Accounting policies on environmental costs and their calculation method in the entity.
Todea, Nicolae ; Stanciu, Ionela Cornelia ; Udrea, Ana-Maria 等
Abstract: The aim of this article is to present certain aspects
regarding environmental costs and their calculation methods within the
entity. The main objectives that were considered when writing this
article included defining the concept of environmental accounting, as
well as environmental costs, identifying the main classification
criteria of environmental costs, and then presenting the calculation
methods of environmental costs within the entity, which differ according
to each area. The scientific approach is based on information from
literature and on European and international practice regarding
environmental costs. In order to achieve this approach we turned to
research methods such as documentation, analysis, synthesis, comparison,
which are part of the positivist research philosophy.
Key words: environmental protection, environmental issues,
environmental accounting, environmental costs
1. THE CONCEPTUAL FRAMEWORK OF ENVIRONMENTAL ACCOUNTING
Environmental issues have started to be reflected in accounting
only in the last half of the 20th Century. The first occurrence of the
concept of environmental accounting goes back to 1970, and since then,
the concept has had a growing development.
Out of many definitions of environmental accounting, the one that
we're considering here was given by Bernard Christophe, who said
that "environmental accounting, called also green accounting,
shouldn't be confused with the mere reflection of environmental
costs in traditional financial statements because it represents an
efficient information system about the degree of rarefaction of natural
elements, determined by the activity of entities and utilized to reduce
these rarefactions and to inform third parties" (Betianu, 2008).
The same inclusive dimension is found in the definition given to
environmental accounting by Steele and Powell (2002), who define it as
being the identification, allocation and analysis of material flows and
of environmental cash-flows in order to provide insight into
environmental impacts and into the associated financial consequences.
According to Bartolomeo (2000), environmental accounting provides
reports for internal use, which generate environmental information that
supports management decisions regarding pricing, cost control and
capital budget, and it also provides reports for external use by
disclosing information about the environment to the public and the
financial community.
In our opinion, environmental accounting is a tool for indentifying
and measuring environmental costs in order to ensure an adequate
environmental performance.
2. ENVIRONMENTAL COSTS--DEFINITION AND CLASSIFICATION
The main component of environmental accounting is the environmental
cost. Over time there have been many definitions for the concept of
environmental cost, and we will analyze these definitions below.
The European Commission Recommendation 453/2001 makes the
distinction between environmental costs and other costs, defining them
as costs of the actions undertaken by the economic entity and by third
parties in the name of an economic entity with the purpose of
preventing, reducing or repairing the environmental damages resulted
from operational activities. These costs include: waste storage and
disposal, soil protection, underground and surface water protection,
clean air and climate protection, noise reduction, biodiversity and
landscape protection.
The definition given to environmental costs by the United Nations
Conference on Trade and Development (UNCTAD) posits that they
"comprise the costs of steps taken, or required to be taken, to
manage the environmental impact of an enterprise's activity in an
environmentally responsible manner, as well as other costs driven by the
environmental objectives and requirements of the enterprise".
The Environmental Protection Agency defined environmental costs as
being costs with a direct financial impact over entities (internal
costs) and individual costs, for which the entity is not responsible
(external costs). This definition represents the basis for the
distinction between environmental costs, which is seen below (de Beer
& Friend, 2006):
[FIGURE 1 OMITTED]
According to the Environmental Protection Agency (1995), internal
costs include:
--Conventional costs, which include costs with equipments, raw
materials and consumables;
--Hidden costs, which refer to the results of assigning
environmental costs to indirect costs or overlooking future and
contingent costs;
--Contingent costs refer to environmental costs that will not occur
with certainty in the future, depending on uncertain future events, such
as the costs involved in a future restoration process;
--PR costs are less tangible because they cover the subjective
perceptions of management, clients, employees, community and regulators.
This category may include costs
of the annual environmental reports, as well as costs for
environmental activities, such as planting trees.
External costs include the costs of environmental degradation for
which the entities are not legally responsible and which have negative
consequences on humans, property and their well being, and can't be
always compensated through legal systems.
Determining the financial value of external costs is difficult,
but, nevertheless, some entities are trying to approach these costs as
part of their environmental accounting system.
From our point of view, environmental costs are those expenses
incurred to prevent, reduce or repair damages caused to the environment,
incurred at the initiative of the entity or required by the regulations
and rules in place to reduce the environmental impact of the entity and
to reduce the environmental risk.
3. ENVIRONMENTAL COSTS DETERMINING METHODS WITHIN THE ENTITY
According to Henri Jean-Francois (2010), the methods used by the
entities to determine environmental costs are the life-cycle assessment,
the environmental balance method (green balance), the full cost method,
the total cost assessment method and the ABC method. These methods are
not exclusive, a series of parameters are common to several methods.
The Life-cycle assessment method: the duration of the life-cycle is
a method acknowledged by the ISO 14001 Environmental Management Systems,
which consists of the analysis for each product of the material
flows' inputs and outputs. More specifically, from an ecologic
perspective, this approach analyzes the real and potential impacts of
material flows over the environment.
Therefore, it includes three stages: the inventory of all flows
related to energy, water, raw materials, air and emissions; the
inventory of qualitative and quantitative measures that impact the
environment; interpretation of the results and an assessment of possible
methods to reduce environmental impacts.
The environmental balance method: consists of identifying and
measuring the inputs and outputs flows of an entity, of a service,
process or product in terms of energy, water, materials, waste or
emissions. Therefore, it may be used during the inventory stage of the
life-cycle assessment method or as a first step in other methods. A
large number of environmental performance indicators can be determined
based on the data supplied by this method. Traditionally, an
environmental balance is done in physical, non-monetary terms.
The environmental balance method faces two major criticisms. First,
the analyses of the input/output flows don't measure the
environmental impact because they refer solely to the use of natural
resources by the entity, overlooking what their value means for the
environment. The second criticism claims that this method doesn't
manage to provide monetary information.
The Full cost method: full cost is an allocation of all the costs
for a product (materials, salaries, etc.) including potential and real
environmental costs. With this approach, it's possible to choose
products with lower costs (in terms of the environment or not). However,
in terms of the environment, the full cost most often refers to taking
into account the monetary value of external costs.
The Total cost assessment method: was developed by the Tellus
Institute and is similar with the full costs method. While the full
costs method is generally used to measure cost by product, the total
cost assessment method is used to measure the cost of capital
investments. In addition, the classification of the costs used to assess
total cost requires identifying the costs explicitly related to the
environment. The major advantage of this method is the fact it includes
costs related to capital investments and to the life-cycle of the
product.
The ABC method: one of the major obstacles in measuring and
managing environmental costs is related to allocating these costs to the
activities or products that generated them. In fact, many entities
approach environmental costs per se and don't identify them as
being related to the environment, thereby underestimating environmental
costs. Activity based costing improves the calculus of internal costs by
relating the costs generally found in indirect accounts to polluting activities and products that are determined with the help of the
quantitative assessment procedures of the life-cycle.
Therefore, the ABC method allows an entity to allocate
environmental costs to activities, and then to products. Still, it must
be mentioned that using this method requires the prior identification of
environmental costs. The strength of the ABC method is enhancing the
understanding of the economic processes associated with each product,
but it is difficult to implement within the entity.
4. CONCLUSIONS
The forementioned aspects show that environmental accounting is an
instrument used by the entities to prevent and remove the effects of
pollution, to control costs and to improve environmental performance. As
can be seen, there are differences between the calculation methods of
the environmental costs, some methods allowing only to identify and/or
to allot environmental costs. Choosing these methods should be combined
with existing methods of the entity in order to avoid excessive costs.
The results of the conducted research revealed that literature has
different calculation methods for environmental costs and therefore,
depending on the sector in which the entity functions, it can choose one
of the presented methods. By separately managing environmental costs, by
identifying the cost bearers and generators and by using cost-sharing
basis and adequate costing methods, we may conclude how important is the
implementation of environmental management accounting, which may
contribute more efficient processes that generate costs' reductions
and increased profitability.
As prospect for future research, we are considering how to actually
determine environmental costs within the entity with the help of the
method used by it. The conclusion that can be drawn here is that we have
to make the entire activity unfold in complete harmony with the
environment, ensuring sustainable development.
5. REFERENCES
Betianu L. (2008), Total Quality Environmental Accounting,
University "Alexandru Ioan Cuza" Publishing,
ISBN:978-973-703-306-2, Iasi
Bartolomeo M et al. (2000), Environmental management accounting in
Europe: current practice and future potential, The European Accounting
Review, vol. 9, Issue 1
Environmental Protection Agency (1995), An introduction to
Environmental Accounting as a Business Management Tool, Available from
http://www.epa.gov/, Accesed 2010-12-10
Henri Jean-Francois et al. (2010), Environmental costs, CMA Management Journal, Vol. 84, Issue 4, ISSN: 1490-4225
Patrick de Beer, Friend F (2006), Environmental accounting: A
management tool for enhancing corporate environmental and economic
performance, Ecological Economics Journal, no.58, 2006, p. 550
*** International Federation of Accountants, Environmental
Management Accounting (2005), Available from http://www.ifacnet.com/,
Accessed on 2010-12-20
*** United Nations Conference on Trade and Development (1998),
Environmental financial accounting and reporting at the corporate level,
Available from http://www.unctad.org/, Accessed 2010-05-10
