Electronic copy available at: http://ssrn.com/abstract=1516837

1

IFRS and Environmental Accounting

Abstract

This paper examines whether International Financial Reporting Standards (IFRS) can be

used for monitoring environmental degradations. The paper critically examines the

contemporary environmental accounting literature, and attempts to find a mandatory

reporting mechanism in the contexts of accounting for a public good and REA (resource,

event, action) accounting of McCarthy (1982). It selects the relevant financial reporting

standards and examines their strengths and weaknesses. Using qualitative and case study

research method, the financial statements of three global mining companies that are

operating in an environmentally sensitive sector were studied. The study finds that the

Global Reporting Initiatives (GRI) guidelines and private sector self-regulation are insufficient to monitor environmental disclosure. The paper proposes a mandated

separate statement of environmental assets and liabilities. The elements of the proposed

statement are discussed.

JEL classification: M41, M42, M48, Q56, Q51 Q20 N27, D53, D63

Key words: IFRS, GRI, environmental accounting, sustainability reports, mining

companies, environmental assets and liabilities, Africa

1 Introduction

As financial globalization proceeds, international financial reporting and auditing

standards are increasingly becoming important instruments of integration. This has been

observed in both the London and Pittsburg summits of the G20 leaders in 2009. The G20

leaders reinforced the influence of International Financial Reporting Standards (IFRS) in

that they called for the implementation of global accounting standards by 2011. By the

end of 2008, there were over 100 countries that had adopted IFRS (Cabrera, 2008; Barth,

et al 2008). Another parallel summit was the United Nations special summit on the

environment which was held on 22 September 2009. The United Nations summit underscored the link between environment and finance. This paper makes a critical

appraisal of the contemporary environmental accounting literature, and examines whether

global financial reporting standards (IFRS) can contribute towards the monitoring and

protection of the environment.

When the existing body of IFRS is examined from an environmental perspective, a

number of insights can be made. A quick glance through the conceptual framework and a

number of standalone standards provide useful grounds for monitoring environmental

assets, liabilities and expenditures. Furthermore, since accounting is characterized by

recognition, measurement and disclosure, mandated accounting for the environment

brings accountability to the boardroom. Added to this is the fact that IFRS has legal

backing in more than 100 countries, and hence it has a unique advantage of bringing

environmental accountability into both financial markets and regulatory frameworks.

Electronic copy available at: http://ssrn.com/abstract=1516837

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For most companies environmental factors are no longer off balance sheet risks.

Notwithstanding this, previous research on corporate social and environmental reporting

has not been able to disentangle commitment from propaganda (Freedman and Jaggi,

2006; Bebbington, Gonzales and Moneva, 2008; Gray, Kouhy and Lavers, 1995).

Furthermore, anecdotal evidence shows that few companies have actually set aside

provisions or contributed to independent funds for decommissioning of plant assets and

the rehabilitation and restoration of the environment. Additionally, few global companies

have complied with financial reporting standards that relate to contingent liabilities which

arise from past events. Law firms are specializing in environmental litigations and

lawsuits against environmentally sensitive industries have been increasing. Surprisingly

firms that face lawsuits and reputational damages in one area get honored for their social

and environmental (sustainability) reporting. This paper examines whether the voluntary

disclosure route is able to resolve market and non market (regulatory) failures in

monitoring public goods like the environment.

The environment is both a complex and an eclectic matter. Carbon emissions and

contaminations of rivers that cross national boundaries are only the trans-boundary

environmental problems. Non-trans-boundary environmental problems are the ones

whose direct effects and externalities remain within the country that is producing it or

agreeing to receive other countries dumps (such as toxic waste dumping). Hence, policy formation requires enforceable global treaties, sound national policy and the examination

of advances in a number of disciplines. The mainstream financial reporting literature

addresses the environmental accounting problem from the usual voluntary-mandatory-

market reaction perspectives or from social contract and institutional perspectives. The

voluntary disclosures conceptual bases are mostly agency and market efficiency theories while social contract and institutional perspectives are embedded in social theory. The

management accounting and strategy literature approaches the problem from a reward

and penalty framework for executives and the firms stakeholders. For instance, Wisner, Epstein and Bagozzi (2006), using data from 179 responses of executives and structural

equation modeling find an association between financial performance and environmental

performance. Policy research however requires bringing together a number of disjoint

concepts and disciplines into one coherent framework.

Emission standards, waste management, air and water pollution, climate change,

extraction of exhaustible resources, bio-fuels, energy savings, biodiversity,

desertification, forestry, agriculture and land use, cattle farming, food security,

population, poverty, urbanization, transport, carbon related financial products, El Nino,

eco efficient technology, and development related matters are both national and

international issues. This paper uses a conceptual schema to synthesize causes and

effects of environmental degradations, and argues that a global REA (resource, event,

action) accounting model in the context of public good and IFRS is necessary for

Electronic copy available at: http://ssrn.com/abstract=1516837

3

monitoring the environmental behavior of global firms. Global financial reporting and

auditing standards will be able to discriminate among the beauty contestants in

environmental disclosures. The nonfinancial and financial information can be reported

through a mandatory separate statement of environmental assets and liabilities. This

paper proposes some of the elements of such a statement.

REA is a generalized framework of accounting system that uses a shared data

environment. The concept was first developed by McCarthy (1982). Public policy

research requires the distillation of trans-boundary, national, and micro level information.

An integrated shared data environment that is generated through well founded

recognition, measurement and reporting system reduces disclosure differences among

firms (Swanson, 2006). The challenge for International Accounting Standards Board

(IASB) is whether it will make the statement of environmental assets and liabilities part

of the mandatory set of financial statements that firms in environmentally sensitive

industries should periodically publish. In other words whether improved environmental

(sustainability) reports can be produced through IFRS is the central question.

The discussion on corporate sustainability reports can be linked to the earnings quality

literature. Cormier, Magnan and Van Velthovern (2005); Murray, Power, Gray, (2006);

Konar and Cohen, (2001); Klasson and McLaughlin, (1996); Barth and McNichols,

(1995); for instance examined the association between information disclosure and

financial performance. Givoy, Hayn and Katz (2008) in their study of ownership structure

synthesized the earnings quality research into four dimensions. The four dimensions were

the persistence of accruals, estimation errors in accrual process, the prevalence of

earnings management and the prevalence of conservatism. Barth, Landsman and Lang

(2008), in their study of IAS adoption internationally, developed a three dimensional

index of accounting quality. The elements of accounting quality were earnings

management (including earnings smoothing), timely recognition of losses and the value

relevance of accrual accounting information. Comparing the earnings figure

internationally is even more problematic as it is affected by accounting differences and a

number of institutional differences, development, ownership structure, education and

similar factors (Choi and Meek 2008). Bhattacharya, Daouk & Welker (2003) for

instance used earnings aggressiveness, loss avoidance and earnings smoothing as

earnings opacity measures to rank 34 countries. When one invokes trans-boundary and

non-trans-boundary environmental issues into the earnings quality literature, it is evident

that the absence of provisions for decommissioning and rehabilitations, and reserves set

aside for contingent liabilities for activities that are related to the firms past and present activities, suggests earnings inflation by domestic and transnational companies. Hence,

there is a paucity of research on the link between accounting quality studies and

environmental accounting studies.

As noted earlier, another cluster of research argues that the firms environmental disclosure effort is a self serving exercise of obtaining social legitimization. Social

researchers argue that the firm achieves this through isomorphism (coercion, mimicking

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and normative pressures). See for example DiMaggio and Powell (1983); Patten (2005);

Chen and Chen (2009); Cho, Freedman and Patten, (2009). In other words, firms engage

in impression management, and want to create an image of environmental friendliness

when in fact the nature of their activity is environmentally sensitive. If this is correct, the

voluntary disclosure mechanism breaks down. Hence, decoupling the protection of public

good from corporate public relation exercise is necessary.

A quick glance through IASB and FASB standards reveals that there are several

standalone standards and interpretations that are in one way or another linked to

environmental and resource (REA) accounting. For instance, IFRIC 3 deals with

emission rights (allowances) and is related to trans-boundary matters. IFRS 8 also defines

reportable segments. IAS 27 defines who should consolidate and how consolidation of

inter-related entities should be done. IAS 28 and IAS 31 respectively deal with

associates and joint ventures while IFRS 3 deals with mergers and acquisitions. IAS 38

deals with the impairment of emission rights (intangibles). IAS 32, IFRS 7 and IAS 39

(new IFRS 9, November 12, 2009) deal with presentation, disclosure, and recognition and

measurement of financial instruments. IFRS 6 (effective January 2009) deals with

exploration for and evaluation of mineral resources. IFRIC#1 addresses changes in

existing decommissioning, restoration, rehabilitation and similar liabilities. IFRIC #5

provides for rights to interests arising from decommissioning, restoration and

environmental rehabilitation funds. As regards liabilities arising from past events, IAS 37

deals with provisions, contingent liabilities and continent assets. In short IASB already

has the basis on which environmental information at corporate level can be reported.1

The purpose of this paper is therefore to make a critical review of the extant

environmental accounting literature, and find (if any) theoretical link(s) between financial

globalization, IFRS and trans-boundary and non-trans-boundary environmental problems.

More specifically it searches for a framework in IFRS so that environmental risks

(liabilities, litigations, reputation damages, loss of future profits) and assets (endowments,

rights and known reserves) of public and private goods can be accounted for. The paper

identifies key standards that are relevant to environmental monitoring, and suggests ways

of integrating financial and nonfinancial information into the existing financial reporting

system. The paper follows a qualitative-archival research methodology to identify the

type of information that can be recognized and disclosed within financial statements of

global companies that are operating in environmentally sensitive sectors. Compustats global vantage database was used to inspect the extent of globalization (integration) of

mining companies. The 2008 annual reports of three major (global) mining companies

were studied.

1 With regard to small and medium sized firms, note that IASB has a watered down version of IFRS.

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The contributions of the paper are fourfold. First, the literature review suggests that

because environment is a public good, market solutions alone will not provide answer to

the multitude of environmental degradation problems that the world is facing. This will

hold for both trans-boundary and non-trans-boundary problems. Second, consistent with

Freedman and Jaggi (2006); and Bebbington et al (op cit) observations the case study had

difficulty in decoupling the propaganda from information. Third, within financial

reporting framework, the overall conclusion from the three financial statements can be

summarized as follows:- (i) From a compliance perspective, it is impossible to conclude

that the companies are indeed meeting the requirements of IFRS. (ii) All the three global

companies did not disclose the size and adequacy of the provisions that they have set

aside for normal provisions and contingencies in respect of the environment. (iii) The

notes and descriptions of the three companies appear similar, indicating the global

convergence of financial reporting practices and the entrenchment of the audit industry.

In other words, no global company produced a separate statement on the environment.

Finally, from an earnings quality perspective, the implications of the non recognition, non

disclosure and inadequacy of provisions for past and present environmental

responsibilities points to one direction:- the inflation of earnings and values

(fundamental/intrinsic) of equities.

The remaining section of the paper is organized as follows. Section 2 reviews the

literature. Section 3 states the research questions more succinctly, and outlines the

methodology. Section 4 contains the conceptual schema and examines relevant financial

reporting standards. Section 5 reports the results of the case study, and proposes a

separate mandatory statement of changes in assets, liabilities and provisions. Section 6

contains concluding remarks, and indicates the directions for future research.

2 Relevant Literature

As noted earlier the literature on the environment is multidisciplinary and dense. This

review focuses on the segment of the literature that deals with accounting. Haripriya

(2000) outlines four non-mutually exclusive environmental accounting systems. They are

(i) pollution expenditure accounting; (ii) physical accounting that measures the stocks of

environmental assets over time; (iii) Green indicators:- a system closely linked to

conventional GDP measure and adjusted to the Nordhaus- Tobin measure of economic

welfare; and (iv) the United Nations System of National Accounts (SNA). The environmental economics literature analyzes welfare measurement, sustainability,

technological change, externality and green accounting within the framework of general equilibrium models (Aronsson, Johansson and Lofgren; 1997). Lange (2003)

shows the link between environmental accounting and sustainable development. For him, environmental accounting research purports to find indicators of potential pollutant

industries, and suggests policies on how best to regulate these industries. Furthermore,

Lange (2003:11) links the discussion on sustainable development to inter-generational altruism, and follows the world commission on environment and development (aka the

Brundtand Commission, 1987) which in turn states that sustainable development is

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meeting the needs of the present generation without compromising the ability of future

generations to meet their own needs.

Another cluster of literature links economics with technology. Van Berkel (2006) for

example shows the link between technology and the environment. Eco-efficiency concept

relates to five prevention practices (process design, input substitution, plant

improvement, good house-keeping, reuse, recycling and recovery) and five resource

productivity factors (resource efficiency, energy use and greenhouse gas emissions, water

use and impacts, control of minor elements and toxics and by product creations). Van

Berkel (op cit) argues that eco efficiency can be fostered at three distinct mutually

reinforcing innovation platforms: operations, plant design and process technology.

Derwall, Guenster, Bauer and Koedijk (2005), show that firms that score high in eco-

efficiency ratings are associated with superior financial performance. Burnett, Wright and

Sinkin (2009) argue that firms that adopt eco efficient business strategies should have

improved market values. Wisner et al (op cit) reach similar conclusions.

Mathews (1997) provides a review of 25 years of social and environmental accounting

literature by classifying the then literature into empirical, normative statements,

philosophical discussion and accounting and non accounting research. He further notes

that the sustainability research domain has not been attracting the attention of mainstream

accounting researchers. Notwithstanding Mathews (op cit) observations, the number of

research papers increased over the next decade. Three volumes of research work was

published in Advances in Environmental Accounting and Management and the Journal of

Accounting, Auditing and Accountability published a number of research works in the

topic. Country specific studies such as Murray, Sinclair, Power and Gray (2006)

examined whether UKs financial markets care about social and environmental information. Using annual and monthly stock market data for 100 companies, and a

combination of parametric and nonparametric tests Murray et al (op cit) reached mixed

conclusion. Cormier, Magnan and Van Velthovern (2005) identified the determinants of

environmental disclosure using theories embedded in economic incentives, public

pressure and institutional theory. They find that risk, ownership, fixed assets age and

firms size determine the level of environmental disclosure by German firms.

Barth and McNichols (1995), using Compustat data, examined whether the stock market

values environmental liabilities and clean up costs. Klasson and McLaughlin (1996) used

event study methodology to examine the link between financial performance and

environmental performance. Konar and Cohen (2001) examined whether there is an

association between firm-level environmental performance and intangible assets, and

reported that poor environmental performance has a significant negative effect on the

intangible-asset value of publicly traded firms. Konar and Cohen (op cit) argued that

major corporations voluntarily over-comply with environmental regulation, and

externally portray an image of being environmentally concerned. The authors provide

evidence that this image is rewarded. This view was reflected in a number of papers that

appeared in volume 3 of Advances in Environmental Accounting and Management

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(Freedman and Jaggi, eds 2006). The view was also echoed in the legitimization-social

contract and reputation risk management theory of Bebbington, Gonzalez and Abadia

(2008).

In contrast to the above, empirical studies that examined environmental disclosures in the

United States (see for example Freedman and Wasley, 1990; Walden and Schwartz,

1997) reported that US companies that were under intense reputation scrutiny because of IPOs, did not improve the level of environmental disclosure. In contrast to the US study, Durand and Tarca (2008) stated that neither historical cost nor historical cost with

supplementary notes with disclosure, were useful for Australian firms. Durand and Tarca

(op cit) reported that specific tangible extractive industry assets are value relevant while

intangible assets are value relevant only in some periods. Cho, Freedman, and Patten

(2009) examine potential explanations for the corporate choice to disclose environmental

capital spending amounts. Their overall results suggest that companies use the disclosure

of environmental capital spending as a strategic tool to address their exposures to

political and regulatory restrictions.

Cross country studies suggest mixed results. Most cross sectional studies attempt to find

an association between environmental disclosure index and financial performance.

Yusuff and Lehman (2008) compared Australian and Malaysian data using a rating

system which is similar to Wiseman (1982) scores.2 Cormier and Magnan (2007)

analyzed the information dynamics between corporate environmental disclosure and financial markets (proxied by financial analysts' earnings forecasts) and public pressures

(as proxied by a firm's media exposure). Using information from print and web sources,

and sample from Belgium, France, Germany, Netherlands, Canada and the United States,

Cormier and Magnan (op cit) concluded that enhanced environmental disclosure leads to

more precise earnings forecasts by analysts especially in environmentally sensitive

industries.

From the review of the relevant literature one observes the following. First, as noted

earlier, environment is a multidisciplinary study, and setting a coherent set of national

2 Wisemans scores were developed using a detailed information disclosure sheet. The elements of the

scoring sheet look for information items such as past and current environmental expenditures; future

estimates of environmental expenditures; financing for environmental equipment; environmental cost

accounting; past and present litigation; potential litigation; environmental data; control, installations,

facilities or processes described; land rehabilitation and remediation; conservation of natural resources;

departments or offices for pollution control; discussion of regulations and requirements; environmental

policies or company concern; environmental goals and targets; awards for environmental protection;

environmental audit; environmental management system; environmental end products/services; sustainable

development reporting; environmental memberships/relationships; environmental stakeholder engagement;

environmental activities; and environmental research and development; and environmental awareness and

education programmes.

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and global policy is not an easy task. Second, the Burntland Commissions definition of sustainable development is similar to Hicks definition of economic profit, which states that income is the maximum amount that an individual can consume during the current

period, and leave the firm well off at the end of the period as it was at the beginning.

Hence, this requires both intergenerational altruism and the conversion of accrual net

income figure to economic profit. Third, the environment is partly a private (trade-able)

good and partly a public (non trade-able) good. Fourth, to the extent trans-boundary

emissions and river systems are affect the quality and sustainability of life, the

environment is also a global (international) good. Hence, in order to prevent market

failure and improve allocation efficiency treaties and regulations are necessary. That is,

the monitoring problem cannot be resolved through the voluntary disclosure and self

regulation mechanism. Hence, the type of accounting that is required for the environment

needs to combine concepts of REA accounting (system), SNA, IFRS and accounting for

public goods.

Furthermore, prior research that attempted to link environmental disclosure with stock

market returns requires some rethinking. The studies followed an instrumentalist

paradigm; and examined either market reaction to the release of environmental news or

whether or not current shareholders are purchasing future earnings at the correct price. In this respect, Penman and Zhang (2002:3) for example argued that models of

sustainable (maintainable) earnings are also models of price earnings ratios. This implies

that the market distinguishes between reporters of sustainable (maintainable) earnings

from others (reporters of unsustainable) earnings. Based on this premises, Penman and

Zhang (op cit) attempted to build a parsimonious model of sustainable earnings. The

model purports to impound social and environmental information, a belief that emerged

from the entrenched efficient market theory.

From a practical-institutional perspective, corporate social and environmental reports

appear to be guided by Global Reporting Initiatives (GRI) guidelines rather than the Kyoto agreement and IASB standards. The GRIs triple bottom line reporting, which states that corporate earnings are a function of economic value added, environmental

value added and social value added is also advanced by consulting firms.3 In other words,

the focus of mainstream empirical research and GRI was on the promotion of voluntary

disclosure. Another interesting observation is that, as of late, a variety of sustainability

indices that compare listed companies started to emerge. Voluntary corporate governance

3 The Economist (November 17, 2009) attributes the phrase the triple bottom line to a British consultant

by the name of John Elkington in 1994. The triple bottom line (TBL) consists of three Ps: profit, people and

planet. The magazine correctly relates the triple bottom line measurements to a balanced scorecard, and

notes that the three separate accounts cannot easily be added up.

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codes such as King III also advanced the self regulation perspective. In this respect, the

Institute of Directors of South Africa (aka King III: 2009:6) traverses through the murky

issues of mandatory and voluntary disclosure, and recommends that companies voluntary

comply with environmental standards. The report assigns the sustainability reporting

responsibility to the audit committee, which often gets outsourced to external audit firms.

3 Research questions and methodology

The above discussion leads to a number of research questions. In this paper the central

question that needs to be answered is whether the current IASB standards provide the

conceptual and technical grounds for the preparation of a separate standardized and

auditable statement of corporate environmental assets and liabilities. The second question

is whether it is possible to define the elements of such a statement, and identify the type

of emerging recognition, measurement and disclosure issues. If a separate statement is

infeasible for one reason or another the paper outlines the environmental information that

can be produced within the current framework of IASB standards.

Both questions require the examination of the existing IASB standards, GRI guidelines,

national and international information gathering systems, and company reporting

practices. The paper elected a qualitative-case research methodology. Case method has a

number of advantages. It allows the researcher to interrogate primary information, and

enables him/her to examine the research problem(s) from close range. It overcomes the

sample size requirements of quantitative research. Henning (2004:32) also states that

social entities (organizations) can be bounded by parameters that show specific dynamics.

Furthermore, previous research on environmental accounting (see for example, Buhr and

Reiter, 2006) used case study method, and hence the result of this paper can be compared

with prior research results. Finally, international accounting research faces the problems

of accounting diversity and international databases add particular problem for carrying

out empirical research on this topic. Hence, the following steps were followed. First,

through a causality schema, the paper outlines the factors that are associated with

environmental degradation and climate change (Figure 1). Second, the paper analyzes the

existing IASB standards to identify environment related standards/provisions/paragraphs

(Table 1). Third, three global companies that operate in environmentally sensitive sectors

were selected (Table 2). The 2008 annual reports and other reports on the three

companies were condensed (Appendices 1, 2 & 3) and studied. Fourth, the paper

examined whether it is feasible to prepare a standardized and auditable separate statement

for the environment (Table 4). The strengths and limitations of the proposed statement

are outlined.

4: 0 Conceptual relationships, sustainability indices and IFRS

4.1 Conceptual schema and sustainability indices

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Figure 1 is drawn following the conventions of structural equation modeling. In order to

improve the readability of the figure, certain connectors (associations) between nodes and

mathematical notations were omitted or reduced to the minimum. Note that there are five

nodes in Figure 1:- emission, production, depletion, projects and urbanization. Each node

in turn contains multiple factors. For instance, the emission node has factors from X11 to

X1n, and X11 can represent Co2 or an equivalent element that contributes to emission of

pollutants that affect air and water quality. The production node in turn has multiple

factors ranging from X21 to X 2n. The nodes and the rest of the factors can be identified

by carefully reviewing ISO and other industry standards and the emerging literature. i is a policy node that is caused by activities (X11 to Xnn) that lead to emission, production,

depletion, large projects and urbanization activities. The policy node is further mediated

by market and nonmarket forces. Market forces are product, labour and financial markets

(including financial intermediaries in carbon securities) while nonmarket forces are State

and non-State actors. Another necessary factor is it is necessary to delineate the trans-

boundary causes of environmental degradation from the non-trans-boundary causes. The

interesting question for this paper is the extent to which accounting policy makers can

influence the policy node, i and make accountancy as an instrument of good local and international environmental governance.

Before we proceed to the examination of mandated financial reporting standards it is

important that we noted the usefulness of indices produced by institutions that advance

sustainability ratings. As noted earlier, Freedman and Jaggi (op cit) surmise that it is

difficult to decouple a firms propaganda from genuine information disclosure. Bebbington et at (2008:371) also argue that though social and environmental reporting is

widespread, the phenomena under which such reports are produced remains largely

unexplored. Notwithstanding this, a number of stock exchanges produce sustainability

indices/metrics and rate companies. Audit firms involve themselves in either the rating or

the adjudication process. For instance, the Dow Jones sustainability index sets three

broad criteria of economic reporting, environmental reporting and social reporting. The

weights and criteria can be criticized. A similar criticism can be made about the

Johannesburg Securities Exchanges (JSE) Socially Responsible Investment (SRI) index. With regard to the environment, the JSE classifies firms into high, medium, and low

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Figure 1: Conceptual schema

Emissions

Production of normal

& toxic waste

Depletion of natural

resources (oil &

minerals) &

environmental

degradations

Projects that lead to air &

water pollution & land

degradation

X11

X12

Urbanization that affects

air, water and land quality

X1n

X21

X22

X2n

X31

X32

X3n

X41

X4n

X51

X5n

i

Environmental

degradation,

climate change

Non market forces:

State actors

Non State actors

International conventions

Market forces: Product markets

Financial markets

Labour markets

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Yee (2006:7) states that reported earnings have two guises; first as a fundamental

attribute, and second as a financial reporting attribute. For Yee (op cit) fundamental

earning is the accounting profitability measure that gauges a firms ability to pay dividends, and earnings quality refers to how quickly and precisely reported earnings reveal fundamental earnings (Yee, 2006:7). Sustainable earnings and triple bottom line

research suggest an additional dimension for earnings quality; a dimension that has not

been examined by contemporary research on accounting quality (viz Barth, et al 2008;

Givoy, et al 2008). Notwithstanding this, whether companies that are in the top of stock

exchange environmental disclosure rating league are in the Keynesian beauty contest

(Gao, 2008) for reputation risk management or revealing fundamental (intrinsic) attribute

remains a subtle point.

Furthermore, the association between financial statement information and security prices

continues to send unclear message to policy makers in the United States. For instance,

Ball and Shivakumar (2008) and Berkman and Koch (2009), though from totally different

angles, provide evidence which show that in contrast to established models of

uncertainty, corporate information disclosed through the annual report (quarterly reports)

have no relevance to price formation. Studies on European and emerging markets lead to

different conclusions (Daske, Hail, and Leuz 2008; Negash 2009). Hence, studies that

rely on the mandatory-voluntary disclosure framework and market efficiency research

need to take particular care in addressing the complex issues of the environment.

Furthermore, cross sectional studies on disclosure show that the association between

financial statement information on one hand, and equity prices and uncertainty proxies on

the other hand, are not linear. Hence, in the presence of unsettling research findings,

public information on the environment cannot be discounted on the grounds of Keynesian

beauty contest. In the absence of other reporting mechanism, the public good nature of

environmental information strengthens the argument for the continuation of the rating

practice.

4.2 Relevant financial reporting standards

As noted earlier, a number of existing standards and interpretations directly and indirectly

deal with environmental issues. In this respect, IFRS 6 (implementation January 2009)

for example directly deals with extractive industries and IFRIC 5 provides the guidance

for decommissioning, rehabilitation and restoration of environment related expenditure.

IFRIC 3 (still under discussion) and IAS 38 (intangibles) deal with government allocated

emission rights, trades in these rights and the impairment of the emission allowances.

Furthermore, it is important to note that a number of other standards provide an indirect

support for the recognition, measurement and disclosure of environmental assets and

liabilities. IAS 37 (provisions for contingent liabilities and assets) can be linked to

environmental liabilities. IFRS 3, IAS 27, IAS 28, IAS 31, IAS 24 and IFRS 8

respectively deal with business combinations, investments in joint ventures and

associates, related party disclosures, and specify the reportable segments of a

geographically dispersed global company. Listed global companies, subject to certain

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exemptions, are expected to comply with IFRS. An environment perspective to global

financial reporting standards therefore provides a new insight; an insight that is useful for

monitoring and protecting the environment. The relevant standards are discussed below.

Paragraph 11 of IFRS 6 states the following:-

In accordance with IAS 37 Provisions, continent liabilities and contingent assets, an entity recognizes any obligations for removal and restoration that are incurred during a

particular period as a consequence of having undertaken the exploration for and

evaluation of mineral resources.

Furthermore, paragraph 3 of IAS 37 defines provisions as liabilities of uncertain timing or amount; and contingent liability is defined as a liability that arises from past events, [italics added] and its existence will be confirmed only by the occurrence and

nonoccurrence of one or more of uncertain future events that are not wholly within the

control of the entity. Paragraph 14 of IAS 37 requires that provision should be recognized when (a) an entity has a present obligation (legal or constructive) as a result

of a past event; (b) it is probable that an outflow of resources embodying economic

benefits will be required to settle the obligations; and (c) a reliable estimate can be made

of the amount of the obligation. Paragraph 17 further defines an obligating event as a past event that leads to present obligation. It states that for an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. Finally, paragraph 27 of IAS 37 deals with the disclosure conditions

for contingent liabilities. If the liability is not expected to lead to an outflow of resources

and where an entity is jointly and severally liable for an obligation, that part of the

obligation that is expected to be met by other parties is treated as contingent liability. The

standard therefore leaves the application to the management, audit committee and

external auditors. In other words, even though the two standards do not define the time

limit or the size (amount) of the event or what construes a constructive obligating event, they provide the technical ground for the recognition of environmental liabilities

that arise from past events (activities) that lead to, for example, the deterioration of air

and water quality (see Figure 1).

IFRIC 3 (emission rights) was issued in 2004 but was withdrawn in 2005.4 The 2004

document was prepared against the backdrop of the Kyoto Agreement on the

environment, and the trend in government preparations for reductions in greenhouse gas

emissions. The economic concept is largely founded on the externality theorem, and the

long held European subscription to the polluter pays principle (PPP) for example while

polluting a trans-boundary water such as the River Rhine. The policy assumes that the

government can create an artificial scarcity by limiting (capping through quota allocation

to qualifying firms) the amount of total emissions of pollutants during a period of time.

4 For more recent development about this interpretation, see www.iasplus.com

14

This approach makes sense at global level if the effects of the emissions are distributed

equally across the globe. Furthermore, given that there are about 200 political

jurisdictions in the world, each countrys contribution to global permissible emissions is different, and the incentives for not observing a treaty (if any) are many, hence the issue

becomes complex. Hence, the interesting question again is whether global financial

reporting standards have a role in influencing and implementing monitoring mechanisms

from intergovernmental change of emission rights to microeconomic level trade in these

rights and their derivatives. Furthermore, since nonpolluting or under polluting countries

can also issue sovereign emission, production, depletion, project and urbanization rights,

designing the appropriate mechanism and product might lead to the reallocation of

resources globally.5

The main issues in the original draft have not changes. Rights (allowances) to emit

pollutant continue to be treated as intangible assets to be accounted for according to IAS

38 (Intangible Assets). When the rights are allocated by government department for

amounts less than its fair value, the difference is recognized as deferred income (liability)

in the statement of financial position. When the firm starts polluting, it records provisions

according to IAS 37. The original draft did not raise issues about past events.

Furthermore, according to www.iasplus.com of Deloitte, in May 2008 the IASB staff

defined emission trading scheme as a an arrangement designed to improve the environment, in which participating entities may be required to remit to an administrator

a quantity of tradable rights that is linked to their direct or indirect effects on the

environment. In its November 2009 meeting of IASB the technicalities of defining an obligating event and the timing of recognition of liability at cost or market value and recording of initial government allocation right (at cost of market) and provisions,

whether it should be treated as intangible asset and face impairment annual test are

finalized. However, the lesson from this IFRIC is that a number of standards IAS 38

(Impairments), IAS 20 (Government Grant), IAS 37 (Provisions, contingent liabilities

and contingent assets) and the standards that relate to financial instruments (IAS 32,

IFRS 7 and IAS 39) will be affected, and require amendments.

IFRIC 5 (decommissioning, restoration, rehabilitation and similar liabilities) deals with

accounting for trust funds set aside for the environment. Paragraph 1 of IFRIC 5 defines

the purpose of the fund as to segregate assets to fund some or all of the costs of decommissioning plants (such as a nuclear plant) or certain equipment (such as cars) or in

undertaking environmental rehabilitation (such as rectifying pollution of water or

5 At the heart of the Copenhagen Summit lies this issue. Binding treaty is unlikely to be reached, and even

if it is reached the monitoring mechanism will be expensive. Furthermore, the worlds most polluters have the incentive to elect the voluntary emission reduction route rather than entering a binding treaty. The

recipients of the adverse effects of emissions in the third world are more than likely to settle for some kind

of compensation (probably via development assistance). Regardless of the outcome of the Copenhagen

Summit, many trans-boundary and non-trans-boundary environmental degradation problems will continue

to be unresolved issues.

15

resorting mined land), together referred to as decommissioning. Paragraph 2 states that contributions to this fund may be voluntary or required by regulation or law, and the fund

might be established by a single contributor or multiple contributors for individual or

joint decommissioning costs. In other words, even though the discussion does not appear

to have linkage with IAS 37, here too the standard setters appear to be prudent in

providing the guidance for the management of the funds set aside for provisions and

contingencies that relate to past events.

IAS 8 deals with selecting and applying accounting policy.6 Changes in accounting

policies, changes in estimates and correction of prior period errors are complex issues.

The scope of IAS 8 covers fundamental errors, retrospective adjustments of financial

statements (as far back as practicable, per paragraph 26), and when and how material

omissions or misstatements should be practically treated, and corrected. The only

unsettled matter is whether the retrospective restatement of financial statements for

environmental costs and liabilities is impractical and indeterminate (paragraph 5 of IAS

8).

IFRS 8 also requires firms to disclose their products, services and the geographical areas

in which they are operating. Paragraph 13 of IFRS 8 sets the quantitative thresholds of

10% of combined revenue. However, both paragraph 23 and paragraph 33 are silent

about segment risks and rewards arising from engaging in environmentally sensitive

activities in each of the geographical areas that the company is operating. When IFRS 8 is

examined in conjunction with IAS 27 (consolidation) and the above mentioned standards

the implication for global companies operating in environmentally sensitive industries

becomes serious.

IAS 32, IFRS 7 and IAS 39 (IFRS 9) respectively deal with presentation, disclosure, and

recognition and measurement of financial instruments. Hedge accounting (cash flow

hedge, fair value hedge and hedge of net investment in foreign operations:- paragraph 86

and 87 of IAS 39) require that gains and losses, and effective and non effective hedges be

reported in the comprehensive statement of income. Given the rise of carbon related

financial instruments, and increases in pending lawsuits against companies the combined

impacts of IAS 27, IAS 37, IFRS 6, IFRIC 5, IAS 8 and standards that deal with

derivative instruments is to strengthen the political costs (Watts and Zimmerman, 1986)

for global companies that are operating in environmentally sensitive industries.

6 Paragraph 5 of IAS 8 defines accounting policy as specific principles, bases, conventions, rules and

practices applied by an entity in preparing and presenting financial statements while a change in accounting estimate is an adjustment of the carrying amount of an asset or a liability or amount of periodic consumption as a result of present assessment of expected future benefits and obligations associated with it.

The standard states that prior period errors are omissions or misstatements for one or more periods arising

from failure to use or misuse of reliable information.

16

Table 1 (below) contains a summary of environment related financial reporting standards.

The table identifies relevant terms, phrases, paragraphs and provides remark(s).

Table 1: Environment related financial reporting standards

IFRS/IAS

number

Title and/ or description Relevant paragraph(s).

Paragraph numbers in

parenthesis

Remarks

Framework Framework for

preparation &

presentation of financial

statements

Accountability (14), relevance

(26), materiality (29 &30),

substance (35), neutrality (36),

prudence (37), completeness

(38), liabilities & obligation

(60), capital maintenance (81),

probability (85), measurement

reliability (86), recognition of

liabilities (91)

Statement to the effect that

sustainability is within the

bounds of the conceptual

framework of IASB and

FASB

IAS 41; Specialized industries Sectors sensitivity to the environment. See ISO

classification and Wisemans disclosure scores.

IFRS 6 Exploration & evaluation

of mineral resources

Paragraph (11): requirement

for provision and

contingencies

Refer to statistics about

emissions; production of

pollutants; toxic waste

disposal systems, ground

water pollution & land

degradation; depletion,

industrial accidents;

environmental impact

studies.

IFRIC 3

(withdrawn)

Emission rights and

allowances

Several paragraphs deal with

whether government allocated

rights; and the accounting

treatment at the start of

emission, and the setting aside

of provisions.

Kyoto Agreement,

Copenhagen Summit;

Agreement versus treaty;

efficiency of national and

global allocation systems,

speculation and

transferability of emission

rights; whether climate

change has o boundaries;

markets for trading emission

and similar rights and their

derivatives; sovereign rights;

global shared databases

(REA).

IAS 20 Government Grants Initial acquisitions of emission

rights & allowances recorded

as assets whose valuations are

subject to impairment tests.

Government grants could be

influenced by the politics of

the day. Government can

over/under supply the rights

certificates; endemic

corruptions in the public

sector might frustrate the

system.

17

IFRIC 5

Jan 2006

Decommissioning,

restoration &

environmental

rehabilitation funds

Purpose of fund (1), voluntary

& required contribution to the

fund (2), geographically

dispersed sites (2),

independent trustees,

accounting for interest in the

fund (7), obligations to make

additional contributions (10),

contingent liability (10),

reimbursement rights (BC 12)

Disclosure of the size of the

fund; arms length of the

trustees; plans for additional

contributions; responsibility

for past degradations;

adequacy of the fund.

IFRS 8 Operating segments Core principle (1), nature of

an operating segment (5),

aggregation criteria (12),

quantitative thresholds (13),

disclosure (20), profit/loss/

assets and liabilities (23),

measurement (25),

geographical information (33)

For a global company

whether its branches and

subsidiaries are operating in

environmentally sensitive

sectors; and whether the

segment meets the

quantitative threshold, or

whether it is required to

prepare consolidated

financial statements, and

whether its segments meet

international standards.

IAS 27,

IFRS 3,

IAS 28 and

IAS 31, SIC

12

Consolidation,

investments in mergers

and acquisitions, interests

in joint ventures and

associates; consolidation

of special purpose entities

Several paragraphs relate to

ownership, risk, reward, and

significant influence.

Group & consolidated

statements are prepared for

listed legal entities. Listed

and unlisted companies

might be sued for violating

environmental standards in

countries where their

segments operate/operated in

the past. This in turn might

trigger an unbundling wave.

IAS 37 Provisions, contingent

liabilities & contingent

assets

Several paragraph that require

charging current earnings for

setting aside normal

provisions and contingent

liabilities.

Absence and inadequacy of

provisions suggests earnings

inflation which in turn affects

intrinsic (fundamental)

values of equities.

IAS 8 Accounting policies,

changes in accounting

estimates and errors

Accounting policies (10),

retrospective application (22),

warranty obligations (32

&33), errors (41), prior period

errors (49),, impracticability of

retrospective adjustments (51,

52&53)

The extent to which past

earnings require restatement,

and how this is going to be

shown in past, present and

future financial statements

(retrospective & prospective

adjustments).

IAS 1 Presentation of financial

statements

Material omissions (7);

purpose of financial

statements (9), fair

presentation (15), rectification

of accounting policies (18),

going concern (25), provisions

(54), estimation uncertainty

(125)

Minimum set of information

that must be included in the

comprehensive financial

statements of

environmentally sensitive

companies.

IFRS 1 First time adoption of Accounting policy 97), fair Fair value of environment

18

IFRS value (16), compound

financial instruments (23),

parents, subsidiaries, joint

ventures & associates (24),

changes in decommissioning,

restoration and similar

liabilities (25E), non IFRS

comparative information (36),

reconciliations (39)

related assets, liabilities and

provisions.

IFRS 7,

IAS 37 &

IAS 39,

IFRS 9,

IAS 38

Financial instruments

disclosure, presentation

and recognition and

measurement,

intangibles & impairment

Disclosure of past and

present environment related

risk(s); qualitative and

quantitative description of the

effective and non effective

hedging strategy; fair value

of carbon derivatives and

other environment related

assets and liabilities.

5.0 Case study and Discussion

Financial globalization has accelerated the pace at which multinational companies

diversify the sectors and the regions in which they are operating. Companies from

emerging markets are also routinely getting listed on major American and European stock

exchanges. Information technology has also created an enabling environment for

transmitting information at high speed. Previous research that examined financial

globalization has estimated the gains (Stulz 2005) and country specific studies have also

attempted to show the winners and losers from financial globalization (Makina &

Negash, 2007). For the purpose of this research, the Compustat Global Vantage database

was used. The case study focused on one of the environmentally sensitive sectors. Using

the data query options of the CD ROM located at the Auraria Higher Education Campus

Library of the University of Colorado/Metropolitan State College of Denver, companies

were separated into ADR (American Depository Receipts) and Non ADR companies.

ADR companies are foreign firms listed in the United States stock exchanges. The number of firms that operate in the mining and extractive industries are given in Table 2

below. The difference between the total companies and non-ADR companies gives an

estimate of foreign companies listed on US exchanges.

A closer inspection of the list of ADR companies reveals that major foreign mining and

oil companies that either trace their origin to Sub Saharan Africa (SSA) or have historical

(colonial) connections with the region are listed on US stock exchanges.7 Anglo

7 According to the encyclopedia of the earth, the Africa region contains about 30 percent of the earths

known mineral reserves, including 40 percent of gold, 60 percent of cobalt and 90 percent of platinum.

New oil fields are discovered in various parts of SSA.

19

American Plc traces its root to South Africa and, through its subsidiaries the firm

operates in a number of SSA countries in mining and non mining sectors. China

Petroleum & Chemical and Petro China International are new entrants into the SSA

mining and exploration markets. Its stocks are listed on US exchanges. Royal Dutch Shell

has been operating in Nigeria since the 1960s. Shell also has a significant presence in the

United States. A number of non ADR firms (US firms) also operate in the SSA region. In

other words the analysis of the database reveals that major global oil and mining ADR

firms are operating in the SSA region. The interesting question here is whether United

States financial markets can be used to monitor the environmental behavior of global companies in the SSA region.

Table 2

Industry code Nature of the firm Total

companies

Non-ADR

companies

1010 Aluminum 12 9

1020 Gold 69 61

1021 Precious metals & minerals 38 36

1030 Steel 56 45

4010 Oil & gas refining &

marketing

39 38

4015 Oil & gas storage and

transport

102 99

4030 Oil domestic and integrated 0 0

4040 Integrated oil and gas 34 18

4060 Oil & gas exploration and

production

258 254

4070 Oil and gas equipment and

servicing

86 79

4080 Oil and gas drilling 20 20

4090 Coal & consumable fuels 33 32

Global companies with SSA connections were selected for the case study. There are

number of reasons for this. First, mining is one of the environmentally sensitive

industries.8 Second, mining is an important growth engine for many SSA economies.

Third, mining is often associated with the resource curse problem of many SSA

8 Fryna (2004) notes an increase in litigation against transnational corporations in SSA. He argues that the

increase has led to rising environmental liabilities and reputational damages in the firms country of origin. He further notes that foreign firms have also been successfully sued in African courts for social and

environmental damages. According to the Associated Press of November 17, 2009, the African Union is

also preparing to claim for damages from developed countries at the Copenhagen Summit of December 8-

15, 2009. It is not clear whether this claim relates to environmental development assistance or aid backlog

on claim in the legal sense of the term. It is however important to decouple the trans-boundary and non-

trans-boundary reasons for the demand, and some the issues that are emerging from the accounting

literature.

20

countries. Fourth, since the companies are global entities, it might be easier to enforce

international environment standards through the financial market system, and also

provide for actual and contingent liabilities (if any) arising from these firms past activities.

Based on the Compustat Global Vantage and search engines for the mining industry,

three companies whose presence is well known in various parts of SSA were selected for

case study. The three companies have multiple listings and their market capitalization is

more than the combined GDPs of many SSA countries. The companies are Anglo

American Plc, Royal Dutch Shell and PetroChina International. The financial statements

were obtained from their respective websites. To obtain the news about environmental

lawsuits against each company, Google search was done. The following terms were used

for Google search:- lawsuit against Anglo American corporation environment; lawsuit against Royal Dutch Shell environment and lawsuit against PetroChina International environment. Lawsuits filed, fines by State authorities, out of court settlements and the firms alleged association with conflicts and human/labour rights violations were obtained. The credibility of these news items were verified by following the lead stories,

and by cross checking the information from additional sources. Content analysis or

disclosure indices were not prepared as the research method is qualitative. Appendix 1, 2

and 3 contain condensed extracts from Wikipedia, company social responsibility and

sustainability reports, company websites, various newswires, and the 2008 annual reports

of the three global companies. The analysis took both nonfinancial and financial

perspectives.

The findings are consistent with Freedman and Jaggi (op cit) and Bebbington et al (op

cit) observations in that the analysis revealed that the phenomena under which the social

responsibility and sustainability reports are prepared, who prepares them and whether the

reports are subjected to audits remained unclear. More specifically, the annual reports

rarely contained nonfinancial quantitative data. The presentations did not follow a

specific standard or format, and the GRI and other similar guidelines for reporting

sustainability appear to be inadequately complied with. The social responsibility sections

of the reports also appeared to deal with philanthropy work. The reports did not indicate

the contributions that accrue to the firm from investments in health and safety.9 Royal

Dutch Shell approached the social and environmental sustainability report from a risk and

reputation management perspective. It annual reports states that the company faces

various challenges in the over 100 countries that it is operating. The section on climate

change indicates that the company continuously monitors progress towards its own

voluntary emission targets. PetroChina in turn allocated a greater portion of its rather lengthy separate social responsibility report to deal with its contribution to statutory and

9 For more discussion on the association between ergonomics and company profits, see Negash and

MacKinnon (1998).

21

non statutory welfare fund for its employees, and reported about its happy employees. The environmental section of the its report dealt with the companys plans and the sponsorship it made for environment related conferences. Anglo American Plc

extensively reported about its distribution of antiretroviral drugs to its mining work force

in South Africa while its sustainability report brushed through key environmental

concerns. In sum almost all of the three global companies have disclosed some emission

statistics and described their effort/plans to reduce the emission of harmful gases.

However, the reports were voluntary, unstructured and not confirmed by independent

(environmental) auditors. The disclosure style appears to contain an element of

propaganda that is aimed at building reputation or fighting back the adverse publicity that

the company faced in one or more of its segments. The presentation does not have a

REA concept. The nonfinancial review leads to the conclusion that a more clearer and

mandatory standard is necessary.

The financial statement section of the annual report is also not very different from the

nonfinancial information section. The 2008 annual reports of the three companies were

inspected in respect of IFRS 6 (for early adoption), IFRIC 5, IAS 37, IAS 8, IAS 32,

IFRS 7 and IAS 39. The findings are as follows:-

(a) All three annual reports state that the 2008 financial statements were prepared in accordance with IFRS (IFRS 1 and IAS 1). Notwithstanding this, PetroChina also

states that Chinese Accounting Standards were used, and certain interpretations of

Chinese GAAP came from a government department. The PWCs audit report also states that the financial statements were audited in accordance with Chinese

Auditing Standards.

(b) Anglo American Plc states that costs for restoration of site damages are provided for at their net present values, and charged against profits as extraction progresses.

The changes in the measurement of a liability relating to the decommissioning or

preparation of site are adjusted to cost of the related asset in the current period. If

a decrease in the liability exceeds the carrying amount of the asset, the excess is

recognized immediately in the income statement (page 90). The company also

states that for its South African operations it makes an annual contribution to a

dedicated environmental rehabilitation trust to fund, which it controls and

consolidates. It is not clear whether it is doing the same for its non South African

mines. Furthermore, the size and adequacy of the provision are not disclosed. The

number of times offsetting (netting) of assets against liabilities (disallowed per

IFRS) is done, remains unclear.

(c) On page 121 of its 2008 annual report Royal Dutch Shell states that provisions are recorded at the balance sheet date at the best estimate, using risk adjusted future

cash flows of the present value of the expenditure required to settle the present

obligation. With regard to decommissioning and restoration costs in respect of

hydrocarbon production facilities, value is determined using discounting methods

and liability is recognized. With regard to provisions for environmental

remediation resulting from ongoing or past operations, events are recognized in

22

the period in which an obligation, legal or constructive to a third party arises, and

amounts are reasonably estimated. In other words there are no provisions.

(d) On page 119 of its 2008 annual report PetroChina states that there were no material litigations and arbitration events in respect of the environment during the

year. With regard to IFRIC 5, it states that when the conditions for provisions are

not met, the expenditures for decommissioning, removal and site clearance get

expensed in the income statement when they occur. It does not state whether there

are provisions.

(e) With regard to IAS 32, IFRS 7 and IAS 39, there is little or no disclosure in the financial statements of the three companies about emission rights and/or carbon

derivatives. As regards IFRS 8 and IAS 27, all three companies are preparing

their consolidated financial statements and mention the regions in which they are

operating. However, it was not always clear how many segments were

consolidated.

(f) None of the three global companies separately disclosed the amount of normal provisions or provisions set aside for contingent liabilities in respect of the

environment.

The overall conclusion from the three financial statements can be summarized as follows.

First, from a compliance perspective, it is impossible to conclude that the companies are

indeed meeting the requirements of IFRS. Second, all the three global companies do not

disclose the size and the adequacy of the provisions that they had set aside for normal

provisions and contingencies in respect of the environment. Third, the notes and

descriptions appear similar, indicating the global convergence of financial reporting

practices and the entrenchment of the audit industry. In other words, the three global

companies did not produce a separate statement on the environment. This observation

might be explained by DiMaggio and Powells (1983) institutional isomorphism imposed by the profession, which puts constraint and pressure on a reporting firm to imitate others

and find legitimacy. Finally, from an earnings quality perspective, the implications of the

non recognition, non disclosure and inadequacy of provisions for past and present

environmental responsibilities points to one direction:- the inflation of earnings and the

intrinsic (fundamental) values of equities.

A statement of environmental assets and liabilities?

The above discussion leads to two financial reporting policy alternatives that the IASB

board might wish to consider. The first option is a mandated separate statement that

focuses on the environment. The second option is to require the disclosure of certain

elements of information within the existing reporting framework and strengthening the

offsetting rule. As the world continues to be preoccupied by issues of environmental

degradation, trans-boundary issues get confused with non-trans-boundary issues. The

production of a separate statement on the environment would be a preferred policy to

decouple trans-boundary issues from non-trans-boundary issues in the context of segment

23

(geographical) reporting. The statement can combine nonfinancial and financial

information. The minimum information that ought to be disclosed in the proposed

statement can be determined by amending IAS 1 and providing a transition clause in

IFRS 1. The standards that deal with provisions (IAS 37) and changes in accounting

policy (IAS 8) can be revised to require that provisions for the environment liabilities or

asset replacements/impairments be backed by ring fenced cash or cash equivalents.

IFRIC 3 and IFRS 6 can be connected, and a standalone standard on environmental

sensitive sectors might be necessary. Table 3 contains some of the elements of the

proposed separate statement for the environment.

Table 3: Statement of Environmental Assets and Liabilities*

As of December 31, 20XX ----------------------------------------------------------------------------------------------------------------------------------

Financial information:- Comparative year Environmental assets:- Cash in trust funds Investments in trust funds at fair value

Emission rights held Emission rights held for sale (at fair value) Insurance & similar products held against environmental risks Contributions to voluntary & mandatory schemes Inventory of natural & biological assets & depletions Investments in air & water quality Capitalized research & development Capitalized net site preparation & restoration costs Environmental Liabilities and uncertain liabilities (provisions or contra asset accounts) Present value of decommissioning, restoration & rehabilitation Legal and constructive liabilities arising from past events Deferred income from government allocations of emission rights

Uncertain liabilities (Provisions or contra asset accounts) Provision for decommissioning, restoration & rehabilitation (current) Provision for decommissioning, restoration & rehabilitation of (past) Provision for contingent liabilities from past events

Net adjustments to retained earnings for past errors & material omissions Net surplus (deficit) for current year+ Estimate of net environmental assets (liabilities)

*The statement can be accompanied by the disclosure of minimum nonfinancial information such as actual & ISO permissible standards of emissions, production and disposals of waste, depletion

of natural resources & replacement (forestry), major capital projects that lead to deterioration of

air & water quality and habitat, and urbanization

+Net surplus (deficit) is arrived after consideration of recurrent income & expenditure such as

interest and dividend incomes from environment related investments, tax rebates and dues,

recurrent expenditure on environmental protection, current charges for normal provisions for decommissioning & rehabilitation, past errors and omissions, current contribution to independent environmental rehabilitation fund & tax gains and losses arising from hedge activities on environment related products, etc.

24

6 Concluding remarks and direction for future research

This paper examined whether global financial reporting standards can be used as a device

for monitoring the environmental behavior of global mining and oil companies. The

paper reviewed the literature in economics, finance, environmental accounting,

technology, and examined the voluntary-mandatory mechanisms of corporate disclosure.

I surmise that the proprietary cost (Verrecchia, 1983) and voluntary disclosure

mechanism is infeasible for monitoring public goods such as the environment. Mandated

environmental public information therefore cannot be discounted on the grounds of

voluntary disclosure and Keynesian beauty contest. Second, a careful examination of the

existing IASB standards provided useful avenues for improving the current set of

financial statements, and the production of mandated separate statement of environmental

assets and liabilities.

Furthermore, using qualitative and case research methodology the paper examined the

annual reports of three global companies that are listed on United States stock exchanges.

The three companies also operate in the SSA region. The research thus introduces first

world environmental accountability regulatory and financial reporting regimes to the

third world operations of global mining and oil companies. It also separates transnational

issues from national issues. On the technical side, I find that the social and sustainability

reports that were studied do not have standard formats, and the GRI guidelines appear to

be inadequate. The financial statements though claim to comply with IFRS specific

standards such as IFRS 6 (early adoption), IFRIC 5, IAS 37, IAS 27, IAS 8 and IFRS 8

they did not enable firms to disclose key environmental information. Consequently, the

paper proposed two policy options of either requiring a separate statement of

environmental assets and liabilities, or requiring the disclosure of minimum set of

environmental information through the existing set of comprehensive financial

statements.

The separate statement on the environment that is prepared in accordance with IFRS has

a number of advantages, including the decoupling of reputation management efforts of

environmentally sensitive firms from their genuine information disclosure efforts. The

separate statement emerged from the analysis of the multifactor model in Figure 1, and

the analysis of existing financial reporting standards. The proposed statement is

consistent with the REA concept, and certain information can be aggregated for planning

and monitoring at sector, macro, regional and global levels. The information can be used

by both market and nonmarket (State and pressure groups) actors. It can be linked to the

UN system of environmental accounts(SNA) and XBRLs taxonomy (classification). Furthermore, since companies are already producing lengthy social and environmental

reports the incremental cost of preparing the separate statement outweighs the

ramifications of climate change and lawsuits on the part of the firms.

There are number of avenues for future research. Replication of this research on other

environmentally sensitive sectors might provide corroboration for the conclusions of this

25

paper. Examining the form of association between nonfinancial information and financial

information that purports to serve the environment is another avenue. Expanding the

taxonomy of XBRL in the context of REA, IFRS and SNA requires a shared database

environment. This is another direction for future research.

26

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Appendix 1 Anglo American PLC Part A:

History: (condenses and extracts from Wikipedia). Anglo American PLC is a multi-national mining

company, founded in South Africa in 1917as a mining enterprise but now extending into other areas.

Natural resources remain the focus of its operations. Its headquarters are in London. Its primary listing is

on the London Stock Exchange and it is a constituent of the FTSE 100 Index. Ernest Oppenheimer along

with American J.P. Morgan founded the Anglo American Corporation, a gold mining company, in 1917

with 1 million, raised from U.K. and U.S. sources, and ultimately derived the name of the company.[1]

The

AAC became the majority stakeholder in the De Beers company in 1926. Two years later, the AAC began

mining in the Zambian copper belt. In 2008, the company had 105,000 permanent employees and 39,000

contract employees in its managed operations located in 45 countries.

Commendations:- Anglo American is a member of the World Business Council for Sustainable

Development [29]

and in August 2008, the company was named as a winner of the UK Sustainability

Reporting Awards [30]

. Additionally, Anglo American committed to support the Extractive Industries

Transparency Initiative which strengthens governance by improving transparency and accountability in the

extractives sector [31]

. A socio economic toolkit originally developed by Anglo American to manage the

social aspects of its operational impacts, was released into the public domain for non-profits and other

companies to use [32]

. The program was commended by the