. when a site Is decommissioned.
E.g. Contingent liabilities arising from failure to clean up contaminated sites, and fines and penalties
for noncompliance with regula~ions. These costs are often incurred towards the end of a project so
are often Ignored by managers who focus on short term perfor:mance.
3. Relationship or Image costs - 'Less' tangible costs and benefits that relate to consumer perceptions,
and employee iind community relations.
E.g. cost of producing environmental information for public reporting. Costs are often Ignored by
managers who are unaware of their existence.
4. Reputatlonal costs - failure to address environmental .issues su.ch as lost sales. Costs are often
Ignored by managers who are unaware of the risk of Incurring them.
5. Hidden costs - regulatory costs from activities such as monitoring and reporting of environmental
activities and emissions, . cost of searching for environmentally-responsible suppliers, and the
ongoing cost of cleaning up contaminated land.
6. Societal costs - costs that organizations impose on others (environment and society) for which they
may not be held legally, responsible and which cannot be compensated for in the legal system.

Environmental cost cate1ories associated with activity (Hansen & Mendoza):

1. Prevention Cost - cost of activities undertaken to prevent the production of waste. E.g.
Evaluating and selecting suppliers; Auditing environmental risks;
Evaluating and selecting pollution Developing environmental
control equipment; management systems;
Designing processes; Recycling products;
Designing products; Obtaining ISO 14001 certification
Carrying out environmental studies;
2. Detection Cost - cost incurred to ensure that the organization complies with the rules and regulations
and voluntary standards. E.g.
Auditing envlronmen~I activities; measures;
Inspecting products and processes; Testing for contamination;
Developing environmental performance
3. Internal Failure Cost - - Cost Incurred on activities that have produced the contaminants and waste
that have not been discharged to the environment. E.g.
Operating pollution control equipment; Licensing facilities for producing;
Treating and disposing of toxic waste; contaminants;
Maintaining pollution equipment; Recycling scrap
4. External Failure Cost - Cost Incurred on activities performed after discharging waste Into the
environment. E.g.
Cleaning up a polluted lake; Settling personal Injury claims
Cleaning up oil spills; (environmentally related};
Cleaning up contaminated soil; Restoring land to natural state

IMPACT OF ENVIRONMENTAL COSTS ON THE BOTTOM LINE.

1. Improving revenue - Producing new products or services which meet the environmental needs or
concerns of customers can lead to Increased sales. It may also be possible to sell such produats for a
premium price. Improved sales may also be a consequence of Improving the reputation of the
business.
It is possible that In the future, rather than good environmental management resulting In improved
sales, poor management will lead to losses. All businesses will be expected to meet a minimum
standard related to environmental Issues.
2. Cost reductions - Paying close attention to the use of reso.urces can lead to reductions in cost. Often
simple improvements In processes can lead to significant costs savings.
3. Increases In costs - There may be Increases In some costs, for example the cost of complying with
legal and regulatory requirements, and additional costs to Improve the environmental Image of the
organization. However some of these costs may be offset by government grants and this
expenditure may save money In the long-term as measures taken may prevent future losses.
4. Costs of failure - Poor environmental management can result In significant costs, for example .the
cost of clean-up and fines following an environmental disaster.

Triple Bottom Line

An accounting framework that Incorporates three dimensions of performance: social,
environmental and financial. TBL is commonly called the 3Ps: people, planet and profits.
Negative Impact- economic .loss or decrease in profits:
Dumping of by-products
Moving waste products out of the manufacturing facilities
Positive Impact - Increase in profits or cost savings:
Thru the identification of potential cost savings
Thru risk reduction of current and future activities
To help managers manage their resources more effectively )
To allow management to hire responslb1e employees.
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Physical Information under EMA
EMA places a particular emphasis on materials and materials-driven costs because: use of
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energy, water and materials, as well as the generation of waste and emissions, are directly related to
many of the Impacts organizations have on their environments and materials purchas.e costs are a major
cost driver In many organizations.

Types of Physical Information (key to the development of many environment-related costs)

1. Materials Inputs- energy, water or other materials that enter an organization.
a. Raw and Auxiliary Materials
Part of final physical product or by-product. Auxiliary Materials are the more minor product
components (for example, the glue used in furniture manufacturing). Any water that
becomes part of an organization's final product is covered separately In t~e "Water"
category.
b. Packaging Materials
Inputs used in shipping final product; either in ready.-to-use form, or processed on-site.
c. Merchandise
Items that are bought and directly sold again. Example of environmental Impacts/costs
associated with merchandise Include the Impacts and costs of energy for storing and
handling the merchandise or Impacts and costs of disposal of merchandise (such as food)
that that has outllved Its useful shelf life. There tend to be fewer environmental Impacts
and environment-related costs associated with an organization's handling of merchandise
than with other input materials.
d. Operating Materials
Inputs purchased and used but do not become part of any physical product delivered to a
customer. Examples include office supplies, building cleaning supplies, lighting fixtures, fuel
for transport services. Manufacturing operations which use chemical catalysts, equipment
cleaning solvent, etc. record these costs automatically as a Non-Product Output (Waste and
Emissio.ns) when they leave the organization.
e. Water
All water used from all sources, such as rainwater, groundwater, surface water from rivers
and lakes, regardless of how the water is obtained (for exam13le, private wells or ~he public
water supply system). In some manufacturing sectors, such as food processln& water may
be part of the final physical product (much like Raw and Auxiliary Materials), while other
water is never Intended to go into a final product but Is used for other purposes, such as
cooling or cleaning (much like Operating Materials). Thus, some water may leave a
manufacturing organization in the form of physical product, but the remainder will leave as
Waste or Emissions.
In non-manufacturing organizations, all water used is mu~h like an Operating Material. It
does not go Into a final product but is used as a support material and eventually leaves the
organization as Waste or Emissions. An example Is water used by a vehicle washing service,
which leaves the organization In the form of wastewater or evaporative emissions.
Water is In a separate category from other input materials because it is particularly
Important from an environmental perspective and because accounting systems often
manage water flow Information differently from other materialsflow information.
f. Energy
All energy, of all types, an organization uses: electricity, g~s, coal, fuel oil, district heating
~ and cooling, biomass, solar, wind and water. In some manufacturing operations, Energy may
l sometimes be viewed as something that Is Incorporated Into a final product (for example,
 via a chemical reaction) but, more often, Energy Is viewed as an Operating Material, in that
the Energy is never Intended to become part of a physical product but Is Instead used for
running equipment, etc.
Non-manufacturing operations use equipment energy for resource extraction operations,
fuel for transport service firms, and energy for building heating and cooling operations.
Energy Is .In a separate category from other Input materials because It Is particularly
Important from' an environmental perspective and because accounting systems often
manage energy flow information differently from other materials flow information.
2. Product Outputs - any products, wastes or other materials that leave an organization. Product
Outputs are physical products, by-products and associated packaging that are delivered to external
customers. Thus, th.is category is relevant or:ily to organizations that produce a physical product,
such as resource extractors or manufacturing operations.
a. Products (Including packaging)
Any physical products, such as the computer chips produced by an electronics
manufacturing firm, including packaging.
b. By-products (including packaging)
Minor products Incidentally produced during the manufacture of the primary P,roduct,
including by-products that result In earnings and associated by-product packaging.
3. Non-Product Outputs (Waste and Emissions) - any Output that Is not a Product Output, are
considered as Wastes and Emissions. They are generated In two ways.
First, Materials Inputs that were Intended to leave the facility in the form of Product Output
become Waste and Emissions Instead because of poor equipment efficiency and maintenance,
inefficient operating practices, production losses, product spoilage, poor product design or
other reasons. Materials Inputs that contribute to NPO In this way include Raw and Auxiliary
Materials, Packaging Materials, Merchandise and sometimes Water. For all these, loss (scrap)
percentages should be measured, calculated or estimated.
Second, Materials Inputs that were never intended to become part of Product Output leave an
organization. Inputs that contribute to Waste and Emissions in this way are Operating
Materials, Water and Energy.
Organizations in all sectors can generate Waste and Emissions - resource extraction,
manufacturing, transport and other service sector operations. Waste and Emissions can result
from continuous losses (for example, continuous heat loss from an un-insulated oven or
continuous water leaks from an old storage tank), episodic losses (for example> scrap from a
poor quality batch of product), or one-time losses (for example, an accidental spill of some
kind), and can come from any part of an organization - inventory, manufacturing, building
services, shipping, etc.
a. Solid Waste
Relatively non-hazardous waste In solid for.m, such as waste paper, plastic containers, food
waste, non-hazardous solid scrap product, etc.
b. Hazardous Waste
More hazardous waste materials in solid form (such as discarded batteries), liquid form
(such as waste paint and solvents) or mixed form (such as wastewat~r treatment sludge).
Depending on the context, "hazardous" could be defined as infectious, flammable, toxic or
carcinogenic.
c. Wastewater
waste streams whose primary component Is water but which also co.ntaln contaminants of
some kind, such as high biological oxygen demand (BQQ), total suspended solids (TSS),
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nutrients (such as phosphates), excess heat and to.Ml.c_mi~Jlals (such as solvents, pesticides
or heavy metals).
d. Air Emissions
Air streams contaminated with problematic levels of pollutants. Examples of pollutants
Include energy combustion by-products, such as nitrogen oxides, sulfur dioxide, carbon
monoxide, partlculate matter consumed and volatile organic compounds, as well as other
pollutants such as metal particulates. Air emissions can also include radiation, noise and
heat.

ENVIRONMENTAL DISASTERS.
A disaster Is a sudden, calamitous event that seriously disrupts tpt functioning of a community or
society and causes human, material, and economic or environntental losses that exceed the
community's or society's ability to cope using its own resources. Though ofte!" caused by nature,
disasters can have human origins.

An envlronm~ntal disaster Is an incident which occurs either as the result of a natural disaster or a
human caused disaster which results in a negative or "disastrous" Impact upon the natural
environment. The biggest confusion when using the term "environmental disaster" Is using It
interchangeably with "natural disaster." An environmental disaster can sometimes be the result of a
natural disaster but It does not have to be, environmental disasters can also be the result of human
caused Incidents such as an oil spill or a nuclear disaster.

Types of Environmental Disasters:

1. Agricultural Disasters
Result of an Impact upon the agricultural Industry. An example Is the "dust bowl" that occurred
in the United States and canada between 1934 and 1939.
2. Biodiversity Disasters
After effect of a specific species moving In to a new territory and destroying or severely
damaging new species or having a destructive effect upon the natural environment. An example
Is the Introduction of rabbits in to Australia or the presence of Dut~h elm disease.
3. Industrial Disasters
Result of large Industries impacting the natural environment either in a small radius or on a
global span. An exampJeis the leak of methyl isocyanate that occurred In the Bhopal disaster or
the use of CFC'S depleting the ozone layer.
4. Human Health Disasters
Spread of disease or other cause of mass death among the human species resulting In mass
destruction and devastation. An example Is the Introduction of the Bubonic Plague in to the
population or the spread of smallpox among the new Americas.
5. Natural Disasters
Natural process of weather patterns or other factors affecting Earth. These natural disasters
Include: earthquakes, hurricanes, tornadoes, tsunamis, mudslides, sinkholes and droughts.
6. Nuclear Disasters
Nuclear activity such as a nuclear spill or damage to nuclear power plants that result in a
radiation leak. Many people lump nuclear disasters in with Industrial disasters; however, due to
the significance of the damage caused by nuclear disasters and the unique nature of the
disasters themselves they should be separated in to their own category. An example is the
Fukushima power plant damage that resulted from the 2011 tsunami.