Environmental Management Accounting Procedures and Principles

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Environmental Management Accounting Procedures and Principles 4.1.1. Depreciation for related equipment The most obvious assets in this section are refuse compactors, collection containers and vehicles, waste heat recovery systems, air pollution filters, noise abatement investments, sewage treatment plants, etc. But also watch out for more hidden equipment. Depending on the type of business and the state of environmental management, these plants may already be assigned to separate cost centres. The land/soil category may also include such areas as landscape protection, recultivation and repair of contaminated sites. An asset (e.g., investment) is recognized in the balance sheet if future economic cost savings are likely and the value can be measured reliably. Investments are capitalized and accounted for by depreciation in the profit and loss account, if they bear a future benefit, otherwise they are immediately expensed. As a rule, expenses which do not lead to future economic cost savings should be expensed in the year in which they occur. End-of-pipe technologies qualify as assets as they are required by regulatory authorities to continue with production. Their value can easily be measured as they are typically stand-alone treatment facilities. The FEE, the European accountancy body, recommends that costs incurred to prevent future environmental impact should be capitalized whereas clean-up costs for past environmental damage should be expensed as they bear no future benefit. Likewise, the treatment costs of environmental contamination should generally be expensed. Capitalization of environmental costs is only allowed if future economic cost savings, increased efficiency or improved safety may be expected to result from present expenses. In any type of activity and especially in investments which, in addition to their primary purpose (usually an economic one), also have an environmental aspect (and vice versa), there are substantial problems relating to the question of accrual and deferral, e.g., in connection with measures to improve workplace safety, security or infrastructure. A clear allocation is only possible for investments in end-of-pipe technologies which, however, are unable to address an emission problem fully but usually only transpose it to another environmental medium (e.g., from air to soil). Rationalization investments which are implemented due to the advent of a new technology will, as a rule, lead to both a reduction of costs and emissions. The problem in evaluating an end-of-pipe investment from an environmental point of view is due to the fact that there is no such thing as an environment protection investment proper as such a measure does not contribute to a sustainable solution of an ecological problem but merely helps to fight the symptoms. However, a separate assessment of an environment protection investment, e.g., a filter technology in the category of fixed assets, is usually only possible if it is an end-of-pipe investment. Investments in environmental protection and pollution prevention measures are calculated in terms of annual depreciation, based on an assessment of the share of the investment attributable to environmental protection. Investment is 100 per cent environmental in the case of end-of-pipe technologies. Investments which are incurred solely for the purpose of emission treatment are typically end-of-pipe technologies, i.e., devices which are installed for cleaning purposes after the production processes. Filters, waste collection equipment and wastewater -20-
Environmental Management Accounting Procedures and Principles treatment plants are typical end-of-pipe technologies which help to concentrate or hold back toxic substances. However, they usually do not solve the problem at the source, but rather prevent uncontrolled release in exchange for controlled release. The environmental manager will be the one to define the waste and emission treatment facilities of the company whereas the accountant may subsequently determine their purchase value and annual depreciation. As tax laws are not always equally relevant in all countries in determining how accounting profits (in financial reporting) are defined and determined, the depreciation charged in financial reports might be irrelevant to the determination of taxable profits. In the United Kingdom, the depreciation charged in financial reports is added back to the accounting profit stated in those reports, then an alternative calculation (termed “capital allowance”) is done, based on standard Inland Revenue rules, and deducted in order to compute taxable profits. This means that companies can (and should) charge depreciation in their accounts at the amount that they believe really reflects the useful lives of their assets, undistorted by any tax consideration. When calculating costs instead of expenditure, the assessment of depreciation may be based on repurchasing values. If this is common practice in the company, financing costs may also be quoted. 4.1.2. Maintenance and operating material and services Once the relevant environmental investments and equipment have been defined, the annual costs for related operating materials and equipment, maintenance, inspection etc. can be determined and attributed to this section. 4.1.3. Related personnel Time spent handling waste and emission related investments is calculated here. Time spent for inefficient production, generating waste, and time spent for general environmental management activities should be quoted elsewhere. This section mainly applies to the personnel of waste collection departments, and the people in charge of wastewater and air emission control, dealing directly with the identified waste and emissions streams and equipment. 4.1.4. Fees, taxes, charges All disposal, sewer access and effluent fees, but also costs for specific licenses, or environmental taxes, if applicable, should be quoted here. In several countries, eco-taxes are levied on energy and water input, as well as packaging and sometimes specific hazardous chemicals. On the output side, taxes and charges can be levied on waste volumes, wastewater and air emissions. -21-
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