1

IFRS and Environmental Accounting

Abstract
This paper examines whether International Financial Reporting Standards (IFRS) can be
used for monitoring environmental degradations. The paper critically examines the
contemporary environmental accounting literature, and attempts to find a mandatory
reporting mechanism in the contexts of accounting for a public good and REA (resource,
event, action) accounting of McCarthy (1982). It selects the relevant financial reporting
standards and examines their strengths and weaknesses. Using qualitative and case study
research method, the financial statements of three global mining companies that are
operating in an environmentally sensitive sector were studied. The study finds that the
Global Reporting Initiatives (GRI) guidelines and private sector self-regulation are
insufficient to monitor environmental disclosure. The paper proposes a mandated
separate statement of environmental assets and liabilities. The elements of the proposed
statement are discussed.
JEL classification: M41, M42, M48, Q56, Q51 Q20 N27, D53, D63
Key words: IFRS, GRI, environmental accounting, sustainability reports, mining
companies, environmental assets and liabilities, Africa
1

Introduction

As financial globalization proceeds, international financial reporting and auditing

standards are increasingly becoming important instruments of integration. This has been
observed in both the London and Pittsburg summits of the G20 leaders in 2009. The G20
leaders reinforced the influence of International Financial Reporting Standards (IFRS) in
that they called for the implementation of global accounting standards by 2011. By the
end of 2008, there were over 100 countries that had adopted IFRS (Cabrera, 2008; Barth,
et al 2008). Another parallel summit was the United Nations special summit on the
environment which was held on 22 September 2009. The United Nations summit
underscored the link between environment and finance. This paper makes a critical
appraisal of the contemporary environmental accounting literature, and examines whether
global financial reporting standards (IFRS) can contribute towards the monitoring and
protection of the environment.
When the existing body of IFRS is examined from an environmental perspective, a
number of insights can be made. A quick glance through the conceptual framework and a
number of standalone standards provide useful grounds for monitoring environmental
assets, liabilities and expenditures. Furthermore, since accounting is characterized by
recognition, measurement and disclosure, mandated accounting for the environment
brings accountability to the boardroom. Added to this is the fact that IFRS has legal
backing in more than 100 countries, and hence it has a unique advantage of bringing
environmental accountability into both financial markets and regulatory frameworks.

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

For most companies environmental factors are no longer off balance sheet risks.
Notwithstanding this, previous research on corporate social and environmental reporting
has not been able to disentangle commitment from propaganda (Freedman and Jaggi,
2006; Bebbington, Gonzales and Moneva, 2008; Gray, Kouhy and Lavers, 1995).
Furthermore, anecdotal evidence shows that few companies have actually set aside
provisions or contributed to independent funds for decommissioning of plant assets and
the rehabilitation and restoration of the environment. Additionally, few global companies
have complied with financial reporting standards that relate to contingent liabilities which
arise from past events. Law firms are specializing in environmental litigations and
lawsuits against environmentally sensitive industries have been increasing. Surprisingly
firms that face lawsuits and reputational damages in one area get honored for their social
and environmental (sustainability) reporting. This paper examines whether the voluntary
disclosure route is able to resolve market and non market (regulatory) failures in
monitoring public goods like the environment.

The environment is both a complex and an eclectic matter. Carbon emissions and
contaminations of rivers that cross national boundaries are only the trans-boundary
environmental problems. Non-trans-boundary environmental problems are the ones
whose direct effects and externalities remain within the country that is producing it or
agreeing to receive other countries dumps (such as toxic waste dumping). Hence, policy
formation requires enforceable global treaties, sound national policy and the examination
of advances in a number of disciplines. The mainstream financial reporting literature
addresses the environmental accounting problem from the usual voluntary-mandatorymarket reaction perspectives or from social contract and institutional perspectives. The
voluntary disclosures conceptual bases are mostly agency and market efficiency theories
while social contract and institutional perspectives are embedded in social theory. The
management accounting and strategy literature approaches the problem from a reward
and penalty framework for executives and the firms stakeholders. For instance, Wisner,
Epstein and Bagozzi (2006), using data from 179 responses of executives and structural
equation modeling find an association between financial performance and environmental
performance. Policy research however requires bringing together a number of disjoint
concepts and disciplines into one coherent framework.

Emission standards, waste management, air and water pollution, climate change,
extraction of exhaustible resources, bio-fuels, energy savings, biodiversity,
desertification, forestry, agriculture and land use, cattle farming, food security,
population, poverty, urbanization, transport, carbon related financial products, El Nino,
eco efficient technology, and development related matters are both national and
international issues. This paper uses a conceptual schema to synthesize causes and
effects of environmental degradations, and argues that a global REA (resource, event,
action) accounting model in the context of public good and IFRS is necessary for

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

monitoring the environmental behavior of global firms. Global financial reporting and
auditing standards will be able to discriminate among the beauty contestants in
environmental disclosures. The nonfinancial and financial information can be reported
through a mandatory separate statement of environmental assets and liabilities. This
paper proposes some of the elements of such a statement.
REA is a generalized framework of accounting system that uses a shared data
environment. The concept was first developed by McCarthy (1982). Public policy
research requires the distillation of trans-boundary, national, and micro level information.
An integrated shared data environment that is generated through well founded
recognition, measurement and reporting system reduces disclosure differences among
firms (Swanson, 2006). The challenge for International Accounting Standards Board
(IASB) is whether it will make the statement of environmental assets and liabilities part
of the mandatory set of financial statements that firms in environmentally sensitive
industries should periodically publish. In other words whether improved environmental
(sustainability) reports can be produced through IFRS is the central question.
The discussion on corporate sustainability reports can be linked to the earnings quality
literature. Cormier, Magnan and Van Velthovern (2005); Murray, Power, Gray, (2006);
Konar and Cohen, (2001); Klasson and McLaughlin, (1996); Barth and McNichols,
(1995); for instance examined the association between information disclosure and
financial performance. Givoy, Hayn and Katz (2008) in their study of ownership structure
synthesized the earnings quality research into four dimensions. The four dimensions were
the persistence of accruals, estimation errors in accrual process, the prevalence of
earnings management and the prevalence of conservatism. Barth, Landsman and Lang
(2008), in their study of IAS adoption internationally, developed a three dimensional
index of accounting quality. The elements of accounting quality were earnings
management (including earnings smoothing), timely recognition of losses and the value
relevance of accrual accounting information. Comparing the earnings figure
internationally is even more problematic as it is affected by accounting differences and a
number of institutional differences, development, ownership structure, education and
similar factors (Choi and Meek 2008). Bhattacharya, Daouk & Welker (2003) for
instance used earnings aggressiveness, loss avoidance and earnings smoothing as
earnings opacity measures to rank 34 countries. When one invokes trans-boundary and
non-trans-boundary environmental issues into the earnings quality literature, it is evident
that the absence of provisions for decommissioning and rehabilitations, and reserves set
aside for contingent liabilities for activities that are related to the firms past and present
activities, suggests earnings inflation by domestic and transnational companies. Hence,
there is a paucity of research on the link between accounting quality studies and
environmental accounting studies.
As noted earlier, another cluster of research argues that the firms environmental
disclosure effort is a self serving exercise of obtaining social legitimization. Social
researchers argue that the firm achieves this through isomorphism (coercion, mimicking

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

and normative pressures). See for example DiMaggio and Powell (1983); Patten (2005);
Chen and Chen (2009); Cho, Freedman and Patten, (2009). In other words, firms engage
in impression management, and want to create an image of environmental friendliness
when in fact the nature of their activity is environmentally sensitive. If this is correct, the
voluntary disclosure mechanism breaks down. Hence, decoupling the protection of public
good from corporate public relation exercise is necessary.
A quick glance through IASB and FASB standards reveals that there are several
standalone standards and interpretations that are in one way or another linked to
environmental and resource (REA) accounting. For instance, IFRIC 3 deals with
emission rights (allowances) and is related to trans-boundary matters. IFRS 8 also defines
reportable segments. IAS 27 defines who should consolidate and how consolidation of
inter-related entities should be done. IAS 28 and IAS 31 respectively deal with
associates and joint ventures while IFRS 3 deals with mergers and acquisitions. IAS 38
deals with the impairment of emission rights (intangibles). IAS 32, IFRS 7 and IAS 39
(new IFRS 9, November 12, 2009) deal with presentation, disclosure, and recognition and
measurement of financial instruments. IFRS 6 (effective January 2009) deals with
exploration for and evaluation of mineral resources. IFRIC#1 addresses changes in
existing decommissioning, restoration, rehabilitation and similar liabilities. IFRIC #5
provides for rights to interests arising from decommissioning, restoration and
environmental rehabilitation funds. As regards liabilities arising from past events, IAS 37
deals with provisions, contingent liabilities and continent assets. In short IASB already
has the basis on which environmental information at corporate level can be reported.1
The purpose of this paper is therefore to make a critical review of the extant
environmental accounting literature, and find (if any) theoretical link(s) between financial
globalization, IFRS and trans-boundary and non-trans-boundary environmental problems.
More specifically it searches for a framework in IFRS so that environmental risks
(liabilities, litigations, reputation damages, loss of future profits) and assets (endowments,
rights and known reserves) of public and private goods can be accounted for. The paper
identifies key standards that are relevant to environmental monitoring, and suggests ways
of integrating financial and nonfinancial information into the existing financial reporting
system. The paper follows a qualitative-archival research methodology to identify the
type of information that can be recognized and disclosed within financial statements of
global companies that are operating in environmentally sensitive sectors. Compustats
global vantage database was used to inspect the extent of globalization (integration) of
mining companies. The 2008 annual reports of three major (global) mining companies
were studied.

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

The contributions of the paper are fourfold. First, the literature review suggests that
because environment is a public good, market solutions alone will not provide answer to
the multitude of environmental degradation problems that the world is facing. This will
hold for both trans-boundary and non-trans-boundary problems. Second, consistent with
Freedman and Jaggi (2006); and Bebbington et al (op cit) observations the case study had
difficulty in decoupling the propaganda from information. Third, within financial
reporting framework, the overall conclusion from the three financial statements can be
summarized as follows:- (i) From a compliance perspective, it is impossible to conclude
that the companies are indeed meeting the requirements of IFRS. (ii) All the three global
companies did not disclose the size and adequacy of the provisions that they have set
aside for normal provisions and contingencies in respect of the environment. (iii) The
notes and descriptions of the three companies appear similar, indicating the global
convergence of financial reporting practices and the entrenchment of the audit industry.
In other words, no global company produced a separate statement on the environment.
Finally, from an earnings quality perspective, the implications of the non recognition, non
disclosure and inadequacy of provisions for past and present environmental
responsibilities points to one direction:- the inflation of earnings and values
(fundamental/intrinsic) of equities.
The remaining section of the paper is organized as follows. Section 2 reviews the
literature. Section 3 states the research questions more succinctly, and outlines the
methodology. Section 4 contains the conceptual schema and examines relevant financial
reporting standards. Section 5 reports the results of the case study, and proposes a
separate mandatory statement of changes in assets, liabilities and provisions. Section 6
contains concluding remarks, and indicates the directions for future research.
2

Relevant Literature

As noted earlier the literature on the environment is multidisciplinary and dense. This
review focuses on the segment of the literature that deals with accounting. Haripriya
(2000) outlines four non-mutually exclusive environmental accounting systems. They are
(i) pollution expenditure accounting; (ii) physical accounting that measures the stocks of
environmental assets over time; (iii) Green indicators:- a system closely linked to
conventional GDP measure and adjusted to the Nordhaus- Tobin measure of economic
welfare; and (iv) the United Nations System of National Accounts (SNA). The
environmental economics literature analyzes welfare measurement, sustainability,
technological change, externality and green accounting within the framework of
general equilibrium models (Aronsson, Johansson and Lofgren; 1997). Lange (2003)
shows the link between environmental accounting and sustainable development. For
him, environmental accounting research purports to find indicators of potential pollutant
industries, and suggests policies on how best to regulate these industries. Furthermore,
Lange (2003:11) links the discussion on sustainable development to inter-generational
altruism, and follows the world commission on environment and development (aka the
Brundtand Commission, 1987) which in turn states that sustainable development is

meeting the needs of the present generation without compromising the ability of future
generations to meet their own needs.
Another cluster of literature links economics with technology. Van Berkel (2006) for
example shows the link between technology and the environment. Eco-efficiency concept
relates to five prevention practices (process design, input substitution, plant
improvement, good house-keeping, reuse, recycling and recovery) and five resource
productivity factors (resource efficiency, energy use and greenhouse gas emissions, water
use and impacts, control of minor elements and toxics and by product creations). Van
Berkel (op cit) argues that eco efficiency can be fostered at three distinct mutually
reinforcing innovation platforms: operations, plant design and process technology.
Derwall, Guenster, Bauer and Koedijk (2005), show that firms that score high in ecoefficiency ratings are associated with superior financial performance. Burnett, Wright and
Sinkin (2009) argue that firms that adopt eco efficient business strategies should have
improved market values. Wisner et al (op cit) reach similar conclusions.
Mathews (1997) provides a review of 25 years of social and environmental accounting
literature by classifying the then literature into empirical, normative statements,
philosophical discussion and accounting and non accounting research. He further notes
that the sustainability research domain has not been attracting the attention of mainstream
accounting researchers. Notwithstanding Mathews (op cit) observations, the number of
research papers increased over the next decade. Three volumes of research work was
published in Advances in Environmental Accounting and Management and the Journal of
Accounting, Auditing and Accountability published a number of research works in the
topic. Country specific studies such as Murray, Sinclair, Power and Gray (2006)
examined whether UKs financial markets care about social and environmental
information. Using annual and monthly stock market data for 100 companies, and a
combination of parametric and nonparametric tests Murray et al (op cit) reached mixed
conclusion. Cormier, Magnan and Van Velthovern (2005) identified the determinants of
environmental disclosure using theories embedded in economic incentives, public
pressure and institutional theory. They find that risk, ownership, fixed assets age and
firms size determine the level of environmental disclosure by German firms.
Barth and McNichols (1995), using Compustat data, examined whether the stock market
values environmental liabilities and clean up costs. Klasson and McLaughlin (1996) used
event study methodology to examine the link between financial performance and
environmental performance. Konar and Cohen (2001) examined whether there is an
association between firm-level environmental performance and intangible assets, and
reported that poor environmental performance has a significant negative effect on the
intangible-asset value of publicly traded firms. Konar and Cohen (op cit) argued that
major corporations voluntarily over-comply with environmental regulation, and
externally portray an image of being environmentally concerned. The authors provide
evidence that this image is rewarded. This view was reflected in a number of papers that
appeared in volume 3 of Advances in Environmental Accounting and Management

(Freedman and Jaggi, eds 2006). The view was also echoed in the legitimization-social
contract and reputation risk management theory of Bebbington, Gonzalez and Abadia
(2008).
In contrast to the above, empirical studies that examined environmental disclosures in the
United States (see for example Freedman and Wasley, 1990; Walden and Schwartz,
1997) reported that US companies that were under intense reputation scrutiny because
of IPOs, did not improve the level of environmental disclosure. In contrast to the US
study, Durand and Tarca (2008) stated that neither historical cost nor historical cost with
supplementary notes with disclosure, were useful for Australian firms. Durand and Tarca
(op cit) reported that specific tangible extractive industry assets are value relevant while
intangible assets are value relevant only in some periods. Cho, Freedman, and Patten
(2009) examine potential explanations for the corporate choice to disclose environmental
capital spending amounts. Their overall results suggest that companies use the disclosure
of environmental capital spending as a strategic tool to address their exposures to
political and regulatory restrictions.
Cross country studies suggest mixed results. Most cross sectional studies attempt to find
an association between environmental disclosure index and financial performance.
Yusuff and Lehman (2008) compared Australian and Malaysian data using a rating
system which is similar to Wiseman (1982) scores.2 Cormier and Magnan (2007)
analyzed the information dynamics between corporate environmental disclosure and
financial markets (proxied by financial analysts' earnings forecasts) and public pressures
(as proxied by a firm's media exposure). Using information from print and web sources,
and sample from Belgium, France, Germany, Netherlands, Canada and the United States,
Cormier and Magnan (op cit) concluded that enhanced environmental disclosure leads to
more precise earnings forecasts by analysts especially in environmentally sensitive
industries.
From the review of the relevant literature one observes the following. First, as noted
earlier, environment is a multidisciplinary study, and setting a coherent set of national

Wisemans scores were developed using a detailed information disclosure sheet. The elements of the
scoring sheet look for information items such as past and current environmental expenditures; future
estimates of environmental expenditures; financing for environmental equipment; environmental cost
accounting; past and present litigation; potential litigation; environmental data; control, installations,
facilities or processes described; land rehabilitation and remediation; conservation of natural resources;
departments or offices for pollution control; discussion of regulations and requirements; environmental
policies or company concern; environmental goals and targets; awards for environmental protection;
environmental audit; environmental management system; environmental end products/services; sustainable
development reporting; environmental memberships/relationships; environmental stakeholder engagement;
environmental activities; and environmental research and development; and environmental awareness and
education programmes.

and global policy is not an easy task. Second, the Burntland Commissions definition of
sustainable development is similar to Hicks definition of economic profit, which states
that income is the maximum amount that an individual can consume during the current
period, and leave the firm well off at the end of the period as it was at the beginning.
Hence, this requires both intergenerational altruism and the conversion of accrual net
income figure to economic profit. Third, the environment is partly a private (trade-able)
good and partly a public (non trade-able) good. Fourth, to the extent trans-boundary
emissions and river systems are affect the quality and sustainability of life, the
environment is also a global (international) good. Hence, in order to prevent market
failure and improve allocation efficiency treaties and regulations are necessary. That is,
the monitoring problem cannot be resolved through the voluntary disclosure and self
regulation mechanism. Hence, the type of accounting that is required for the environment
needs to combine concepts of REA accounting (system), SNA, IFRS and accounting for
public goods.
Furthermore, prior research that attempted to link environmental disclosure with stock
market returns requires some rethinking. The studies followed an instrumentalist
paradigm; and examined either market reaction to the release of environmental news or
whether or not current shareholders are purchasing future earnings at the correct price.
In this respect, Penman and Zhang (2002:3) for example argued that models of
sustainable (maintainable) earnings are also models of price earnings ratios. This implies
that the market distinguishes between reporters of sustainable (maintainable) earnings
from others (reporters of unsustainable) earnings. Based on this premises, Penman and
Zhang (op cit) attempted to build a parsimonious model of sustainable earnings. The
model purports to impound social and environmental information, a belief that emerged
from the entrenched efficient market theory.
From a practical-institutional perspective, corporate social and environmental reports
appear to be guided by Global Reporting Initiatives (GRI) guidelines rather than the
Kyoto agreement and IASB standards. The GRIs triple bottom line reporting, which
states that corporate earnings are a function of economic value added, environmental
value added and social value added is also advanced by consulting firms.3 In other words,
the focus of mainstream empirical research and GRI was on the promotion of voluntary
disclosure. Another interesting observation is that, as of late, a variety of sustainability
indices that compare listed companies started to emerge. Voluntary corporate governance

The Economist (November 17, 2009) attributes the phrase the triple bottom line to a British consultant
by the name of John Elkington in 1994. The triple bottom line (TBL) consists of three Ps: profit, people and
planet. The magazine correctly relates the triple bottom line measurements to a balanced scorecard, and
notes that the three separate accounts cannot easily be added up.

codes such as King III also advanced the self regulation perspective. In this respect, the
Institute of Directors of South Africa (aka King III: 2009:6) traverses through the murky
issues of mandatory and voluntary disclosure, and recommends that companies voluntary
comply with environmental standards. The report assigns the sustainability reporting
responsibility to the audit committee, which often gets outsourced to external audit firms.
3

Research questions and methodology

The above discussion leads to a number of research questions. In this paper the central
question that needs to be answered is whether the current IASB standards provide the
conceptual and technical grounds for the preparation of a separate standardized and
auditable statement of corporate environmental assets and liabilities. The second question
is whether it is possible to define the elements of such a statement, and identify the type
of emerging recognition, measurement and disclosure issues. If a separate statement is
infeasible for one reason or another the paper outlines the environmental information that
can be produced within the current framework of IASB standards.
Both questions require the examination of the existing IASB standards, GRI guidelines,
national and international information gathering systems, and company reporting
practices. The paper elected a qualitative-case research methodology. Case method has a
number of advantages. It allows the researcher to interrogate primary information, and
enables him/her to examine the research problem(s) from close range. It overcomes the
sample size requirements of quantitative research. Henning (2004:32) also states that
social entities (organizations) can be bounded by parameters that show specific dynamics.
Furthermore, previous research on environmental accounting (see for example, Buhr and
Reiter, 2006) used case study method, and hence the result of this paper can be compared
with prior research results. Finally, international accounting research faces the problems
of accounting diversity and international databases add particular problem for carrying
out empirical research on this topic. Hence, the following steps were followed. First,
through a causality schema, the paper outlines the factors that are associated with
environmental degradation and climate change (Figure 1). Second, the paper analyzes the
existing IASB standards to identify environment related standards/provisions/paragraphs
(Table 1). Third, three global companies that operate in environmentally sensitive sectors
were selected (Table 2). The 2008 annual reports and other reports on the three
companies were condensed (Appendices 1, 2 & 3) and studied. Fourth, the paper
examined whether it is feasible to prepare a standardized and auditable separate statement
for the environment (Table 4). The strengths and limitations of the proposed statement
are outlined.
4: 0 Conceptual relationships, sustainability indices and IFRS
4.1 Conceptual schema and sustainability indices

10

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

improve the readability of the figure, certain connectors (associations) between nodes and
mathematical notations were omitted or reduced to the minimum. Note that there are five
nodes in Figure 1:- emission, production, depletion, projects and urbanization. Each node
in turn contains multiple factors. For instance, the emission node has factors from X11 to
X1n, and X11 can represent Co2 or an equivalent element that contributes to emission of
pollutants that affect air and water quality. The production node in turn has multiple
factors ranging from X21 to X 2n. The nodes and the rest of the factors can be identified
by carefully reviewing ISO and other industry standards and the emerging literature. i is
a policy node that is caused by activities (X11 to Xnn) that lead to emission, production,
depletion, large projects and urbanization activities. The policy node is further mediated
by market and nonmarket forces. Market forces are product, labour and financial markets
(including financial intermediaries in carbon securities) while nonmarket forces are State
and non-State actors. Another necessary factor is it is necessary to delineate the transboundary causes of environmental degradation from the non-trans-boundary causes. The
interesting question for this paper is the extent to which accounting policy makers can
influence the policy node, i and make accountancy as an instrument of good local and
international environmental governance.
Before we proceed to the examination of mandated financial reporting standards it is
important that we noted the usefulness of indices produced by institutions that advance
sustainability ratings. As noted earlier, Freedman and Jaggi (op cit) surmise that it is
difficult to decouple a firms propaganda from genuine information disclosure.
Bebbington et at (2008:371) also argue that though social and environmental reporting is
widespread, the phenomena under which such reports are produced remains largely
unexplored. Notwithstanding this, a number of stock exchanges produce sustainability
indices/metrics and rate companies. Audit firms involve themselves in either the rating or
the adjudication process. For instance, the Dow Jones sustainability index sets three
broad criteria of economic reporting, environmental reporting and social reporting. The
weights and criteria can be criticized. A similar criticism can be made about the
Johannesburg Securities Exchanges (JSE) Socially Responsible Investment (SRI) index.
With regard to the environment, the JSE classifies firms into high, medium, and low

11

Figure 1: Conceptual schema

X11
X12

Emissions

X1n
X21
X22

Non market forces:

State actors
Non State actors
International conventions

Production of normal
& toxic waste

X2n
X31
X32
X3n

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

X41
X4n

Projects that lead to air &

water pollution & land
degradation

X51
X5n

Urbanization that affects

air, water and land quality

Market forces:
Product markets
Financial markets
Labour markets

Environmental
degradation,
climate change

12

Yee (2006:7) states that reported earnings have two guises; first as a fundamental
attribute, and second as a financial reporting attribute. For Yee (op cit) fundamental
earning is the accounting profitability measure that gauges a firms ability to pay
dividends, and earnings quality refers to how quickly and precisely reported earnings
reveal fundamental earnings (Yee, 2006:7). Sustainable earnings and triple bottom line
research suggest an additional dimension for earnings quality; a dimension that has not
been examined by contemporary research on accounting quality (viz Barth, et al 2008;
Givoy, et al 2008). Notwithstanding this, whether companies that are in the top of stock
exchange environmental disclosure rating league are in the Keynesian beauty contest
(Gao, 2008) for reputation risk management or revealing fundamental (intrinsic) attribute
remains a subtle point.
Furthermore, the association between financial statement information and security prices
continues to send unclear message to policy makers in the United States. For instance,
Ball and Shivakumar (2008) and Berkman and Koch (2009), though from totally different
angles, provide evidence which show that in contrast to established models of
uncertainty, corporate information disclosed through the annual report (quarterly reports)
have no relevance to price formation. Studies on European and emerging markets lead to
different conclusions (Daske, Hail, and Leuz 2008; Negash 2009). Hence, studies that
rely on the mandatory-voluntary disclosure framework and market efficiency research
need to take particular care in addressing the complex issues of the environment.
Furthermore, cross sectional studies on disclosure show that the association between
financial statement information on one hand, and equity prices and uncertainty proxies on
the other hand, are not linear. Hence, in the presence of unsettling research findings,
public information on the environment cannot be discounted on the grounds of Keynesian
beauty contest. In the absence of other reporting mechanism, the public good nature of
environmental information strengthens the argument for the continuation of the rating
practice.
4.2 Relevant financial reporting standards
As noted earlier, a number of existing standards and interpretations directly and indirectly
deal with environmental issues. In this respect, IFRS 6 (implementation January 2009)
for example directly deals with extractive industries and IFRIC 5 provides the guidance
for decommissioning, rehabilitation and restoration of environment related expenditure.
IFRIC 3 (still under discussion) and IAS 38 (intangibles) deal with government allocated
emission rights, trades in these rights and the impairment of the emission allowances.
Furthermore, it is important to note that a number of other standards provide an indirect
support for the recognition, measurement and disclosure of environmental assets and
liabilities. IAS 37 (provisions for contingent liabilities and assets) can be linked to
environmental liabilities. IFRS 3, IAS 27, IAS 28, IAS 31, IAS 24 and IFRS 8
respectively deal with business combinations, investments in joint ventures and
associates, related party disclosures, and specify the reportable segments of a
geographically dispersed global company. Listed global companies, subject to certain

13

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

financial reporting standards therefore provides a new insight; an insight that is useful for
monitoring and protecting the environment. The relevant standards are discussed below.
Paragraph 11 of IFRS 6 states the following:In accordance with IAS 37 Provisions, continent liabilities and contingent assets, an
entity recognizes any obligations for removal and restoration that are incurred during a
particular period as a consequence of having undertaken the exploration for and
evaluation of mineral resources.
Furthermore, paragraph 3 of IAS 37 defines provisions as liabilities of uncertain timing
or amount; and contingent liability is defined as a liability that arises from past events,
[italics added] and its existence will be confirmed only by the occurrence and
nonoccurrence of one or more of uncertain future events that are not wholly within the
control of the entity. Paragraph 14 of IAS 37 requires that provision should be
recognized when (a) an entity has a present obligation (legal or constructive) as a result
of a past event; (b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligations; and (c) a reliable estimate can be made
of the amount of the obligation. Paragraph 17 further defines an obligating event as a
past event that leads to present obligation. It states that for an event to be an obligating
event, it is necessary that the entity has no realistic alternative to settling the obligation
created by the event. Finally, paragraph 27 of IAS 37 deals with the disclosure conditions
for contingent liabilities. If the liability is not expected to lead to an outflow of resources
and where an entity is jointly and severally liable for an obligation, that part of the
obligation that is expected to be met by other parties is treated as contingent liability. The
standard therefore leaves the application to the management, audit committee and
external auditors. In other words, even though the two standards do not define the time
limit or the size (amount) of the event or what construes a constructive obligating
event, they provide the technical ground for the recognition of environmental liabilities
that arise from past events (activities) that lead to, for example, the deterioration of air
and water quality (see Figure 1).
IFRIC 3 (emission rights) was issued in 2004 but was withdrawn in 2005.4 The 2004
document was prepared against the backdrop of the Kyoto Agreement on the
environment, and the trend in government preparations for reductions in greenhouse gas
emissions. The economic concept is largely founded on the externality theorem, and the
long held European subscription to the polluter pays principle (PPP) for example while
polluting a trans-boundary water such as the River Rhine. The policy assumes that the
government can create an artificial scarcity by limiting (capping through quota allocation
to qualifying firms) the amount of total emissions of pollutants during a period of time.

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

14

This approach makes sense at global level if the effects of the emissions are distributed
equally across the globe. Furthermore, given that there are about 200 political
jurisdictions in the world, each countrys contribution to global permissible emissions is
different, and the incentives for not observing a treaty (if any) are many, hence the issue
becomes complex. Hence, the interesting question again is whether global financial
reporting standards have a role in influencing and implementing monitoring mechanisms
from intergovernmental change of emission rights to microeconomic level trade in these
rights and their derivatives. Furthermore, since nonpolluting or under polluting countries
can also issue sovereign emission, production, depletion, project and urbanization rights,
designing the appropriate mechanism and product might lead to the reallocation of
resources globally.5
The main issues in the original draft have not changes. Rights (allowances) to emit
pollutant continue to be treated as intangible assets to be accounted for according to IAS
38 (Intangible Assets). When the rights are allocated by government department for
amounts less than its fair value, the difference is recognized as deferred income (liability)
in the statement of financial position. When the firm starts polluting, it records provisions
according to IAS 37. The original draft did not raise issues about past events.
Furthermore, according to www.iasplus.com of Deloitte, in May 2008 the IASB staff
defined emission trading scheme as a an arrangement designed to improve the
environment, in which participating entities may be required to remit to an administrator
a quantity of tradable rights that is linked to their direct or indirect effects on the
environment. In its November 2009 meeting of IASB the technicalities of defining an
obligating event and the timing of recognition of liability at cost or market value and
recording of initial government allocation right (at cost of market) and provisions,
whether it should be treated as intangible asset and face impairment annual test are
finalized. However, the lesson from this IFRIC is that a number of standards IAS 38
(Impairments), IAS 20 (Government Grant), IAS 37 (Provisions, contingent liabilities
and contingent assets) and the standards that relate to financial instruments (IAS 32,
IFRS 7 and IAS 39) will be affected, and require amendments.
IFRIC 5 (decommissioning, restoration, rehabilitation and similar liabilities) deals with
accounting for trust funds set aside for the environment. Paragraph 1 of IFRIC 5 defines
the purpose of the fund as to segregate assets to fund some or all of the costs of
decommissioning plants (such as a nuclear plant) or certain equipment (such as cars) or in
undertaking environmental rehabilitation (such as rectifying pollution of water or

At the heart of the Copenhagen Summit lies this issue. Binding treaty is unlikely to be reached, and even
if it is reached the monitoring mechanism will be expensive. Furthermore, the worlds most polluters have
the incentive to elect the voluntary emission reduction route rather than entering a binding treaty. The
recipients of the adverse effects of emissions in the third world are more than likely to settle for some kind
of compensation (probably via development assistance). Regardless of the outcome of the Copenhagen
Summit, many trans-boundary and non-trans-boundary environmental degradation problems will continue
to be unresolved issues.

15

resorting mined land), together referred to as decommissioning. Paragraph 2 states that

contributions to this fund may be voluntary or required by regulation or law, and the fund
might be established by a single contributor or multiple contributors for individual or
joint decommissioning costs. In other words, even though the discussion does not appear
to have linkage with IAS 37, here too the standard setters appear to be prudent in
providing the guidance for the management of the funds set aside for provisions and
contingencies that relate to past events.
IAS 8 deals with selecting and applying accounting policy.6 Changes in accounting
policies, changes in estimates and correction of prior period errors are complex issues.
The scope of IAS 8 covers fundamental errors, retrospective adjustments of financial
statements (as far back as practicable, per paragraph 26), and when and how material
omissions or misstatements should be practically treated, and corrected. The only
unsettled matter is whether the retrospective restatement of financial statements for
environmental costs and liabilities is impractical and indeterminate (paragraph 5 of IAS
8).
IFRS 8 also requires firms to disclose their products, services and the geographical areas
in which they are operating. Paragraph 13 of IFRS 8 sets the quantitative thresholds of
10% of combined revenue. However, both paragraph 23 and paragraph 33 are silent
about segment risks and rewards arising from engaging in environmentally sensitive
activities in each of the geographical areas that the company is operating. When IFRS 8 is
examined in conjunction with IAS 27 (consolidation) and the above mentioned standards
the implication for global companies operating in environmentally sensitive industries
becomes serious.
IAS 32, IFRS 7 and IAS 39 (IFRS 9) respectively deal with presentation, disclosure, and
recognition and measurement of financial instruments. Hedge accounting (cash flow
hedge, fair value hedge and hedge of net investment in foreign operations:- paragraph 86
and 87 of IAS 39) require that gains and losses, and effective and non effective hedges be
reported in the comprehensive statement of income. Given the rise of carbon related
financial instruments, and increases in pending lawsuits against companies the combined
impacts of IAS 27, IAS 37, IFRS 6, IFRIC 5, IAS 8 and standards that deal with
derivative instruments is to strengthen the political costs (Watts and Zimmerman, 1986)
for global companies that are operating in environmentally sensitive industries.

Paragraph 5 of IAS 8 defines accounting policy as specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements while a change in
accounting estimate is an adjustment of the carrying amount of an asset or a liability or amount of periodic
consumption as a result of present assessment of expected future benefits and obligations associated with it.
The standard states that prior period errors are omissions or misstatements for one or more periods arising
from failure to use or misuse of reliable information.

16

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

The table identifies relevant terms, phrases, paragraphs and provides remark(s).
Table 1: Environment related financial reporting standards
IFRS/IAS
number

Title and/ or description

Framework

Framework
for
preparation
&
presentation of financial
statements

IAS 41;

Specialized industries

IFRS 6

Exploration & evaluation

of mineral resources

Paragraph (11): requirement

for
provision
and
contingencies

IFRIC 3

Emission rights
allowances

Several paragraphs deal with

whether government allocated
rights; and the accounting
treatment at the start of
emission, and the setting aside
of provisions.

(withdrawn)

IAS 20

Government Grants

and

Relevant
paragraph(s).
Paragraph
numbers
in
parenthesis
Accountability (14), relevance
(26), materiality (29 &30),
substance (35), neutrality (36),
prudence (37), completeness
(38), liabilities & obligation
(60), capital maintenance (81),
probability (85), measurement
reliability (86), recognition of
liabilities (91)

Initial acquisitions of emission

rights & allowances recorded
as assets whose valuations are
subject to impairment tests.

Remarks

Statement to the effect that

sustainability is within the
bounds of the conceptual
framework of IASB and
FASB

Sectors sensitivity to the

environment.
See
ISO
classification and Wisemans
disclosure scores.
Refer to statistics about
emissions; production of
pollutants;
toxic
waste
disposal systems, ground
water pollution & land
degradation;
depletion,
industrial
accidents;
environmental
impact
studies.
Kyoto
Agreement,
Copenhagen
Summit;
Agreement versus treaty;
efficiency of national and
global allocation systems,
speculation
and
transferability of emission
rights;
whether
climate
change has o boundaries;
markets for trading emission
and similar rights and their
derivatives; sovereign rights;
global
shared
databases
(REA).
Government grants could be
influenced by the politics of
the day. Government can
over/under supply the rights
certificates;
endemic
corruptions in the public
sector might frustrate the
system.

17

IFRIC 5
Jan 2006

Decommissioning,
restoration
environmental
rehabilitation funds

&

Purpose of fund (1), voluntary

& required contribution to the
fund
(2),
geographically
dispersed
sites
(2),
independent
trustees,
accounting for interest in the
fund (7), obligations to make
additional contributions (10),
contingent
liability
(10),
reimbursement rights (BC 12)
Core principle (1), nature of
an operating segment (5),
aggregation criteria (12),
quantitative thresholds (13),
disclosure (20), profit/loss/
assets and liabilities (23),
measurement
(25),
geographical information (33)

IFRS 8

Operating segments

IAS
27,
IFRS
3,
IAS 28 and
IAS 31, SIC
12

Consolidation,
investments in mergers
and acquisitions, interests
in joint ventures and
associates; consolidation
of special purpose entities

Several paragraphs relate to

ownership, risk, reward, and
significant influence.

IAS 37

Provisions,
contingent
liabilities & contingent
assets

IAS 8

Accounting
policies,
changes in accounting
estimates and errors

IAS 1

Presentation of financial
statements

IFRS 1

First time adoption of

Several paragraph that require

charging current earnings for
setting
aside
normal
provisions and contingent
liabilities.
Accounting policies (10),
retrospective application (22),
warranty
obligations
(32
&33), errors (41), prior period
errors (49),, impracticability of
retrospective adjustments (51,
52&53)
Material
omissions
(7);
purpose
of
financial
statements
(9),
fair
presentation (15), rectification
of accounting policies (18),
going concern (25), provisions
(54), estimation uncertainty
(125)
Accounting policy 97), fair

Disclosure of the size of the

fund; arms length of the
trustees; plans for additional
contributions; responsibility
for
past
degradations;
adequacy of the fund.

For a global company

whether its branches and
subsidiaries are operating in
environmentally
sensitive
sectors; and whether the
segment
meets
the
quantitative threshold, or
whether it is required to
prepare
consolidated
financial statements, and
whether its segments meet
international standards.
Group
&
consolidated
statements are prepared for
listed legal entities. Listed
and
unlisted
companies
might be sued for violating
environmental standards in
countries
where
their
segments operate/operated in
the past. This in turn might
trigger an unbundling wave.
Absence and inadequacy of
provisions suggests earnings
inflation which in turn affects
intrinsic
(fundamental)
values of equities.
The extent to which past
earnings require restatement,
and how this is going to be
shown in past, present and
future financial statements
(retrospective & prospective
adjustments).
Minimum set of information
that must be included in the
comprehensive
financial
statements
of
environmentally
sensitive
companies.

Fair value of environment

18

IFRS

IFRS
IAS 37
IAS
IFRS
IAS 38

7,
&
39,
9,

Financial
instruments
disclosure, presentation
and recognition and
measurement,
intangibles & impairment

value
(16),
compound
financial instruments (23),
parents, subsidiaries, joint
ventures & associates (24),
changes in decommissioning,
restoration
and
similar
liabilities (25E), non IFRS
comparative information (36),
reconciliations (39)

related assets, liabilities and

provisions.

Disclosure of past and

present environment related
risk(s);
qualitative
and
quantitative description of the
effective and non effective
hedging strategy; fair value
of carbon derivatives and
other environment related
assets and liabilities.

5.0 Case study and Discussion

Financial globalization has accelerated the pace at which multinational companies
diversify the sectors and the regions in which they are operating. Companies from
emerging markets are also routinely getting listed on major American and European stock
exchanges. Information technology has also created an enabling environment for
transmitting information at high speed. Previous research that examined financial
globalization has estimated the gains (Stulz 2005) and country specific studies have also
attempted to show the winners and losers from financial globalization (Makina &
Negash, 2007). For the purpose of this research, the Compustat Global Vantage database
was used. The case study focused on one of the environmentally sensitive sectors. Using
the data query options of the CD ROM located at the Auraria Higher Education Campus
Library of the University of Colorado/Metropolitan State College of Denver, companies
were separated into ADR (American Depository Receipts) and Non ADR companies.
ADR companies are foreign firms listed in the United States stock exchanges. The
number of firms that operate in the mining and extractive industries are given in Table 2
below. The difference between the total companies and non-ADR companies gives an
estimate of foreign companies listed on US exchanges.
A closer inspection of the list of ADR companies reveals that major foreign mining and
oil companies that either trace their origin to Sub Saharan Africa (SSA) or have historical
(colonial) connections with the region are listed on US stock exchanges.7 Anglo

According to the encyclopedia of the earth, the Africa region contains about 30 percent of the earths
known mineral reserves, including 40 percent of gold, 60 percent of cobalt and 90 percent of platinum.
New oil fields are discovered in various parts of SSA.
7

19

American Plc traces its root to South Africa and, through its subsidiaries the firm
operates in a number of SSA countries in mining and non mining sectors. China
Petroleum & Chemical and Petro China International are new entrants into the SSA
mining and exploration markets. Its stocks are listed on US exchanges. Royal Dutch Shell
has been operating in Nigeria since the 1960s. Shell also has a significant presence in the
United States. A number of non ADR firms (US firms) also operate in the SSA region. In
other words the analysis of the database reveals that major global oil and mining ADR
firms are operating in the SSA region. The interesting question here is whether United
States financial markets can be used to monitor the environmental behavior of global
companies in the SSA region.
Table 2
Industry code
1010
1020
1021
1030
4010
4015
4030
4040
4060
4070
4080
4090

Nature of the firm

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

Total
companies
12
69
38
56
39

Non-ADR
companies
9
61
36
45
38

102

99

0
34
258

0
18
254

86

79

20
33

20
32

Global companies with SSA connections were selected for the case study. There are
number of reasons for this. First, mining is one of the environmentally sensitive
industries.8 Second, mining is an important growth engine for many SSA economies.
Third, mining is often associated with the resource curse problem of many SSA

Fryna (2004) notes an increase in litigation against transnational corporations in SSA. He argues that the
increase has led to rising environmental liabilities and reputational damages in the firms country of origin.
He further notes that foreign firms have also been successfully sued in African courts for social and
environmental damages. According to the Associated Press of November 17, 2009, the African Union is
also preparing to claim for damages from developed countries at the Copenhagen Summit of December 815, 2009. It is not clear whether this claim relates to environmental development assistance or aid backlog
on claim in the legal sense of the term. It is however important to decouple the trans-boundary and nontrans-boundary reasons for the demand, and some the issues that are emerging from the accounting
literature.

20

countries. Fourth, since the companies are global entities, it might be easier to enforce
international environment standards through the financial market system, and also
provide for actual and contingent liabilities (if any) arising from these firms past
activities.
Based on the Compustat Global Vantage and search engines for the mining industry,
three companies whose presence is well known in various parts of SSA were selected for
case study. The three companies have multiple listings and their market capitalization is
more than the combined GDPs of many SSA countries. The companies are Anglo
American Plc, Royal Dutch Shell and PetroChina International. The financial statements
were obtained from their respective websites. To obtain the news about environmental
lawsuits against each company, Google search was done. The following terms were used
for Google search:- lawsuit against Anglo American corporation environment; lawsuit
against Royal Dutch Shell environment and lawsuit against PetroChina International
environment. Lawsuits filed, fines by State authorities, out of court settlements and the
firms alleged association with conflicts and human/labour rights violations were
obtained. The credibility of these news items were verified by following the lead stories,
and by cross checking the information from additional sources. Content analysis or
disclosure indices were not prepared as the research method is qualitative. Appendix 1, 2
and 3 contain condensed extracts from Wikipedia, company social responsibility and
sustainability reports, company websites, various newswires, and the 2008 annual reports
of the three global companies. The analysis took both nonfinancial and financial
perspectives.
The findings are consistent with Freedman and Jaggi (op cit) and Bebbington et al (op
cit) observations in that the analysis revealed that the phenomena under which the social
responsibility and sustainability reports are prepared, who prepares them and whether the
reports are subjected to audits remained unclear. More specifically, the annual reports
rarely contained nonfinancial quantitative data. The presentations did not follow a
specific standard or format, and the GRI and other similar guidelines for reporting
sustainability appear to be inadequately complied with. The social responsibility sections
of the reports also appeared to deal with philanthropy work. The reports did not indicate
the contributions that accrue to the firm from investments in health and safety. 9 Royal
Dutch Shell approached the social and environmental sustainability report from a risk and
reputation management perspective. It annual reports states that the company faces
various challenges in the over 100 countries that it is operating. The section on climate
change indicates that the company continuously monitors progress towards its own
voluntary emission targets. PetroChina in turn allocated a greater portion of its rather
lengthy separate social responsibility report to deal with its contribution to statutory and

For more discussion on the association between ergonomics and company profits, see Negash and
MacKinnon (1998).

21

non statutory welfare fund for its employees, and reported about its happy employees.
The environmental section of the its report dealt with the companys plans and the
sponsorship it made for environment related conferences. Anglo American Plc
extensively reported about its distribution of antiretroviral drugs to its mining work force
in South Africa while its sustainability report brushed through key environmental
concerns. In sum almost all of the three global companies have disclosed some emission
statistics and described their effort/plans to reduce the emission of harmful gases.
However, the reports were voluntary, unstructured and not confirmed by independent
(environmental) auditors. The disclosure style appears to contain an element of
propaganda that is aimed at building reputation or fighting back the adverse publicity that
the company faced in one or more of its segments. The presentation does not have a
REA concept. The nonfinancial review leads to the conclusion that a more clearer and
mandatory standard is necessary.
The financial statement section of the annual report is also not very different from the
nonfinancial information section. The 2008 annual reports of the three companies were
inspected in respect of IFRS 6 (for early adoption), IFRIC 5, IAS 37, IAS 8, IAS 32,
IFRS 7 and IAS 39. The findings are as follows:(a) All three annual reports state that the 2008 financial statements were prepared in
accordance with IFRS (IFRS 1 and IAS 1). Notwithstanding this, PetroChina also
states that Chinese Accounting Standards were used, and certain interpretations of
Chinese GAAP came from a government department. The PWCs audit report
also states that the financial statements were audited in accordance with Chinese
Auditing Standards.
(b) Anglo American Plc states that costs for restoration of site damages are provided
for at their net present values, and charged against profits as extraction progresses.
The changes in the measurement of a liability relating to the decommissioning or
preparation of site are adjusted to cost of the related asset in the current period. If
a decrease in the liability exceeds the carrying amount of the asset, the excess is
recognized immediately in the income statement (page 90). The company also
states that for its South African operations it makes an annual contribution to a
dedicated environmental rehabilitation trust to fund, which it controls and
consolidates. It is not clear whether it is doing the same for its non South African
mines. Furthermore, the size and adequacy of the provision are not disclosed. The
number of times offsetting (netting) of assets against liabilities (disallowed per
IFRS) is done, remains unclear.
(c) On page 121 of its 2008 annual report Royal Dutch Shell states that provisions are
recorded at the balance sheet date at the best estimate, using risk adjusted future
cash flows of the present value of the expenditure required to settle the present
obligation. With regard to decommissioning and restoration costs in respect of
hydrocarbon production facilities, value is determined using discounting methods
and liability is recognized. With regard to provisions for environmental
remediation resulting from ongoing or past operations, events are recognized in

22

the period in which an obligation, legal or constructive to a third party arises, and
amounts are reasonably estimated. In other words there are no provisions.
(d) On page 119 of its 2008 annual report PetroChina states that there were no
material litigations and arbitration events in respect of the environment during the
year. With regard to IFRIC 5, it states that when the conditions for provisions are
not met, the expenditures for decommissioning, removal and site clearance get
expensed in the income statement when they occur. It does not state whether there
are provisions.
(e) With regard to IAS 32, IFRS 7 and IAS 39, there is little or no disclosure in the
financial statements of the three companies about emission rights and/or carbon
derivatives. As regards IFRS 8 and IAS 27, all three companies are preparing
their consolidated financial statements and mention the regions in which they are
operating. However, it was not always clear how many segments were
consolidated.
(f) None of the three global companies separately disclosed the amount of normal
provisions or provisions set aside for contingent liabilities in respect of the
environment.

The overall conclusion from the three financial statements can be summarized as follows.
First, from a compliance perspective, it is impossible to conclude that the companies are
indeed meeting the requirements of IFRS. Second, all the three global companies do not
disclose the size and the adequacy of the provisions that they had set aside for normal
provisions and contingencies in respect of the environment. Third, the notes and
descriptions appear similar, indicating the global convergence of financial reporting
practices and the entrenchment of the audit industry. In other words, the three global
companies did not produce a separate statement on the environment. This observation
might be explained by DiMaggio and Powells (1983) institutional isomorphism imposed
by the profession, which puts constraint and pressure on a reporting firm to imitate others
and find legitimacy. Finally, from an earnings quality perspective, the implications of the
non recognition, non disclosure and inadequacy of provisions for past and present
environmental responsibilities points to one direction:- the inflation of earnings and the
intrinsic (fundamental) values of equities.
A statement of environmental assets and liabilities?
The above discussion leads to two financial reporting policy alternatives that the IASB
board might wish to consider. The first option is a mandated separate statement that
focuses on the environment. The second option is to require the disclosure of certain
elements of information within the existing reporting framework and strengthening the
offsetting rule. As the world continues to be preoccupied by issues of environmental
degradation, trans-boundary issues get confused with non-trans-boundary issues. The
production of a separate statement on the environment would be a preferred policy to
decouple trans-boundary issues from non-trans-boundary issues in the context of segment

23

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

information. The minimum information that ought to be disclosed in the proposed
statement can be determined by amending IAS 1 and providing a transition clause in
IFRS 1. The standards that deal with provisions (IAS 37) and changes in accounting
policy (IAS 8) can be revised to require that provisions for the environment liabilities or
asset replacements/impairments be backed by ring fenced cash or cash equivalents.
IFRIC 3 and IFRS 6 can be connected, and a standalone standard on environmental
sensitive sectors might be necessary. Table 3 contains some of the elements of the
proposed separate statement for the environment.
Table 3:
Statement of Environmental Assets and Liabilities*
As of December 31, 20XX
---------------------------------------------------------------------------------------------------------------------------------Financial information:Comparative year
Environmental assets:Cash in trust funds
Investments in trust funds at fair value
Emission rights held
Emission rights held for sale (at fair value)
Insurance & similar products held against environmental risks
Contributions to voluntary & mandatory schemes
Inventory of natural & biological assets & depletions
Investments in air & water quality
Capitalized research & development
Capitalized net site preparation & restoration costs
Environmental Liabilities and uncertain liabilities (provisions or contra asset accounts)
Present value of decommissioning, restoration & rehabilitation
Legal and constructive liabilities arising from past events
Deferred income from government allocations of emission rights
Uncertain liabilities (Provisions or contra asset accounts)
Provision for decommissioning, restoration & rehabilitation (current)
Provision for decommissioning, restoration & rehabilitation of (past)
Provision for contingent liabilities from past events
Net adjustments to retained earnings for past errors & material omissions
Net surplus (deficit) for current year+
Estimate of net environmental assets (liabilities)
*The statement can be accompanied by the disclosure of minimum nonfinancial information such
as actual & ISO permissible standards of emissions, production and disposals of waste, depletion
of natural resources & replacement (forestry), major capital projects that lead to deterioration of
air & water quality and habitat, and urbanization
+Net surplus (deficit) is arrived after consideration of recurrent income & expenditure such as
interest and dividend incomes from environment related investments, tax rebates and dues,
recurrent expenditure on environmental protection, current charges for normal provisions for
decommissioning & rehabilitation, past errors and omissions, current contribution to
independent environmental rehabilitation fund & tax gains and losses arising from hedge
activities on environment related products, etc.

24

6 Concluding remarks and direction for future research

This paper examined whether global financial reporting standards can be used as a device
for monitoring the environmental behavior of global mining and oil companies. The
paper reviewed the literature in economics, finance, environmental accounting,
technology, and examined the voluntary-mandatory mechanisms of corporate disclosure.
I surmise that the proprietary cost (Verrecchia, 1983) and voluntary disclosure
mechanism is infeasible for monitoring public goods such as the environment. Mandated
environmental public information therefore cannot be discounted on the grounds of
voluntary disclosure and Keynesian beauty contest. Second, a careful examination of the
existing IASB standards provided useful avenues for improving the current set of
financial statements, and the production of mandated separate statement of environmental
assets and liabilities.
Furthermore, using qualitative and case research methodology the paper examined the
annual reports of three global companies that are listed on United States stock exchanges.
The three companies also operate in the SSA region. The research thus introduces first
world environmental accountability regulatory and financial reporting regimes to the
third world operations of global mining and oil companies. It also separates transnational
issues from national issues. On the technical side, I find that the social and sustainability
reports that were studied do not have standard formats, and the GRI guidelines appear to
be inadequate. The financial statements though claim to comply with IFRS specific
standards such as IFRS 6 (early adoption), IFRIC 5, IAS 37, IAS 27, IAS 8 and IFRS 8
they did not enable firms to disclose key environmental information. Consequently, the
paper proposed two policy options of either requiring a separate statement of
environmental assets and liabilities, or requiring the disclosure of minimum set of
environmental information through the existing set of comprehensive financial
statements.
The separate statement on the environment that is prepared in accordance with IFRS has
a number of advantages, including the decoupling of reputation management efforts of
environmentally sensitive firms from their genuine information disclosure efforts. The
separate statement emerged from the analysis of the multifactor model in Figure 1, and
the analysis of existing financial reporting standards. The proposed statement is
consistent with the REA concept, and certain information can be aggregated for planning
and monitoring at sector, macro, regional and global levels. The information can be used
by both market and nonmarket (State and pressure groups) actors. It can be linked to the
UN system of environmental accounts(SNA) and XBRLs taxonomy (classification).
Furthermore, since companies are already producing lengthy social and environmental
reports the incremental cost of preparing the separate statement outweighs the
ramifications of climate change and lawsuits on the part of the firms.
There are number of avenues for future research. Replication of this research on other
environmentally sensitive sectors might provide corroboration for the conclusions of this

25

paper. Examining the form of association between nonfinancial information and financial
information that purports to serve the environment is another avenue. Expanding the
taxonomy of XBRL in the context of REA, IFRS and SNA requires a shared database
environment. This is another direction for future research.

26

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Appendix 1 Anglo American PLC

Part A:
History: (condenses and extracts from Wikipedia). Anglo American PLC is a multi-national mining
company, founded in South Africa in 1917as a mining enterprise but now extending into other areas.
Natural resources remain the focus of its operations. Its headquarters are in London. Its primary listing is
on the London Stock Exchange and it is a constituent of the FTSE 100 Index. Ernest Oppenheimer along
with American J.P. Morgan founded the Anglo American Corporation, a gold mining company, in 1917
with 1 million, raised from U.K. and U.S. sources, and ultimately derived the name of the company. [1] The
AAC became the majority stakeholder in the De Beers company in 1926. Two years later, the AAC began
mining in the Zambian copper belt. In 2008, the company had 105,000 permanent employees and 39,000
contract employees in its managed operations located in 45 countries.
Commendations:- Anglo American is a member of the World Business Council for Sustainable
Development [29] and in August 2008, the company was named as a winner of the UK Sustainability
Reporting Awards [30]. Additionally, Anglo American committed to support the Extractive Industries
Transparency Initiative which strengthens governance by improving transparency and accountability in the
extractives sector [31]. A socio economic toolkit originally developed by Anglo American to manage the
social aspects of its operational impacts, was released into the public domain for non-profits and other
companies to use [32]. The program was commended by the World Business Awards program of the United
Nations Development Programme [33]
Criticisms:- (condensed from Wikipedia & other sources):- In 1977, the company demanded the paper
it owned, Rand Daily Mail, tone down its equal-rights support after exposing the murder of South African
activist Steve Biko amid the subsequent government backlash. In August 2007, the British charity, War on
Want, published a report accusing Anglo American of profiting from the abuse of people in the developing
countries in which the company operates. According to the charity, "in the Philippines and South Africa,
local communities threatened with Anglo American mines have faced severe repression in their fight to
stay on their land, while in Ghana and Mali, local communities see little of the huge profits being made by
AngloGold Ashanti but suffer from fear and intimidation and from the damaging impact of its mines on
their environment, health and livelihoods".[37]. Anglo American subsequently published a report [38]
responding to War on Want and separately disclosed its safety performance in its most recent annual
earnings report [39], along with immediate measures to address safety concerns [40].. Anglo American was
also accused in 2007 of damaging environmental practices: in order to complete its planned Alaskan
Pebble Mine in collaboration with Northern Dynasty Minerals, the global mining giant may build a
massive dam at the headwaters of the world's largest sockeye salmon fishery, which it would risk
obliterating.[41] Opponents are also pointing to the use of cyanide, heavy metals, and acid mine drainage
which can all have potentially devastating effects on the pristine environment of the Bristol Bay area.
Opponents of the Pebble Mine created Ballot Measure 4 to impose additional water quality standards on
new large-scale mines in the state. However, in August 2007, Alaskans voted against the initiative [42]. The
Pebble Limited Partnership has not yet put forward a project proposal and is working to prepare a
Prefeasibility Study for the project in the second half of 2009 [43]. The mine proposal must still undergo
environmental studies and the permitting process, including being subject to state and federal water
protections [44]. Nunamta Aulukestai (Caretakers of Our Land) and the Renewable Resources Coalition
commissioned a report regarding Anglo American and their current and past subsidiaries. The report is
written by Philip Mattera, a corporate reporter. The report, released in July 2008, criticizes Anglo
American for community, worker safety, public health, and environmental problems at their mining
operations in South Africa, Zimbabwe, Ghana, Mali, Ireland, and the United States (Nevada) and notes the
difference between Anglo's stated corporate goals and their actual corporate performance.
Part B: Condensed from Anglo American plc Annual Report 2008 (pages 88 & 90).

30

1. Accounting policies (page 88)

Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting
Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations
adopted for use by the European Union, with those parts of the Companies Act 1985 applicable to
companies reporting under IFRS and with the requirements of the UK Disclosure and Transparency rules of
the Financial Services Authority in the United Kingdom as applicable to periodic financial reporting. The
financial statements have been prepared under the historical cost convention as modified by the recording
of pension assets and liabilities and certain financial instruments. A summary of the principal Group
accounting policies is set out below with an explanation of changes to previous policies following adoption
of new accounting standards and interpretations in the year. The details of the elections made on conversion
to IFRS were set out in the 31 December 2005 Annual Report. Significant areas of estimation uncertainty
include: useful economic lives of assets and o re reserves estimates; impairment of assets; restoration,
rehabilitation and environmental costs; and retirement benefits.
Restoration, rehabilitation and environmental costs (page 90):- An obligation to incur restoration,
rehabilitation and environmental costs arises when environmental disturbance is caused by the development
or ongoing production of a mining property. Such costs arising from the decommissioning of plant and
other site preparation work, discounted to their net present value, are provided for and capitalized at the
start of each project, as soon as the obligation to incur such costs arises. These costs are charged against
profits over the life of the operation, through the depreciation of the asset and the unwinding of the discount
on the provision. Costs for restoration of subsequent site damage which is created on an ongoing basis
during production are provided for at their net present values and charged against profits as extraction
progresses. Changes in the measurement of a liability relating to the decommissioning of plant or other site
preparation work that result from changes in the estimated timing or amount of the cash flow, or a change
in the discount rate, are added to, or deducted from, the cost of the related asset in the current period. If a
decrease in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in
the income statement. If the asset value is increased and there is an indication that the revised carrying
value is not recoverable, an impairment test is performed in accordance with the accounting policy set out
on page 89. For some South African operations annual contributions are made to dedicated environmental
rehabilitation trusts to fund the estimated cost of rehabilitation during and at the end of the life of the
relevant mine. The Group exercises full control of these trusts and therefore the trusts are consolidated. The
trusts assets are recognized separately on the balance sheet as non-current assets at fair value. Interest
earned on funds invested in the environmental rehabilitation trusts is accrued on a time proportion basis and
recognized as interest income.

Appendix 2 Shell Oil Company and Royal Dutch Shell

History: (condenses and extracts from Wikipedia & other sources)
Shell Oil Company is the United States-based affiliate of Royal Dutch Shell, a multinational oil
company ("oil major") of Anglo Dutch origins, which is amongst the largest oil companies in the world.
Approximately 22,000 Shell employees are based in the U.S. The head office in the U.S. is in Houston,
Texas. Shell Oil Company, including its consolidated companies and its share in equity companies, is one
of Americas largest oil and natural gas producers, natural gas marketers, gasoline marketers and

31

petrochemical manufacturers. Shell operates in over 100 countries of differing political stability.
Commendations:- Shell Oil (the U.S. subsidiary) was one of the first companies to leave the Global
Climate Coalition, a lobby group which had opposed restrictions on greenhouse gases. [20] Shell is also a
founding member of the World Business Council for Sustainable Development, which Watts led as
Chairman in 2002/2003. Delivering the annual business lecture hosted by Greenpeace in 2005, Shell
chairman Lord Oxburgh said that we must act now on global warming or face a "disaster", and encouraged
governments to provide a regulatory framework to encourage the reduction of greenhouse gas emissions. [21]
Criticisms:- The U.S. Environmental Protection Agency (EPA) issued a Notice of Violation to Shell Oil
Company for its infringements of the Clean Air Act at a bulk petroleum terminal the company owned in
Bridgeport, Conn., until October 1, 1998. According to the report, Shell loaded a total of 28.4 million
gallons of gasoline onto barges without required vapor recovery equipment on seven days in 1997. The
result is 56 tons of uncontrolled volatile organic compound emissions to the atmosphere in an area of New
England. During the investigation in May 1999 EPA also found that Shell built an additional loading bay in
1995 without permit of the state Department of Environmental Protection. In 2008, a new lawsuit was
opened against Shell Oil Company in Houston, Texas for alleged Clean Air Act violation. Shells Deer
Park facility is the nations eighth-largest oil refinery and one of the worlds largest producers of
petrochemicals. The facility is also the second largest source of air pollution in Harris County, which ranks
among the worst in the nation in several measures of air quality. According to Sierra Club and Environment
Texas, analysis of Shells own reports to the Texas Commission on Environmental Quality, air pollutants
released at Deer Park since 2003 include 2 million pounds of sulfur dioxide, 1 million pounds of volatile
organic compounds (VOCs), 600,000 pounds of carbon monoxide, 250,000 pounds of nitrogen oxides, and
90,000 pounds of benzene and 60,000 pounds of 1,3-butadiene. The lawsuit seeks a court order requiring
Shell to end its Clean Air Act violations and pay additional penalties of up to $32,500 per day for each
violation of the Clean Air Act. [12]. Shell has been criticised for its businesses in Africa, notably in relation to
protests of the Ogoni in 1995.[17] In the 1990s, protesters criticized the company's environmental record,
particularly the possible pollution caused by the proposed disposal of the Brent Spar platform into the
North Sea. Shell has had a number of lawsuits in Nigeria. in 1996, the Center for Constitutional Rights
(CCR), Earth Rights International (ERI), Paul Hoffman of Schonbrun, DeSimone, Seplow, Harris &
Hoffman and other human rights attorneys have brought a series of cases to hold Shell accountable for
alleged human rights violations in Nigeria, including summary execution, crimes against humanity, torture,
inhumane treatment and arbitrary arrest and detention. The lawsuits are brought against Royal Dutch Shell
and Brian Anderson, the head of its Nigerian operation. The United States District Court for the Southern
District of New York set a trial date of June, 2009. On 9 June 2009 Shell agreed to an out of court
settlement of 15.5 million USD to victims' families. However, the company denied any liability for the
deaths, stating that the payment was part of a reconciliation process. In a statement given after the
settlement, Shell suggested that the money was being provided to the relatives of Saro-Wiwa and the eight
other victims, in order to cover the legal costs of the case and also in recognition of the events that took
place in the region.

Part B: Condenses and extracts from Shells Annual Report of 2008

RISK FACTORS
Rising climate change concerns could lead to additional regulatory measures that may result in project
delays and higher cost. The nature of Shells operations exposes us to a wide range of significant health,
safety, security and environment (HSSE) risks. Our investment in joint ventures and associated companies
may reduce our degree of control as well as our ability to identify and manage risks. Reliable information
technology (IT) systems are a critical enabler of our operations. Shells future performance depends on
successful development and deployment of new technologies. Skilled employees are essential to the
successful delivery of Shells strategy. An erosion of the business and operating environment in Nigeria

32

and other places where US has imposed sanctions could adversely impact our earnings and financial
position. Shell companies face the risk of litigation and disputes worldwide. Shell is currently under
investigation by the United States Securities and Exchange Commission and the United States Department
of Justice for violations of the US Foreign Corrupt Practices Act.
As well as measuring financial performance and efficiency, Shell uses various indicators to evaluate Shells
contribution to sustainable development. This Review discusses on pages 14 and 15 the priorities with
regards to staff and environmental data such as greenhouse gas emissions, use of flaring and energy use in
our businesses and assets. Safety remains a key topic for Shell and is measured by the number of injuries
and fatal accidents, as discussed on page 14. The main metric for assessing our performance in the area of
sustainable development is total recordable case frequency (TRCF). We were one of the first energy
companies to acknowledge the threat of climate change, to call for action, and to take action ourselves. In
1998, we set ourselves voluntary targets for reducing greenhouse gas (GHG) emissions from our
operations. In 2008, Shell-operated facilities emitted around 75 million tons of GHGs (measured on a CO 2equivalent basis), about 30% below the 1990 level. We produced fewer GHG emissions in 2008 than in
2007 mainly because we sold a number of refineries. We also provide products and advice to customers to
help them use energy more efficiently and reduce their emissions. In 2008, we continued to roll out the
Shell Fuel Save Energy Challenge, a driver awareness campaign to promote fuel saving driving habits and
the use of Fuel Economy formula fuels. We are investing to build a low-CO2 bio-fuels business based on
sustainable sources. We increased to 50% our stake in the Canadian company that operates an advanced
process using enzymes to make ethanol from straw. Our German partner, CHOREN, continued work on a
commercial demonstration plant to produce fuel from waste wood chips.
The Consolidated Financial Statements have been prepared in accordance with the provisions of the
Companies Act 1985, Article 4 of the International Accounting Standards (IAS) Regulation and with
International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to Shell,
there are no material differences with IFRS as issued by the International Accounting Standards Board
(IASB), therefore the Consolidated Financial Statements have been prepared in accordance with IFRS
PROVISIONS:- (extract from F20; Notes to financial statements (page 121)
Provisions are liabilities where the timing or amount of future expenditure is uncertain. Provisions are
recorded at the balance sheet date at the best estimate, using risk-adjusted future cash flows, of the present
value of the expenditure required to settle the present obligation. Non-current amounts are discounted using
the risk-free rate. Specific details for decommissioning and restoration costs and environmental remediation
are described below. The carrying amount of provisions is regularly reviewed and adjusted for new facts or
changes in law or technology.
Provisions for decommissioning and restoration costs, which are primarily in respect of hydrocarbon
production facilities, are based on current requirements, technology and price levels and the present value is
calculated using amounts discounted over the useful economic life of the assets. The liability is recognized
(together with a corresponding amount as part of the related property, plant and equipment) once an
obligation (whether legal or constructive) crystallizes in the period when a reasonable estimate can be
made. The effects of changes resulting from revisions to the timing or the amount of the original estimate
of the provision are reflected on a prospective basis, including by adjustment to the carrying amount of the
related property, plant and equipment.
Provisions for environmental remediation resulting from ongoing or past operations or events are
recognized in the period in which an obligation, legal or constructive, to a third party arises and the
amount can be reasonably estimated. Measurement of liabilities is based on current legal requirements and
existing technology. Recognition of any joint and several liability is based upon Shells best estimate of the
final pro rata share of the liability. Liabilities are determined independently of expected insurance
recoveries.

33

Appendix 3 PetroChina International Company Limited

Part A:
History (condenses and extracts from Wikipedia):- PetroChina Company Limited (simplified
Chinese: , traditional Chinese: ) (SEHK:
0857, SSE: 601857, NYSE: PTR) is a Chinese oil company and is the listed arm of state-owned China
National Petroleum Corporation (CNPC), China's biggest producer of oil.[1] Traded in Hong Kong and
New York, the mainland enterprise announced its plans to issue stock in Shanghai in November 2007,[1]
and following its debut on the Shanghai index, its market value tripled. PetroChina thus became the first
company with a trillion dollar market capitalization. [2][3] It is currently the largest company in the world
by market capitalization. Its social report indicates that its foreign oil and gas investments have been
extended to cover 27 projects related to oil and gas exploration, development, pipeline construction,
refining and chemicals, as well as refined products marketing in 14 countries or regions, including
Africa, Central Asia, South America, the Middle East and Asia Pacific. (Social responsibility report
2008: page 21). The firm employs 477 780 people in 2008 (page 96 of annual report). The company was
created in 1999 by China National Petroleum Corporation. (CNPC), a wholly State owned enterprise
(page 110 of annual report).
Commendations (extract)
The companys environment report states that in 2008 the firm has been laying the foundation. In the
preparation of the report it has followed international guidelines such as the GRI. In January 2008, the
Chairman of the Board and the responsible officers of subordinate units separately, signed the Safety and
Environment Accountability Pledge which defined the accountable body, the accountability goals and
accident-control indices, included the same in the annual performance evaluation of senior management
executives, and concretely assigned the responsibility of this annual safety and environmental
protection to the most senior managers and supervisors of each unit at all levels, and to pass on
employees in every post. (social responsibility report 2008 page 29)
Criticisms (extract)
Chinas overseas investment and aid focuses mostly on exploitation of oil fields and other
resources, processing and manufacturing industries and labor-intensive construction and
service areas in Africa and Southeast Asia. These industries are generally closely connected to
the local land, habitat and living conditions and projects without a reinforcing environmental
management can easily cause damage. China National Petroleum Corporation, parent
company of PetroChina, also promised it would stick to environmental requirements in its
overseas
projects.
http://globalcompactcritics.blogspot.com/2008/09/chinas-overseasenvironmental-problems.html
Part B: Extracts from the company websites and
petrochina.com.cn/Ptr/About_ PetroChina/ Contact_Us/picl.htm

annual

reports.

http://www.

In its core business it states that PetroChina is the largest oil and gas producer and distributor, playing a
dominant role in the oil and gas industry in China. It is one of the companies with higest sales revenue in
China. It is engaged in wide range of activities related to oil and natural gas, including: exploration,
development, production and marketing of crude oil and natural gas; refining, transportation, storage and
marketing of crude oil and oil products; production and marketing of primary petrochemical products,
derivative chemicals and other chemicals; transportation of natural gas, crude oil and refined oil, and

34

marketing of natural gas

On Emission Reduction In 2008, emission of all main pollutants met the standards. Total discharges of
chemical oxygen demand (COD) and oil in waste water and sulfur dioxide in waste gas were
significantly reduced. Reduction of pollutant emission was further called for. The Company set and
implemented the Regulations on Environmental Statistic Management and Regulations on Environmental
Monitoring Management, organized pollutant source investigations for the first time, perfected the
pollutant reduction monitoring, statistic and evaluation systems, and carried out evaluation on the
reduction of pollutant emission. The Company continued to implement the 10 Projects for Reduction of
Pollutant Emission and assigned indices to enterprises and key drains. The Company comprehensively
assessed the reduction of pollutant emission reduction of the enterprises, projects and management,
ensuring that the target could be reached as scheduled. (social responsibility report 2008 page 31).
On Climate Change, Climate change is significant global issue that has garnered a considerable amount
of global attention. PetroChina gives a lot of weight to the effects of greenhouse gases emission control
and reduction to alleviate climate change and we fully support Chinas National Climate Change
Program by adopting measures to reduce carbon emissions and increase carbon absorption in order to
help mitigate the effects of climate change. (1) Co-sponsored the International Forum on Climate Change
and Technology Innovation. In April, 2008, the Company co-sponsored the International Forum on
Climate Change and Technology Innovation. More than 600 representatives from over 10 international
organizations and non-governmental organizations from over 30 countries joined the forum. This is the
first large-scale and high-level international conference on climate change held in China, providing a
platform for enterprises and academia both at home and abroad to share the latest technology and
practical experience in dealing with climate change. Mr. Wang Yilin, Director of the Company,
participated in the Forum on behalf of PetroChina, and introduced the efforts made by the Company to
control greenhouse gases, including energy conservation and pollutants reduction, technology innovation,
and developing low carbon and new energy sources, etc. (2) Implemented the project of carbon
sequestration via forest plantation
The financial data set out below is extracted from the audited financial statements of the Group prepared
under IFRS (page 25 of 2008 annual report). 2. The financial data set out below is extracted from the
audited financial statements of the Group prepared under CAS Page 37). 1. Material litigation and
arbitration events. 17. Statutory Common Welfare Fund (page 78). If the conditions for provisions are
not met, the expenditures for decommissioning removal and site clearing will be expensed in the income
statement when occurred ( Page 119).