Hajnalka Ván
University of Szeged, Kálvária sgt. 1, 6722, Hungary E-mail: van.hajnalka@eco.u-szeged.hu
Abstract: Environmental management accounting (EMA) focuses much more on the cost side of environmental activities, than on their benefits. Environmental benefits are often regarded as reduction in costs only or some very limited opportunity for creating revenues. The profitability of environmental activities is a very important question for firms, though. My paper aims at collecting the typical benefits of environmental activities in a scheme and analyzes their connection with the balance sheet.
Keywords: environmental accounting, benefit side, balance sheet,
I. INTRODUCTION
Mostly environmental costs stand in the focal point of EMA, together with their possible connection to past environmental damage or prevention of such risks. That is, environmental costs are differentiated among the following categories: waste and emission treatment, prevention, and environmental management, material purchase value of non-product output and processing costs of non-product output. The benefit side, on the contrary, is often limited to account for environmental revenues (subsidies and other earnings) [1] [2] [3].
Environmental costs appear on the assets and liabilities side of the balance sheet. The assets may be fixed assets, as the capitalisation of environment related investment costs, or current assets as the major potential collector of stocks related to the environment. Any change in inputs/outputs of the material flow would certainly influence the level and composition of stocks.
On the liabilities side, provisions and the accounts payable may hide environment related information [1].
Provisions may embrace uncertain liabilities, determined by the law, and the accounts payable related to environmental issues.
The present paper seeks an answer to the following questions:
- How can we grasp the benefits of environmental projects?
- Do benefits take the same place on the balance sheet as costs?
II. BENEFIT SIDE
My review of the relevant literature demonstrated that the benefit side is mentioned only in some cases. Related concepts include Schaltegger-Burrit’s idea (2000) [4], who, first of all, defined environmentally induced benefits. “Such benefits include environmentally induced additional revenues […] and reduced costs” ([4] p. 95.).
These benefits can be divided into direct and indirect elements. Direct revenues include measurable factors,
like gain from sales of recyclables, increased volume of sales and higher prices for the products sold. Indirect elements are less tangible, for example, image, increased customer satisfaction etc., although this book focuses on the environmentally induced costs.
The approach of United Nations Division for Sustainable Development (2001) [1] is similar to the above-mentioned concept. It distinguishes subsidies, awards and other earnings. The first pillar embarks tangible (direct) effects, while the second comprises less tangible ones. However, focus falls on the cost side.
In Japan, the government requires the submission of a report on the environmental effects, benefits and costs too. Beside the “environmental conservation cost” there is a distinction of “environmental conservation benefit”
and “economic benefit associated with environmental conservation activities” ([5] p. 3.). “Environmental conservation benefit” is measured in physical units like prevention, reduction etc. “Economic benefit associated with environmental conservation activities” means profit for a company, and is measured in financial terms. It is a better-expanded scheme differentiating between actual and estimated benefits, but its basic emphasis is on measurement.
The last concept that I would like to mention was conceived by Csutora M. (2007) [6]. This paper combines environmental benefits with the evaluation of natural resources. Its main innovation lies in displaying less tangible elements in this scheme too, and providing a possible measuring method.
In summary, EMA concentrates on the cost side, and the benefits can only appear as benefit from cost savings.
In the present paper, my emphasis falls on the benefits of a company’s business operations and not the positive effects of the environmental activities on the external environment like customers, natural environment etc. It is similar to the “economic benefit associated with environmental conservation activities” defined by the Japanese Ministry, although I also deal with measurable and less measurable benefits.
In this relation, the question of what environmental benefits are also arises. These benefits originate from environmental activities, have positive effect on the company, one part of these can be evaluated by using monetary and/or physical value too, and the majority is probably less tangible, only predictable or immeasurable.
To sum up, we must differentiate between tangible and less tangible benefits of environmental activities.
Positive effects can easily be calculated for cost savings of environmental projects such as reduced costs due to decreasing level of pollution, etc. [4] [5]. On the other
hand, estimation and measurement can easily run into difficulties for customer attraction, good image, good relationship with authorities etc. [6] [7]. Apparently, benefits are in much more complex relationship with the balance sheet than costs.
III. THE PROCESSES WITHIN A COMPANY
Accounting refers to the measurement of economic events as well as summarising and reporting them in the form of financial statements for use by the stakeholders.
Reporting is the ultimate function of accounting. The so-called input-output process represents the main business recycling process in a company. This process is generated by three factors: the financial, product and production/service providing process [8] (Figure 1).
There exist financial elements in the background of every process, since profitability is the main goal of an economic company, and this process embraces the whole company. A company can focus on production or service providing, which ensure its operation. The third category connects products to sales, also complementing the process by marketing and PR elements among others. Of course, acceptable operations also require other additional processes like human resources, administration etc.
FIGURE 1:PROCESSES WITHIN A COMPANY
Parallel with these processes, benefits deriving from environmental activities can also be grasped. This method ensures that not only the measurable elements, but also the ones falling outside accounting transformation can be calculated as environmental benefits.
IV. BENEFIT SIDE AND THE BALANCE SHEET
My paper is focusing on environmental benefits hidden in the balance sheet. I have collected those benefits in a scheme and arranged them along four categories: process benefits, product benefits, financial benefits and other benefits. Of those categories, only product benefits and financial benefits appear on the balance sheet directly.
Process benefits originate from the realignment of the process within the company. Product benefits can be revealed through stocks analyses. Financial benefits indicate positive effects on the fiscal side, although they are not easy to identify on the balance sheet. The other category of benefits contains less tangible benefits.
We can organise tangible, as well as less tangible benefits into these four categories.
It is possible to draw up a summarizing table (Table 1) along these double dimensions (tangible-intangible, process, product, financial and other benefits).
Firstly, financial benefits contain the cases that have an effect on financial processes. In a well-established system, it is easy to assess the benefits deriving from sold recycling materials as subsidies for a wastewater operate plant etc. The other focus falls on the lower level of taxes, fees, due to the environmentally friendly technology. The above-mentioned benefits have positive effect on financial processes, while provision and insurance have negative effects on it. According to my opinion, provisions may ensure the financial arrangement of an accident. Apparently, financial benefits embark generally measurable elements, but human cost reduction due to better working conditions may prove less measurable [9]. Better working conditions mean lower migration, which reduces training expenses or saves coaching time. However, this factor is only estimated and not concretely measurable.
The financial benefits on the balance sheet can on the one hand appear in an indirect way, in the profit and loss account as increased revenues, or decreased expenditures, which means the increased or decreased retained earnings. On the other hand, it can appear directly in the provision, although it is not a stock but a flow indicator.
The realignment of the production/service providing process can exercise a positive effect in the firm. The tangible part can be ensured by better utilisation of materials, for example, lower amount of materials or energy produced in-house etc. This has positive effects on the price of products too. The less tangible part is the information of environmental management system that generates more rational decision-making, reliability and flexibility.
Process benefits on the balance sheet can appear as the improving figures in the stocks (materials flow accounting) and in the retained earnings influenced by revenues and costs. Process benefits are also mentioned in the literature in many cases.
Product benefit contains benefits from the sale of environmentally friendly products and saved raw materials. Furthermore, it can also boost the sale of other products exercising a multiplier effect.
These benefits can appear on the balance sheet in the stock or indirectly in the retained earnings.
As the table shows, the other benefits can contain more elements than the previously mentioned three categories. Within this category, we can distinguish benefits related to human resources, the company and surroundings. Better working conditions can make human workforce more reliable and efficient. The company can receive awards due to its environmental activities, the number of accidents can decrease, which can lead to fair evaluation. The connection with stakeholders can improve, while customers, authorities or competitors’ trust can also increase. These elements can appear on the balance sheet in a complex way, that is, in the form of fixed assets like good will or can be hidden in retained earnings. In many cases measurement only means an estimation, while statement is not easy for a company either, however, it exercises positive effects like flexibility in operations, quicker processes in terms of administration, permissions etc.
The above-described scheme explains that benefits are hidden in the balance sheet, and a very detailed system is necessary to assess them. Companies can complete the figures with notes that may include such elements although it is not standardised.
V. FURTHER CONSIDERATIONS
The conventional accounting system aims at identifying, measuring and communicating economic information. Its most important task is to create the measurable elements of assets and ensure a better comparison among annual reports. Environmental management accounting aims to integrate environment related cases into the system [10]. The question lies in whether it is possible to identify, measure and report environment-related costs, assets, revenues with the methods of conventional accounting.
In this system, we cannot measure the less tangible benefits; however, we can evaluate their role in the value-creating strategies, although in other cases it is not possible. This idea is similar to the problem of displaying intangible assets on the balance sheet. There are some indicators to measure these assets, but it is a very slippery area [11] [12].
Sustainability has become one of today’s most frequently used terms included in virtually all documents.
I believe that these research fields should develop a closer cooperation in order to build up a stable and well-established system. For example, a new concept emphasizing sustainability is also formed in regional development theory. Based on this new concept the pristine natural environment for recreation and ambiance is more important than the old concept (attempting to acquire roads, industrial parks etc.) [13] [14].
VI. CONCLUSION
The estimation and measurement of the advantages of environmental projects is more difficult, uncertain, and costly, than cost valuation. In spite of that, it is important to do due to its positive effects on the company and the society.
REFERENCES
[1] UNSDSD: Environmental Management Accounting Procedures and Principles, UNSDSD, New York 2001
[2] Csutora M –Kerekes S.: A környezetbarát vállalatirányítás eszközei, KJK-KERSZÖV, Budapest, 2004
[3] Ditz D. – Ranganathan J. – Banks R. D.: Green Ledgers: Case Studies in Corporate Environmental Accounting, World Resources Institute, United States 1995
[4] Schaltegger S. – Burritt R.: Contemporary Environmental Accounting Issues, Concepts and Practice, Greenleaf Publishing, 2000
[5] Ministry of the Environment Japan: Environmental Accounting Guidelines, Japan, 2005
[6] Csutora M.: EMA – estimating the benefit side, EMAN conference Helsinki 2007.
[7] Beer P. – Friend F. : Environmental accounting: A management tool for enhancing corporate environmental and economic performance, Ecological Economics, 58. 548-560. p. 2006 [8] Chickán A.: Vállalatgazdaságtan, AULA, 2002
[9] Earnhart D. –Lizal L.: Does better environmental performance affect revenues, cost, or both? Evidence from a transition economy, William Davidson Institute Working Paper Number 856, 2007
[10] IFAC: Environmental Management Accounting, International Federation of Accountants, New York, 2005
[11] Konrad Group: The invisible balance sheet Key indicators for accounting, control and valuation of know-how companies, Stockholm 2000
[12] Koch G. R. – Leitner K. H. – Bornemann M.: Measuring and reporting intangible assets and results in a European Contact Research Organisation, Joint German-OECD Conference, Berlin 2000
[13] Blakely E. J. – Bradshaw T. K.: Plannind Local economic development, theory and practice, SAGE Publications, United States, 2002
[14] Pike A. – Rodríguez-Pose A. – Tomaney J. : Local and Regional Development, Routledge, New York, 2006
TABLE 1:BENEFITS OF ENVIRONMENTAL ACTIVITIES ON THE BALANCE SHEET