Environmental Management Accounting Procedures and Principles

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Environmental Management Accounting Procedures and Principles The report includes checklists for each environmental medium and for calculation of investments, making this a helpful tool for accountants, controllers and environmental managers, and facilitating international standardization. The report has the following structure: • Chapter 2 explains the term EMA - Environmental Management Accounting, its fields of application and linkages to other information systems. • Chapter 3 discusses the terms and range of environmental costs. • Chapter 4 explains the scheme for annual corporate environmental expenditures, which comprises the transition of the environmental part of the data from financial accounting and cost calculation. • Chapter 5 deals with information available on the company level, traces environmental aspects in the balance sheet and where to find them in the profit and loss accounts. It explains the structure of material flow balances and where to get the necessary data from stock management and production planning systems. The last issues dealt with are consistency and consolidation of data. • Chapter 6 goes one step further into the organization and highlights the principles and terminology of cost accounting, process flow charts, overhead cost attribution, activity based costing and flow cost accounting. • Chapter 7 describes environmental performance indicators as an application example of EMA. The chapter is based on the outline of ISO 14031, the worldwide standard on environmental performance evaluation, and specifically addresses the problem of finding meaningful denominators for indicators. • Chapter 8 describes another important application field, using EMA data for the calculation of investment decisions and cost savings. The annex provides checklists for environmental expenditures and earnings by environmental media and conversion factors for the material flow balance. A list of references allows more detailed study of the subject. 2. WHAT IS EMA – ENVIRONMENTAL MANAGEMENT ACCOUNTING ? Accounting is done in monetary and physical units. 2.1. Conventional monetary accounting Conventional corporate monetary accounting comprises: -4-
Environmental Management Accounting Procedures and Principles • Financial accounting (bookkeeping, balancing, consolidation, auditing of the financial statement and reporting); • Cost accounting (also called management accounting); • Corporate statistics and indicators (past oriented); • Budgeting (future oriented); • Investment appraisal (future oriented). Bookkeeping and cost accounting provide the data basis for the other instruments. They can and have also been used to trace expenditures, costs, indicators, investments and savings, due to measures for environmental protection, but not systematically. Corporate application of financial accounting comprises mainly internal calculation tools, but is also used for external reporting to financial authorities, shareholders and the company register. Statistical agencies make use of this information, but this national application is beyond the scope of financial accounting. Cost accounting constitutes the central tool for internal management decisions such as product pricing and is not regulated by law. This internal information system deals with the following questions: What are the production costs for different products and what should the selling price of these products be? For determining the inventories of finished goods and workin-progress for the balance sheet, cost accounting also needs to be done for financial reporting. The main stakeholders in cost accounting are members of different management units (e.g., executive, site, product and production managers). For environmental management, the related costs (mostly hidden in general overhead costs) may be traced and allocated to products and cost centres. The appropriate approach will therefore be described in chapter 6. Cost accounting is based on data obtained from financial accounting but sometimes uses different values, e.g., repurchasing values for depreciations, average prices for material input or imputed interest. The latter are assessed differently due to the system of transition from expenditure to costs. Most small and medium-sized companies (SMEs) use the same figures with only minor adjustments. Alas, many companies do not have a separate cost-accounting system, but calculate on the basis of the financial accounting data from bookkeeping instead. Financial accounting, on the contrary, is mainly designed to satisfy the information needs of external shareholders and financial authorities, both of whom have a strong economic interest in standardized comparable data and in receiving true and fair information about the actual economic performance of the company. Therefore, financial accounting and reporting are being dealt with in national laws and international accounting standards. They regulate how specific items should be treated, specifying, e.g., whether environmental investments should be capitalized or expensed, under which circumstances provisions may be made for future treatment liabilities, or when contingent liabilities should be disclosed. Imputed (calculatory) approaches as used in cost accounting are not permissible. All costs must therefore be recalculated to show actual expenditure and prices. -5-
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