The current issue and full text archive of this journal is available at

www.emeraldinsight.com/2040-8269.htm

IFRS and environmental

accounting

IFRS and
environmental
accounting

Minga Negash
Department of Accounting, Metropolitan State College of Denver,
Denver, Colorado, USA

577

Abstract
Purpose The purpose of this paper is to examine whether International Financial Reporting
Standards (IFRS) can be used for monitoring environmental degradation. A comprehensive review of
academic and professional literature indicates that the IFRS regime provides useful conceptual and
practical frameworks for monitoring firms that are operating in environmentally sensitive industries.
Design/methodology/approach Using qualitative and case study research methods, the
financial statements of three environmentally sensitive companies were studied.
Findings The sustainability reports produced by the companies contained both information and
propaganda. The credibility of published sustainability reports is unclear. The size and adequacy of
the contributions of the companies towards sharing the costs of decommissioning, rehabilitation and
restoration of the environment are not disclosed. A new statement is proposed.
Practical implications Policy implications at national and international level are many.
Social implications The paper shows that environment has both financial and non-financial
implications. The effects of environmental degradations on the habitat and society are serious.
Originality/value The paper contributes to new knowledge in several ways. There are at least
three major conclusions from this paper, and the ideas are original.
Keywords Financial reporting, International standards, International Financial Reporting Standards,
Globalization, Environmental accounting, Sustainability reports
Paper type Research paper

1. Introduction
Jonas and Jones (2010) reported that by the end of 2009 there were over 3,100 corporate
social and environmental reports that were published in 60 countries. Audit firms
and stock exchange affiliated institutions annually rate sustainability reports and argue
that there is a business case for preparing such reports. The web sites of many
environmentally sensitive companies contain lengthy material about the environment,
society and safety. Parallel to what the business sector is doing, national governments
and the United Nations are also preoccupied with issues of sustainability. Hence,
an interesting financial reporting question arises. Whether International Financial
Reporting Standards (IFRS) and global capital markets can be used as monitoring
institutions (laws, organizations) for policies that are aimed at protecting the environment
is an important and timely research question. Interestingly, when the existing body of
IFRS is examined from an environmental perspective, a number of insights can be made.
The author is grateful to the University of Witwatersrand and the Metropolitan State College of
Denver for enabling him to complete this work during his sabbatical. He also acknowledges the
useful comments of Tsegaye Wolde Georgis, the participants of the American Accounting
Association annual meeting in San Francisco and the reviewers of this journal. Barbara Uliss did
the editorial work.

Management Research Review

Vol. 35 No. 7, 2012
pp. 577-601
q Emerald Group Publishing Limited
2040-8269
DOI 10.1108/01409171211238811

MRR
35,7

578

First, an accrual accounting based earnings figure does not take cognizance of issues of
sustainability. Similarly, the finance side of the balance sheet does not adequately
provide for liabilities that might arise due to the firms past environmental activities.
Second, even within the current conceptual framework, since IFRS has legal backing in
more than 100 countries, it has a unique advantage of bringing environmental
accountability to the boardroom and the financial market.
The environment is both a complex and an eclectic subject. The contemporary
accounting literature addresses the environmental accounting problem from:
.
the usual rationalist-efficient market-voluntary disclosure perspectives; and
.
from the legitimization, image building (reputation management) and social
contract perspectives.
Within the rationality and market efficiency framework, the discussion of corporate
sustainability reports can be easily linked to the earnings quality and the earnings
sustainability literature. In this respect, Givoy et al. (2009) 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 the accrual
process, the prevalence of earnings management and the prevalence of conservatism.
Barth et al. (2008), in their study of International Accounting Standards (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.
When one invokes trans-boundary and non-trans-boundary environmental issues into
the earnings quality literature, it is evident that the absence of for example, 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
overstatement and debt understatement. Hence, there is a paucity of research on the link
between accounting quality (earnings) studies and environmental accounting studies.
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, p. 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 (2002) 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 that dominates the
mainstream financial reporting research.
In comparison to the rationalist framework, social theorists approach the
environment degradation problem from the perspectives of Marxian political
economy (Tinker and Gray, 2003; Tinker and Sy, 2009) and the legitimization and
reputation management theory of DiMaggio and Powell (1983). Based on Llewelyns
(2003) five levels of theory and theorizing in social sciences, Chen and Chen (2010)
observed that the 50 academic papers they reviewed did not produce enough context free
or grand theories about environmental accounting. The dominant social research

conclusions about environmental accounting are primordial accumulation (Tinker and

Gray, 2003) and legitimization through isomorphism (Patten, 2005; Chen and Chen, 2009;
Cho et al., 2009).
Emission standards, waste management, air and water pollution, climate change,
extraction of exhaustible resources, bio-fuels, energy savings, biodiversity,
desertification, forestry, agriculture, land use, cattle farming, food security,
population, poverty, urbanization, transport, carbon securities, El Nino, eco-efficient
technology and production systems, and development related matters are both national
and international environmental issues. This paper uses a conceptual schema to
synthesize the causes and effects of environmental degradation, and argues that a global
resource, event, action (REA) accounting model in the context of public good and IFRS is
necessary for monitoring the environmental behavior of global firms. Global financial
reporting and auditing standards have the potential to discriminate among the beauty
contestants in environmental disclosure ratings, and the credibility of environmental
information can be enhanced if the process is linked to the regulatory framework.
REA is a generalized framework of accounting systems that uses a shared data
environment. The concept was first developed by McCarthy (1982). Public policy
research requires the distillation of trans-boundary, non-trans-boundary or national and
micro (firm) level environmental information. An integrated shared data environment
that is generated through well founded recognition, measurement and reporting systems
reduces disclosure differences among firms (Swanson, 2006). It improves the
comparability of published environmental information across different jurisdictions.
The challenge for the 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 and mandated environmental
(sustainability) reports can be produced through the IFRS regime is the central question.
A quick glance through IFRS reveals that there are several standards and
interpretations that are in one way or another linked to the environment. For instance,
IFRIC 3 deals with emission rights (allowances) and is related to trans-boundary matters.
Similarly, IFRS 8 defines reportable segments (segmental and geographical disclosures).
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, 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 state-contingent assets. In short, the IASB already has the basis on which
environmental information at the corporate level can be reported[1].
The purpose of this paper is therefore to contribute to the critical review of the
extant environmental accounting literature, and find (if any) theoretical link(s) between
IFRS and trans-boundary and non-trans-boundary environmental degradation
problems. More specifically the paper searches for a framework in IFRS so that

IFRS and
environmental
accounting
579

MRR
35,7

580

environmental risks (earnings revisions, revaluation of 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 non-financial information into the existing financial reporting system. The paper
follows a qualitative-case and 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 industries. Compustats
global vantage database was used to inspect the extent of globalization (integration) of
mining and oil companies. The 2008 annual reports of three major (global) mining and oil
companies were studied. The results were compared with the 2009 annual reports.
The findings of the paper are fourfold. First, the literature review suggests that
because the environment is a public good, market solutions alone will not provide
answers 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 both Freedman and Jaggi (2006) and Bebbington et al. (2008) observations
this study had difficulty in decoupling corporate propaganda from information
disclosure. The sustainability reports contain extensive fluff material. Third, within the
existing financial reporting framework, the overall conclusion from the three financial
statements can be summarized as follows:
(1) IASBs standards provide the necessary framework for generating
environmental information. However, from a compliance perspective, it is
impossible to conclude that the companies are indeed meeting the requirements
of IFRS.
(2) In 2008 all three global companies did not disclose the size and adequacy of the
provisions that they had set aside for normal provisions and contingencies in
respect of the environment. In 2009 one of the three companies disclosed the size
but not the adequacy of the provision.
(3) The fluff material, notes and descriptions of the three annual reports appear
similar, indicating the global convergence of reporting practices.
Finally, from a financial statement analysis perspective, the implications of the
non-recognition, non-disclosure and inadequacy of provisions for past and present
environmental responsibilities points to one direction: the un-sustainability of reported
earnings, an understatement of potential liabilities and the absence of earmarked
reserves.
The remaining sections of the paper are organized as follows. Section 2 reviews the
literature. Section 3 states the research questions more succinctly, and outlines the
methodology. Section 4 contains a 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 direction(s) for future research.
2. Relevant literature
As noted earlier the literature on the environment is multidisciplinary and
dense. Chen and Chen (2010, p. 42) classify the literature that was published between
2004 and 2009 into legitimization, stakeholder, institutional, impression management,

political economy, quality, signaling, economic disclosure, actor network, efficient

market and disclosure theories. This review focuses on the segment of the literature that
deals with the term accounting. Haripriya (2000) outlines four non-mutually exclusive
environmental accounting systems. They are:
(1) pollution expenditure accounting;
(2) physical accounting that measures the stocks of environmental assets over
time;
(3) green indicators: a system closely linked to conventional GDP measure and
adjusted to the Nordhaus-Tobin measure of economic welfare; and
(4) 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 et al., 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,
p. 11) links the discussion on sustainable development to inter-generational altruism,
and follows the world commission on environment and development (Brutland
commission) which in turn states that sustainable development is 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. The eco-efficiency
concept relates to five prevention practices (process design, input substitution, plant
improvement, good house-keeping, and 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 (2006) argues that eco-efficiency can be fostered at three distinct mutually
reinforcing innovation platforms: operations, plant design and process technology.
Sarkis (1998, 2003) also observed that firms can gain from better supply chain
management systems and environment friendly process design. Derwall et al. (2005),
show that firms that score high in eco-efficiency ratings are associated with superior
financial performance. Burnett et al. (2009) argue that firms that adopt eco-efficient
business strategies should have improved market values. Wisner et al. (2006) reach
similar conclusions.
Mathews (1997) provides a review of 25 years of social and environmental accounting
literature by classifying the 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 the main US
accounting journals. Notwithstanding Mathews (1997) observations, the number of
research papers on the topic has increased over time. Three volumes of research work
were published in Advances in Environmental Accounting and Management. The Journal
of Accounting, Auditing and Accountability also published a number of works on the topic.
Within the rationalist-business case and empirical framework, Barth and McNichols
(1994), using Compustat data, examined whether the stock market values environmental

IFRS and
environmental
accounting
581

MRR
35,7

582

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
values of publicly traded firms. Konar and Cohen (2001) argued that major corporations
voluntarily over-comply with environmental regulation, and externally portray positive
images. The authors provide evidence that these images are rewarded. This view was
reflected in a number of papers that appeared in volume 3 of Advances in Environmental
Accounting and Management (Freedman and Jaggi, 2006).
In contrast to the above, empirical studies that examined environmental disclosures in
the USA (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. Furthermore, the association between
financial statement information and security prices (returns) in the USA continues to
send an unclear message. For instance, Ball and Shivakumar (2008) and Berkman and
Koch (2009), though from different angles, provide evidence which shows that in contrast
to established models of uncertainty, corporate information disclosed through the annual
report (quarterly reports) has had no relevance to price formation on NYSE. In a recent
paper, Jonas and Jones (2010), using logit regression, reported that shareholder value
attributes are positively associated with corporate social and environmental disclosures
and negatively associated with political cost attributes. Interestingly, social researchers
have also reached similar conclusions using theories of legitimization, social contract and
reputation risk management (Bebbington et al., 2008). 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 (2008) reported that specific tangible extractive industry assets are value relevant
while intangible assets are value relevant only in some periods. Cho et al. (2009) examined
potential explanations for corporate choice to disclose environmental capital spending
information. 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.
Furthermore, cross-country studies suggest mixed results. Most cross-sectional
studies attempt to find an association between an environmental disclosure index and
financial performance. Yusoff and Hehman (2008) for example compared Australian and
Malaysian data using a rating system which is similar to Wiseman (1982) scores[2].
Cormier et al. (2005) analyzed the information dynamics between corporate
environmental disclosure and financial markets (proxy: financial analysts earnings
forecasts) and public pressures (proxy: a firms media exposure). Using information
from print and web sources, and samples from Belgium, France, Germany,
The Netherlands, Canada and the USA, Cormier et al. (2005) concluded that enhanced
environmental disclosure leads to more precise earnings forecasts by analysts especially
in environmentally sensitive industries. They 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 determined the level of environmental disclosure.

From the review of the relevant literature one observes the following. First, as noted
earlier, environment is a multidisciplinary subject. Hence, financial reporting policy
makers need to note the multidisciplinary nature of the topic. 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 definition of profit requires consideration of
intergenerational altruism issues. Furthermore, it requires the conversion of the accrual
accounting based 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 affect the quality and sustainability
of life, the environment is also a global (international) good. Hence, the type of
accounting that is required for the environment needs to combine concepts of REA
accounting (system), SNA and IFRS.
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
useful instruments for monitoring environmental degradation. The second question is
whether it is possible to define the elements of a separate and auditable statement that
deals with environmental issues, and identify the emerging recognition, measurement
and disclosure problems. If a separate statement is infeasible for one reason or another,
the paper outlines the environmental information that can be produced within the
framework of IFRS.
Both questions require the examination of the existing IASB standards, GRI guidelines,
industry guidelines, national and international information gathering systems, and
company reporting practices. The paper elected a qualitative-case research methodology.
The 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 a close
range. It overcomes the sample size requirements of quantitative research. Furthermore,
large sample studies hide issues that can be identified by focused studies (Tinker and
Gray, 2003). Size is also associated with environmental degradation. Large firms are often
considered outliers in many empirical works. Henning (2004, p. 32) also states that social
entities (organizations) can be bounded by parameters that show specific dynamics.
Furthermore, previous research on environmental accounting (Buhr and Reiter, 2006)
used the case study method, and hence the result of this paper can be compared with prior
research. Accordingly, 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 existing IASB standards were analyzed to
identify environment related standards/provisions/paragraphs (Table I). Third, three
global companies that operate in environmentally sensitive sectors were selected
(Table II). The 2008 annual reports, sustainability reports and other reports on the three
companies were condensed and studied. The findings in the 2008 reports were compared
with the 2009 reports. Fourth, the paper examined whether it is feasible to prepare a
standardized and auditable separate statement for the environment (Table III). Finally,
the strengths and limitations of the proposed statement are discussed.

IFRS and
environmental
accounting
583

MRR
35,7

X11
X12

Emissions

X1n
X21
X22
X2n

Production of normal
& toxic waste

Non market forces:

State actors
Non State actors
International conventions

584
X31
X32
X3n

Depletion of natural
resources (oil &
minerals) &
environmental
degradations

Policy node
(regulatory &
voluntary
codes)
' ij

Environmental
degradation,
climate change,
major
environmental
accidents

X41
X4n

Projects that potentially lead to

major air, sea & water
pollution; land & marine &
urban life degradation

X51

Figure 1.
Conceptual schema in
a SEM framework

X5n
Urbanization that affects
air, water and land quality

Market forces:
Product markets
Financial markets
Labor markets
Knowledge &
Technology markets

4. Conceptual relationships, sustainability indices and IFRS

4.1 Conceptual schema and sustainability indices
Previous work on social and environmental reporting has attempted to develop
a conceptual schema (Mitchell and Hill, 2010). However, the schema did not follow a
modeling perspective. This paper develops the concept in the context of structural
equation modeling (SEM). SEM has been used for indicating the causality relationship
between environment, development and human ecology (Kukla-Gryz, 2006; Jorgenson,
2004; La Peyre et al., 2001). Figure 1 is drawn following the conventions of SEM. 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.
The five nodes can be regarded as causes while the degradation and climate change
node can be seen as effect. Each of the five nodes in turn contains multiple factors. For
instance, the emissions 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 X2n.
The nodes and the rest of the factors can be identified by carefully reviewing
International Organization for Standardization (ISO) and other industry standards and
the emerging literature. The rest of the five nodes are self-explanatory. h is a policy node
that is caused by activities of firms and policy makers (X11-Xnn) that lead to increase
(decrease) in emission, production, depletion, commissioning and permitting large
projects and urbanization activities. The policy node is further mediated by market and
non-market forces. Market forces are product, labor, knowledge capital, technology and
financial markets (including financial intermediaries) while non-market forces are state
and non-state actors. Another factor is the need 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

IFRIC 3
(withdrawn)

IFRS 6

IAS 41

Framework

IFRS/IAS
number

Emission rights and allowances

Exploration and evaluation of mineral

resources

Specialized industries

Framework for preparation and

presentation of financial statements

Title and/or description

Statement to the effect that environmental

Accountability (14), relevance (26),
sustainability is within the bounds of the
materiality (29 and 30), substance (35),
neutrality (36), prudence (37), completeness conceptual framework of IASB and FASB
(38), liabilities and obligation (60), capital
maintenance (81), probability (85),
measurement reliability (86), recognition of
liabilities (91)
Sectors sensitivity to the environment. See
ISO classification and Wisemans
disclosure scores
Paragraph (11): requirement for provision Refer to statistics about emissions;
and contingencies
production of pollutants; toxic waste
disposal systems, ground water pollution,
land and coastal region (marine life)
degradation; depletion, industrial accidents;
environmental impact studies; eco efficient
process re-engineering studies
Several paragraphs deal with government Kyoto agreement, Copenhagen summit;
allocated rights; the accounting treatment at agreement versus treaty; efficiency of
the start of emission, and the setting aside of national and global rights allocation
systems, speculation and transferability of
provisions
emission rights; whether climate change
has both trans-boundary and non-transboundary effects; markets for trading
emission and similar rights and their
derivatives; sovereign rights; global shared
databases (REA)
(continued)

Relevant paragraph(s). Paragraph numbers

in parenthesis
Remarks

IFRS and
environmental
accounting
585

Table I.
Environment related
financial reporting
standards

Table I.

Title and/or description

Relevant paragraph(s). Paragraph numbers

in parenthesis
Remarks

586

IAS 20

Government grants

Initial acquisitions of emission rights and

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;
hence affect the price of carbon securities.
Endemic corruptions in the public sector
might frustrate the system. Transboundary and non-trans-boundary causes
need international treaty
IFRIC 5
Decommissioning, restoration and
Purpose of fund (1), voluntary and required Disclosure of the size of the fund; arms
( January 2006) environmental rehabilitation funds
contribution to the fund (2), geographically length distance of the trustees; plans for
additional contributions; responsibility for
dispersed sites (2), independent trustees,
past degradations; adequacy and liquidity
accounting for interest in the fund (7),
of the fund
obligations to make additional
contributions (10), contingent liability (10),
reimbursement rights (BC 12)
For a global company whether its branches
IFRS 8
Operating segments
Core principle (1), nature of an operating
and subsidiaries are operating in
segment (5), aggregation criteria (12),
quantitative thresholds (13), disclosure (20), environmentally sensitive sectors; and
whether the segment meets the quantitative
profit/loss/assets and liabilities (23),
threshold, or whether it is required to
measurement (25), geographical
prepare consolidated financial statements,
information (33)
and whether its segments meet
international standards
Group and consolidated statements are
IAS 27, IFRS 3, Consolidation, investments in mergers and Several paragraphs relate to ownership,
prepared for listed legal entities. Listed and
IAS 28 and IAS acquisitions, interests in joint ventures and risk, reward, and significant influence
unlisted companies might be sued for
associates; consolidation of special purpose
31, SIC 12
violating environmental standards in
entities
countries where their segments operate/
operated in the past. This in turn might
trigger an unbundling wave and hence a
need for global treaty
(continued)

IFRS/IAS
number

MRR
35,7

Title and/or description

Relevant paragraph(s). Paragraph numbers

in parenthesis
Remarks

IAS 37

Provisions, contingent liabilities and

contingent assets

Several paragraphs that require charging Absence and inadequacy of provisions

current earnings for normal provisions and suggests earnings overstatement which in
turn affects the intrinsic (fundamental)
contingent liabilities
values of equities
The extent to which past earnings require
IAS 8
Accounting policies, changes in accounting Accounting policies (10), retrospective
restatement, and how this is going to be
estimates and errors
application (22), warranty obligations (32
and 33), errors (41), prior period errors (49), shown in past, present and future financial
statements (retrospective and prospective
impracticability of retrospective
adjustments)
adjustments (51-53)
IAS 1
Presentation of financial statements
Material omissions (7); purpose of financial Minimum set of information that must be
included in the financial statements of
statements (9), fair presentation (15),
environmentally sensitive companies
rectification of accounting policies (18),
going concern (25), provisions (54),
estimation of uncertainty (125)
Fair value of environment related assets,
IFRS 1
First time adoption of IFRS
Accounting policy (97), fair value (16),
liabilities and provisions
compound financial instruments (23),
parents, subsidiaries, joint ventures and
associates (24), changes in
decommissioning, restoration and similar
liabilities (25E), non-IFRS comparative
information (36), reconciliations (39)
Several paragraphs
Disclosure of past and present environment
IFRS 7, IAS 37 Financial instruments disclosure,
related risk(s); qualitative and quantitative
presentation and recognition and
and IAS 39,
description of the effective and nonIFRS 9, IAS 38 measurement, intangibles and impairment
effective hedging strategy; fair value of
carbon derivatives and other environment
related assets and liabilities

IFRS/IAS
number

IFRS and
environmental
accounting
587

Table I.

MRR
35,7

588

Table II.
ADR and non-ADR
companies

Industry code

Nature of the firm

1010
1020
1021
1030
4010
4015
4030
4040
4060
4070
4080
4090

Aluminum
Gold
Precious metals and minerals
Steel
Oil and gas refining and marketing
Oil and gas storage and transport
Oil domestic and integrated
Integrated oil and gas
Oil and gas exploration and production
Oil and gas equipment and servicing
Oil and gas drilling
Coal and consumable fuels

Total companies

Non-ADR companies

12
69
38
56
39
102
0
34
258
86
20
33

9
61
36
45
38
99
0
18
254
79
20
32

the policy node, h and make financial reporting an instrument of good local and
international environmental governance.
Before we proceed to the examination of mandated financial reporting standards, it is
important to note whether the indices produced by institutions that advance
sustainability ratings are useful. As noted earlier, Freedman and Jaggi (2006) surmise
that it is difficult to decouple a firms propaganda dissemination from genuine corporate
information disclosure. Bebbington et al. (2008, p. 371) also argue that though social and
environmental reporting is widespread, the phenomena under which such reports are
produced remains largely unexplored. Zahller (2010), using trust theory, raises questions
about the credibility of published sustainability reports. Notwithstanding these,
a number of stock exchanges continue to produce sustainability indices/metrics and rate
companies[3]. Given, the conclusions of previous research whether companies that are in
the top/bottom of these ratings are in the Keynesian beauty contest (Gao, 2008) for
reputation risk management or reveal fundamental (intrinsic) attributes remains
unclear.
4.2 Relevant financial reporting standards
As noted earlier, a number of existing standards and interpretations directly and
indirectly deal with environmental issues. For instance, IFRS 6 (implementation
January 2009) 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 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) provides for the
accounting for 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 the specification of the reportable segments of a
geographically dispersed company.
With regard to the enforcement of IFRS, Cabrera (2008) reported that IFRS is
operational in over 100 countries. Listed companies and public interest companies are
required to comply with IFRS. In the USA, where many global companies are listed,

Financial information

Comparative year

Environmental assets

Cash and cash equivalents in hand

Investments in trust funds at fair value
Emission/mining/extraction rights held
Emission/mining/extraction rights held for sale
(at fair value)
Insurance and similar products held against
environmental risks (actuarial value)
Contributions to other voluntary and mandatory
schemes
Inventory of natural and biological assets, less
accumulated depletions/amortization
Investments in air and water quality improvement
Capitalized environment related research and
development
Capitalized site preparation, decommissioning
and restoration costs
Environmental liabilities and uncertain liabilities Present value of terminal decommissioning,
(provisions or contra asset accounts)
restoration and rehabilitation costs
Legal and constructive liabilities arising from past
events (e.g. 50 years)
Deferred income from government allocations of
emission/mining/extractive rights
Uncertain liabilities (provisions or contra asset
Provision for decommissioning, restoration and
accounts)
rehabilitation (current projects)
Provision for decommissioning, restoration and
rehabilitation of (past projects)
Provision for contingent liabilities from past
events (e.g. 50 years)a
Net adjustments to retained earnings for past
errors and material omissionsb
Net surplus (deficit) for current yearc
Estimate of net environmental assets (liabilities)
Notes: The statement can be accompanied by the disclosure of minimum non-financial information
such as actual and ISO permissible standards of emissions, production and disposals of waste,
depletion of natural resources and replacement (forestry), major capital projects that lead to
deterioration of air and water quality and habitat, and urbanization; awhether changes in the identity
of the polluting entity (mergers, unbundling, foreign listing, name change, bankruptcy, and related
opportunistic activities) are grounds for escaping environmental liability needs to be examined, and
may require international treaty; btransitional arrangement (prior period adjustment); cnet surplus
(deficit) is arrived after consideration of recurrent income and 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 and
rehabilitation, past errors and omissions, current contribution to independent environmental
rehabilitation fund and tax gains and losses arising from hedge activities on environment related
products, etc. The figure can be disaggregated for each reported segment per IFRS 8

foreign firms can report either using US GAAP or IFRS. The SECs roadmap (work plan)
and FASBs codification project are expected to accelerate the convergence between
IFRS and US GAAP. An environment perspective of financial reporting therefore
provides a new insight into the examination of the gains that may be stemming from

IFRS and
environmental
accounting
589

Table III.
Statement of
environmental assets and
liabilities as of
December 31, 2020

MRR
35,7

590

global financial reporting standards and financial integration[4]. In other words,

policing global environmental degradation through the financial reporting system is
possible.
The relevant IFRS are discussed below. Paragraph 11 of IFRS 6 states the following:
In accordance with IAS 37 Provisions, contingent 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, and its existence will be confirmed only by the
occurrence and non-occurrence 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, the audit committee and the 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 might arise
from past events (activities).
IFRIC 3 (emission rights) was issued in 2004 but it was withdrawn in 2005[5].
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). The new 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. Internationally, CO2 emissions, for example, in auto
intensive America or intensive cattle farming in Europe might affect rainfall patterns in
Africa and vice versa. This approach makes sense at global level if the various types of
emissions are known and their effects are reliably quantified. Furthermore, given that
there are about 200 political jurisdictions in the world, each countrys contribution to
global permissible emissions is likely to be different, and the incentives for not observing

a treaty (if any) are many. Hence, the interesting question again is whether global
financial reporting standards have a role in periodically providing the financial and
non-financial consequences of environmental degradations.
Rights (allowances) to emit pollutants continue to be treated as intangible assets, to be
accounted for in accordance to IAS 38 (intangible assets). When the rights are allocated
by a government department for amounts less than their 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. Furthermore, according
to www.iasplus.com of Deloitte, in May 2008 the IASB staff defined an emission trading
scheme as:
[. . .] an arrangement designed to improve 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, the IASB attempted to provide for key technical issues.
However, the lesson from this IFRIC is that a number of standards: IAS 38 (impairments),
IAS 20 (government grants), IAS 37 (provisions, contingent liabilities and contingent
assets) and the standards that relate to financial instruments (IAS 32, IFRS 7, IAS 39 and
IFRS 9) 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 the pollution of water, marine life in coastal regions such as
in the Gulf of Mexico, lands adjacent to major ports, or rehabilitating mined lands such as the
ones in the Witwatersrand area), 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
are prudent in providing the guidance for the management of funds that might be set
aside for provisions and contingencies that relate to past environmental activities.
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 percent of combined revenue, profit or assets. However, both paragraphs
23 and 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 in. When IFRS 8 is examined in conjunction with IAS 27 (consolidation)

IFRS and
environmental
accounting
591

MRR
35,7

592

and the above mentioned standards, the implication for global companies listed on US
stock exchanges becomes serious[7].
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: paragraphs
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 IFRS 8 and standards
that deal with derivative instruments is to strengthen the value attributes and political
cost attributes of global companies that are operating in environmentally sensitive
industries ( Jonas and Jones, 2010).
Table I contains a summary of environment related financial reporting standards.
The table identifies relevant terms, phrases, paragraphs and provides remark(s).
5. 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 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 liberalization (Makina and
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 at the Auraria Higher Education Campus Library
of the University of Colorado/Metropolitan State College of Denver, companies were
separated into American Depository Receipts (ADR) and non-ADR companies. ADR
companies are foreign firms listed in the US stock exchanges. The firms that were
operating in the mining and extractive industries are given in Table II. The difference
between the total companies and non-ADR companies gives an estimate of foreign
mining and oil 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[8].
Three global companies that have extensive operations in SSA region were closely
studied. The first is global gold mining company while the second and third are global oil
and gas companies. For legal reasons, the names of the three global companies are not
mentioned in this paper. An interesting question here is whether US financial markets,
laws and IFRS can be used for monitoring the environmental behavior of global
companies operating in the SSA region.
There are a number of reasons for the selection of the three global companies. First,
mining is one of the environmentally sensitive industries and the three companies fairly
represent the sector that they are associated with[9]. Second, mining is an important
growth engine for many SSA economies. Third, mining is often associated with the
resource curse problem in many SSA countries. Fourth, since the companies are global
entities with multiple listings, it might be easier to enforce international environment

standards through the financial market system, and also provide useful information to
the investment community in capital rich regions of the world.
The companies are coded as Company A, Company B and Company C. The financial
statements and sustainability reports were obtained from the web sites of the companies.
To obtain information about environmental lawsuits against each company, a Google
search was done. The following terms were used for the search: lawsuit against Company
A [identity withheld] environment; lawsuit against Company B [identity withheld]
environment and lawsuit against Company C [identity withheld] environment.
Lawsuits filed, fines by State authorities, out of court settlements and the firms alleged
association with conflicts and human/labor 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, including Wikipedia. Content
analysis or disclosure indices were not prepared as the research method is qualitative.
The information about each company was condensed. The condensed information
was compiled from Wikipedia, company social responsibility and sustainability reports,
company web sites, various newswires, and the 2008 annual reports of the three global
companies. The 2009 annual reports were compared with the 2008 reports. The analysis
took both non-financial and financial perspectives.
The findings are consistent with the Freedman and Jaggi (2006), Bebbington et al.
(2008) and Zahller (2010) observations in that the analysis revealed that the phenomena
under which the social responsibility and environmental sustainability reports are
prepared, who prepares them and whether the reports are subjected to audits remained
unclear. More specifically, the annual reports rarely contained non-financial quantitative
data. The sustainability reports did not follow a specific standard or format, and the GRI
and other similar guidelines appear to be inadequately complied with. The social
responsibility sections of the reports also appeared to have contained fluff material and
information about philanthropy work. The reports did not indicate the contributions that
accrue to the firm from investments in health and safety. Company B approached the
social and environmental sustainability report from a risk and reputation management
perspective. Its 2008 annual report states that the company faces various challenges in
the over 100 countries that it is currently operating. The section on climate change
indicated that the company continuously monitors progress towards its own voluntary
emission targets. In 2009 it produced a separate sustainability report that included an
opinion from an external entity. Its web site contained lengthy discussion about issues of
environmental degradation and climate change.
In 2008 Company C allocated a greater portion of its rather lengthy separate social
responsibility report to inform its readers that the state owned companys contribution
to statutory and non-statutory welfare fund for its employees were significant. It
extensively reported about its happy workforce. The environment section of the report
dealt with the companys plans and the sponsorship it made for environment related
conferences. In 2009 the report was renamed as sustainability report, but essentially
contained the same information as in the previous year.
In 2008 Company A extensively reported about its distribution of antiretroviral drugs
to its mining work force in Africa while its sustainability report brushed through
key environmental concerns. In contrast to the 2008 report, in 2009 the web site of
Company A was filled with fluff material and contained lengthy discussion about
sustainability. The CEOs letter also contained a paragraph on sustainability.

IFRS and
environmental
accounting
593

MRR
35,7

594

In sum almost all of the three global companies 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 and qualified
(certified/chartered/regulated) environmental auditors. The disclosure style appears to
be self serving, contained an element of propaganda that is aimed at building reputation
or fighting back the adverse publicity that the companies faced in one or more of their
segments. The presentation did not have a REA concept. It did not recognize the public
good nature of the environment. The non-financial review leads to the conclusion that a
clearer and mandatory standard is necessary.
The financial statement section of the annual report is also not very different from
the non-financial information section. The 2008 annual reports of the three companies
were inspected in respect of IFRS 6 (for early adoption), IFRIC 5, IAS 37, IFRS 8, IAS 8,
IAS 32, IFRS 7 and IAS 39. The 2009 annual reports were inspected for changes and
improvements. The findings are as follows:
(1) All three annual reports stated that the 2008 and 2009 financial statements were
prepared in accordance with IFRS (IFRS 1 and IAS 1). Notwithstanding this,
Company C also stated that it has used national (not international) Accounting
Standards, and certain interpretations of the national standard came from a
government department. The global audit firm that audited this company also
stated that the financial statements were audited in accordance with the national
Auditing Standards of the home country. The 2009 financial statements and the
related sustainability report of Company C did not show marked improvements.
(2) In 2008 Company A stated that costs for restoration of site damages were
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 sites were adjusted to the cost of the related
asset in the current period. If a decrease in the liability exceeded the carrying
amount of the asset, the excess was recognized immediately in the income
statement (p. 90). The company also stated that for its African operations it made
an annual contribution to a dedicated environmental rehabilitation trust fund,
which it controlled and consolidated. It was not clear whether it was doing
the same for its non-African mines. Furthermore, the size and adequacy of the
provision were not disclosed. In 2009 the company disclosed the balance in
the provisions account, but it did not comment whether the amount is adequate
for its past environmental activities.
(3) In its 2008 annual report Company B stated that provisions were 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 were recognized in the period in
which an obligation, legal or constructive to a third party arises, and amounts
were reasonably estimated. In other words provisions were not disclosed. In 2009
provisions were disclosed. However, it is not clear whether the amounts are
adequate.

(4) In its 2008 annual report Company C stated that there were no material
litigations and arbitration events in respect of the environment during the year.
With regard to IFRIC 5, it stated that when the conditions for provisions were
not met, the expenditures for decommissioning, removal and site clearance got
expensed in the income statement when they occurred. It did not state whether
there were provisions. In 2009 Company C did not improve its disclosure level.
(5) 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 were preparing
their consolidated financial statements and mentioned the regions in which they
were operating. However, it was not always clear how many segments were
consolidated.
(6) In 2009 there was some improvement in the level of environmental disclosure.
However, despite the lengthy report and the fluff material, a number of relevant
and required information items remained undisclosed.
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 reporting
practices. In other words, in 2008 the three global companies did not produce a separate
statement on the environment. In 2009 all three companies produced sustainability
reports and their web sites were filled with lengthy environment related materials. This
observation might be better 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 earnings quality and
earnings sustainability perspectives, the implications of the non-recognition,
non-disclosure and inadequacy of provisions for past and present environmental
responsibilities points to one direction: overstatement of reported earnings and
understatement of contingent liabilities.
A statement of environmental assets and liabilities?
Even though world leaders appear to be concerned about environmental degradation and
climate change, the link between environment and finance has not been adequately
addressed. Notwithstanding this, the IASB has two options. The first option is to consider
a project on a mandated separate statement on the environment. The second option is to
require the inclusion and disclosure of a minimum set of environmental information
within the existing financial reporting framework by introducing minor amendments to
relevant financial reporting (IFRS) standards. The first option suggests a new conceptual
framework or a further improvement on the recently issued statement (Statement of
Financial Accounting Concepts No. 8, issued by FASB, September 2010) and new
definitions for assets, liabilities and earnings (profits). Furthermore, there is a need for the
consolidation of various clauses that are scattered in the current standards (Table I).
Table III contains some of the elements of the proposed separate statement for the
environment.

IFRS and
environmental
accounting
595

MRR
35,7

596

The second option does not require a new conceptual framework or a radical overhaul
of the existing standards. The minimum information that ought to be disclosed in the
existing statements can be determined by amending IAS 1 (presentation of financial
statements) and providing a transition clause in IFRS 1 (first time adoption of IFRS). The
standards that deal with provisions (IAS 37), changes in accounting policy (IAS 8),
exploration and evaluation of mineral resources (IFRS 6), specialized industries (IAS 41),
government grants (IAS 20), and intangibles (IAS 38) can be amended so that
environment related liabilities and assets (replacements/impairments) are recognized
and provisions are backed by ring fenced cash or near cash investments. The strengths
and weaknesses of each policy option depend on how one perceives the ideological
differences among policy makers and stakeholders on one hand, and the emerging
technical issues of recognition, measurement and disclosure on the other hand.
6. Concluding remarks, limitations and directions for future research
This paper examined whether global financial reporting standards (the IFRS regime)
can be used as a device for monitoring the environmental behavior of global mining and
oil companies. The paper reviewed the literature in social theory, economics, finance,
environmental accounting, and technology, and examined the voluntary and mandatory
mechanisms of corporate disclosure. I surmise that the 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 type sustainability ratings. Second,
a careful examination of the existing IFRS indicated that it has rich conceptual and
practical frameworks. It provided two useful policy avenues for improving the current
set of financial statements and sustainability reports. The first option is the production
of a mandated separate statement of environmental assets and liabilities. The second
option is to itemize the minimum environmental information that must be included in the
existing set of financial statements.
Furthermore, using qualitative and case research methodology the paper examined
the annual reports of three global companies that are listed on US 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 companies. On the technical side, I find that the social and
sustainability reports that were studied did not have standard formats, and the GRI
guidelines appear to be inadequate. The 2008 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. In 2009 two of the three annual reports showed some improvement in the
level of disclosure, but the sustainability reports contained lengthy publicity and fluff
material.
The separate statement on the environment that is prepared in accordance with an
enhanced IFRS conceptual framework has a number of advantages. It decouples the
reputation management (propaganda and legitimization) efforts of environmentally
sensitive firms from genuine information disclosure efforts. It improves the quality and
sustainability of reported earnings. The credibility of published sustainability reports
improves if its content is synchronized with financial statement information. The
proposed statement is consistent with the REA concept. It can be linked to the UN

system of environmental accounts (SNA) and the XBRL taxonomy (classification).

Furthermore, since companies are already producing lengthy social and environmental
reports, the incremental cost of preparing a separate and auditable statement is unlikely
to outweigh the private and social costs of environmental degradation. Finally, the
financial market can also easily capture the environmental information into the asset
pricing mechanism. The extent to which these gains can be realized in part depends on
the policy option chosen by the patrons of IASB.
Even though the paper has attempted to make a comprehensive review of the
literature, there might still be a gap in that the environment is an eclectic and a
multidisciplinary subject. Second, enforcement capacity and interpretation of policy are
factors that have not been considered in this paper. Another limitation of the paper is
that the proposed conceptual schema (SEM) has not been tested using real life data, and
hence the weight of each degradation factor and its influence on finance policy, have not
been examined. Addressing some of these limitations requires a separate work.
There are a number of avenues for future research. Replication of this research on
other environmentally sensitive sectors might provide corroboration for the conclusions
of this paper. Examining the form of association between non-financial information and
financial information that purports to serve the environment is another avenue. Testing
the conceptual schema using real life data is another research question. Discussion of the
various recognition, measurement and disclosure alternatives of the mandatory
statement and its elements requires further research. 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.
Notes
1. With regard to small and medium sized firms, the IASB has issued a less complex financial
reporting standard. IFRS for SMEs ( July 2009) can be amended to address issues of
non-trans-boundary environmental problems that relate to these entities.
2. Wisemans scores were developed using a detailed information disclosure sheet. The elements
of the scoring sheet contained 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 programs.
3. See for example the Dow Jones sustainability index and the Johannesburg Securities
Exchanges ( JSE) Socially Responsible Investment (SRI) index.
4. For more on the debate about the effects of IFRS adoption, see Daske et al. (2008),
Armstrong et al. (2007) and Negash (2009).
5. For more recent development about this interpretation, see www.iasplus.com
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

IFRS and
environmental
accounting
597

MRR
35,7

598

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.
7. Some argue that lawsuits can be filed in US courts for environmental degradation offenses
that might have occurred elsewhere.
8. 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 being discovered in various parts of SSA. In
addition to mining and oil, big agricultural companies from China, India, Korea and Saudi
Arabia are acquiring large farmlands in the SSA region.
9. Frynas (2004) notes an increase in litigation against transnational corporations in SSA. He
argues that the increase has led to rising environmental liabilities and reputation 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.
References
Armstrong, C., Barth, M., Jagolizer, A. and Riedl, E. (2007), Market reaction to the IFRS adoption
in Europe, The Accounting Review, Vol. 85 No. 1, pp. 31-61, available at: http://ssrn.com/
abstract1008416
Aronsson, T., Johansson, P. and Lofgren, K. (1997), Welfare Measurement, Sustainability and
Green National Accounting, Edward Elgar, Williston, VT.
Ball, R. and Shivakumar, L. (2008), How much new information is there in earnings?, Journal of
Accounting Research, Vol. 46, pp. 975-1016, available at: http://ssrn.com/abstract1105228
Barth, M. and McNichols, M. (1994), Estimation and market valuation of environmental liabilities
relating to superfund sites, Journal of Accounting Research, Vol. 32, supplement, pp. 177-209.
Barth, M., Landsman, W. and Lang, M. (2008), International accounting standards and
accounting quality, Journal of Accounting Research, Vol. 46 No. 3, pp. 467-98.
Bebbington, J., Larrinaga Gonzales, C. and Moneva Abadia, J. (2008), Legitimating
reputation/the reputation of legitimacy theory, Accounting, Auditing & Accountability
Journal, Vol. 21 No. 3, pp. 371-4.
Berkman, H. and Koch, P. (2009), Disagreement, short sale constrains and speculative trading
before earnings announcements, available at: http://papers.ssrn.com/sol3/ papers.cfm?
abstract _id1213265
Buhr, S. and Reiter, S. (2006), Ideology, the environment and one world view: a discourse
analysis of Norandas environmental and sustainable development reports, Advances in
Environmental Accounting and Management, Vol. 3, pp. 1-48.
Burnett, R., Wright, C. and Sinkin, C. (2009), Market valuation of the long-run effects of adoption
of effective environmental cost strategies, available at: http://aaahq.org/AM2009/
abstract.cfm?submissionID2293
Cabrera, L. (2008), Widespread acceptance of IFRS continues. Is it time for the US companies to
prepare for the transition?, The CPA Journal, March, available at: www.nysscpa.org/
cpajournal/2008/308/essentials/p36.htm
Chen, J.C. and Chen, J.C. (2009), The accuracy of financial report projections of future
environmental capital expenditures, paper presented at American Accounting
Association Conference, New York, NY, available at: http://aaahq.org/AM2009/abstract.
cfm?submissionID2250

Chen, J.C. and Chen, J.C. (2010), What counts as theories in academic social and environmental
accounting research? A research note on social and environmental accounting literature,
paper presented at American Accounting Association, San Francisco, CA, August.
Cho, C., Freedman, M. and Patten, D. (2009), Corporate disclosure of environmental capital
expenditures: a test of alternative theories, paper presented at American Accounting
Association Conference, available at: http://aaahg.org/Am2009
Cormier, D., Magnan, M. and van Velthoven, B. (2005), Environmental disclosure quality in large
German companies: economic incentives, public pressure or institutional conditions?,
European Accounting Review, Vol. 14 No. 1, pp. 3-39.
Daske, H., Hail, L., Leuz, C. and Verdi, R. (2008), Mandatory IFRS reporting around the world:
early evidence on the economic consequences, available at: http://ssrn.com/
abstract1024240
Derwall, J., Guenster, N., Bauer, R. and Koedijk, K.G. (2005), The eco-efficiency premium puzzle,
Financial Analysts Journal, Vol. 61 No. 2, pp. 51-63.
DiMaggio, P. and Powell, W. (1983), The iron cage revisited, institutional isomorphism and
collective rationality in organizational fields, American Sociological Review, Vol. 48,
pp. 147-60.
Durand, R. and Tarca, A. (2008), An investigation of the usefulness of accounting data in
extractive industry operations, available at: www.business.uwa.edu.au
Freedman, M. and Jaggi, B. (Eds) (2006), Environmental Accounting: Commitment or
Propaganda, Advances in Environmental Accounting and Management, Vol. 3, Elsevier,
Holland, MI.
Freedman, M. and Wasley, C. (1990), The association between environmental performance and
environmental disclosure in annual reports and 10Ks, Advances in Public Interest
Accounting, pp. 183-93.
Frynas, J.G. (2004), Social and environmental litigation against transnational firms in Africa,
The Journal of Modern African Studies, Vol. 42 No. 3, pp. 363-88.
Gao, P. (2008), Keynesian beauty contest, accounting disclosure, and market efficiency,
Journal of Accounting Research, Vol. 46 No. 4, pp. 785-807.
Givoy, D., Hayn, C. and Katz, S. (2009), Does public ownership of equity improves earnings
quality?, available at: www.ssrn.com
Haripriya, G.S. (2000), Integrating forest resources into the system of national accounts in
Maharashta, India, Environment and Development Economics, Vol. 5, pp. 143-56.
Henning, E. (2004), Finding Your Way in Qualitative Research, Van Schaik Publishers, Pretoria.
Jonas, G. and Jones, A. (2010), Corporate social responsibility reporting: using company
attributes to examine voluntary disclosure motivation, paper presented at American
Accounting Association, San Francisco, CA, August.
Jorgenson, A. (2004), Uneven process and environmental degradation in the world economy,
Human Ecology Review, Vol. 11 No. 2.
Klasson, R. and McLaughlin, C. (1996), The impact of environmental management on firm
performance, Management Science, Vol. 42 No. 8, pp. 1199-214.
Konar, S. and Cohen, M. (2001), Does the market value environmental performance?,
The Review of Economics and Statistics, Vol. 83 No. 2, pp. 281-9.
Kukla-Gryz, A. (2006), Use of SEM to examiner relationship between growth, trade and
environment in developing countries, Sustainable Development, No. 5, pp. 327-42.

IFRS and
environmental
accounting
599

MRR
35,7

600

Lange, G. (2003), Policy Applications of Environmental Accounting, Environmental Economics

Series Paper No. 88, The World Bank Environment Department, Washington, DC.
La Peyre, M., Mendelssohn, I., Reams, M., Templet, P. and Grace, J. (2001), Identifying
determinants of nations wetland management programs using SEM, an exploratory
analysis, Environmental Management, Vol. 27 No. 6, pp. 859-68.
Llewelyn, S. (2003), What counts as theory in qualitative management and accounting
research? Introducing five levels of theorizing, Accounting, Auditing & Accountability
Journal, Vol. 16 No. 4, pp. 662-708.
McCarthy, W. (1982), The REA accounting model. A generalized framework for accounting
systems in a shared data environment, The Accounting Review, Vol. LVII No. 3, pp. 554-78.
Makina, D. and Negash, M. (2007), The winners and losers from stock market liberalization,
evidence from Johannesburg stock exchange, p. 25, available at: http://ssrn.com/
abstract1132322
Mathews, M. (1997), Twenty-five years of social and environmental accounting research: is
there a silver jubilee to celebrate?, Accounting, Auditing & Accountability Journal, Vol. 10
No. 4, pp. 481-531.
Mitchell, C. and Hill, T. (2010), An exploratory analysis of shareholders expectations and
perceptions of corporate social and environmental reporting in South Africa, SA Journal
of Accounting Research, Vol. 24 No. 1, pp. 49-78.
Negash, M. (2009), The effects of IFRS adoption: a review of the early evidence, SA Journal of
Accounting Research, Vol. 23 No. 1.
Penman, S. and Zhang, X. (2002), Modeling sustainable earnings and P/E ratios with financial
statement analysis, available at: http://ssrn.com/abstract318967
Sarkis, J. (1998), Evaluating environmentally conscious business practices, European Journal
of Operations Research, Vol. 107 No. 1, pp. 159-74.
Sarkis, J. (2003), A strategic decision framework for green supply chain management, Journal
of Cleaner Production, Vol. 11 No. 4, pp. 397-409.
Stulz, R. (2005), The limits of financial globalization, The Journal of Finance, Vol. LX No. 4,
pp. 1595-638.
Swanson, G. (2006), A systems view of the environment of environmental accounting.
Environmental accounting: commitment or propaganda, Advances in Environmental
Accounting & Management, No. 3, pp. 169-93.
Tinker, T. and Gray, R. (2003), Beyond a critique of pure reason: from policy to politics to praxis
in environmental and social research, Accounting, Auditing & Accountability Journal,
Vol. 16 No. 5, pp. 727-61.
Tinker, T. and Sy, A. (2009), No David to battle Goliath or analyzing accounting for climate
change, International Journal of Critical Accounting, Vol. 1 No. 3, pp. 177-81.
Van Berkel, R. (2006), Eco efficiency in the Australian minerals processing sector, Journal of
Cleaner Production, Vol. 15 Nos 8/9, pp. 772-81.
Walden, W. and Schwartz, B.N. (1997), Environmental disclosures and public policy pressure,
Journal of Accounting & Public Policy, Vol. 16 No. 2, pp. 125-54.
Wiseman, J. (1982), An evaluation of environmental disclosures made in corporate annual
reports, Accounting, Organizations and Society, Vol. 7 No. 1, pp. 53-63.
Wisner, P., Epstein, M. and Bagozzi, R. (2006), Organizational antecedents and consequences of
environmental performance, in Freedman, M. and Jaggi, B. (Eds), Advanced in
Environmental Accounting and Management, Vol. 3, Elsevier, Grand Rapids, MI.

Yusoff, H. and Hehman, G. (2008), Understanding corporate environmental reporting through

semiotics: the case of Malaysian and Australia, paper presented at Ninth Annual Asian
Academic Accounting Association Conference, Universiti Teknologi MARA, Malaysia.
Zahller, K. (2010), Quis costodiet ipsos custodies? Trust, credibility and the role of third parties
in accounting for sustainability, paper presented at the American Accounting
Association, San Francisco, CA.

IFRS and
environmental
accounting
601

Further reading
Barth, M., Beaver, W. and Landsman, W. (2001), The relevance of value relevance literature for
financial accounting standards setting: another view, Journal of Accounting and
Economics, Vol. 31, pp. 77-104.
Graham, J., Harvey, C. and Rajgopal, S. (2005), The economic implications of financial
reporting, Journal of Accounting and Economics, Vol. 40, pp. 3-73.
Gray, R., Kouhy, R. and Lavers, S. (1995), Corporate social and environmental reporting: a review
of the literature and a longitudinal study of UK disclosure, Accounting, Auditing
& Accountability Journal, Vol. 8, pp. 47-77.
GRI (n.d.), Global Reporting Initiative, available at: www.globalreporting.org/
Kuosmanen, T. and Kuosmanen, N. (2009), How not to measure sustainable value (and how one
might), Ecological Economics, Vol. 69, pp. 235-43.
Murray, A., Sinclair, D., Power, D. and Gray, R. (2006), Do financial markets care about social
and environmental disclosure?: Further evidence and exploration from the UK,
Accounting, Auditing & Accountability Journal, Vol. 19 No. 2, pp. 228-55.
Yee, K.K. (2006), Earnings quality and the equity risk premium: a benchmark model,
Contemporary Accounting Research, Vol. 23, pp. 833-77.
About the author
Professor Minga Negash is a tenured Professor of Accounting at Metro State College of Denver
Colorado, and a part-time Continuous Personal Professor at the University of the Witwatersrand,
Johannesburg. He has taught a variety of courses at undergraduate and postgraduate level in
many universities. He supervises a number of Doctoral students at the University of the
Witwatersrand. He has published widely and is a recipient of accolades for his contribution to
research. Minga Negash can be contacted at: mnegash@mscd.edu

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints