GREEN ACCOUNTING - A NEW CHALLENGE FOR ACCOUNTING

SYSTEM AND RESPONSIBILITY TOWARDS ENVIRONMENT

“Earth provides enough to satisfy every man's needs, but not every man's greed.‖ ― Mahatma Gandhi

Sunitha.S

Assistant Professor,

New Horizon College,

Kasturinagar

Bangalore-43

sunithaparamesh5@gmail.com

Abstract

Green accounting is on an expansion path. With increasing social focus on the environment,

accounting fills an expectation role, to measure environmental performance. The status of

environmental awareness provides a dynamic for business reporting its environmental

performance. The business firm’s strategy includes responding to capital and operating costs of

pollution control equipment. This is caused by increasing public concerns over environmental

issues. Green accounting is a management tool for the better consideration of environmental costs.

Many organizations are uncertain about the outcomes of Green accounting and are therefore

reluctant to implement such a tool. In order to help organizations to evaluate the need of Green

accounting this research paper aims to identify real advantages of implementation of Green

accounting within an economic entity. Further through its external reporting process

accountability is extended to stakeholder's on the company's financial performance (which has

been subject to an auditing function), enabling them to make economically useful decisions. The

appearance of environmental problems impacts every area of science globally, as a result,

accounting has to answer these challenges as well, one way of which is Green accounting. Recent

years have witnessed rising concern for environmental degradation, which is taking place mainly

in the form of pollution of various types, viz. air, water, sound, soil erosion, deforestation, etc.

Even though Indian corporate comply with the rules and regulations with regard to environmental

protection, till now no clear cut policies are framed and formulated at the National, State or even

at the company level, for ensuring the level of compliance to environmental norms. This study was

intended to find out the major environmental parameters reported by Indian Corporate as part of

their Environmental reporting practice. The study also focuses on the practice and voluntary

environmental reporting with regard to the environmental parameters identified. The main aim of

the study is to explore the roots and the tendencies of the development of Green accounting

Responsibility towards environment has become one of the most crucial areas of social

responsibility.

Keywords: Green accounting, environmental protection, Social responsibility, environmental

performance, environmental accounting, environmental Reporting.

-1- “Look deep into nature, and then you will understand everything better.” —Albert Einstein

Introduction

In the last few years, there has been a growing awareness of the need to discover the art of living in

harmony with nature. It is also realized that the environment is not a permanent asset. Rapid

industrialization, in spite of its positive effect on economic development has very seriously

threatened the world‘s natural environmental balance. There is a growing pressure from

environmentalists, government, society, customers, employees, and competitors on business firms

to be environmentally accountable. Proper balancing of economic development and environment

protection is gradually being recognized by all concerned. Green accounting is considered one of

the important management systems to enable improvement of economic and environmental

performance of a business firm. Countries like Germany, U K, Japan, USA, and Canada have

issued guidelines for preparation of environmental accounting.

The wind of change caused by sustainability issues is palpable in every aspect of the world. It is

hard for a person to watch television or read newspapers without being informed or acknowledged

with information that related with environmental issues or world sustainability. Align with this

phenomenon, accounting field also moves to the new direction by trying to explore and measures

the contribution of nature or environment in business process that well known as Green or

Environmental Accounting.

The concept of Green Accounting is raising a glimmer interest not only within the academic but

also from the government, business society, social and environmental activist

(Niemann&Tichkiewitch, 2009). However, the implementation of this concept in India still

consider as a difficult concept due to the lack of comprehensive information for the stakeholders

that raising the concern of the implementation effects and the additional cost expenditure that

recognized as a unnecessary cost in the perspective of conventional accounting (Nurhayati, Brown,

& Tower, 2006).. Study by Prasad (2009) in Indian context has thrown some light on availability

of environmental information for decision making. In this background this study makes an attempt

to explore the extent of Green accounting system practiced by Corporate in India. The availability

of this information can help to further strengthen the systems to meet the challenges of improving

environmental and economic performance of business firms.

Green accounting is an inclusive field of accounting. It provides reports for both internal use,

generating environmental information to help make management decisions on pricing, controlling

overhead and capital budgeting, and external use, disclosing environmental information of interest

to the public and to the financial community. While Indian companies are complying with the

environmental norms, clear cut policies are yet to be introduced for ensuring the level of

compliance. This study intended to find out the major environmental parameters reported by

Indian corporate as part of their environmental reporting practice.

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“The good man is the friend of all living things.” —― Mahatma Gandhi

Review of Literature

Prasad (2009), studied corporate environmental sensitivity in selected Indian companies. The

objective of this study has been 1) To demonstrate the present practice of environmental

accounting and reporting among Indian companies, 2) To establish environmental sensitivity of

Indian company‘s visa-a-vis less environmental sensitivity of companies. 3) To analyze to what

extent environmental sensitivity influence adoption of environmental accounting and reporting

among Indian companies and 4) To provide a platform for further research and to stimulate Indian

companies to adopt environmental accounting and reporting. The study was undertaken with two

hypotheses namely H1 firms in environmentally sensitive industries are more likely to introduce

environmental accounting procedures than firms in less environmentally sensitive industries and 2.

Firms in environmentally sensitive industries are more likely to externally disclose environmental

information than firms in less environmentally sensitive industries. The data was collected through

a mailed questionnaire to the Chief of Accounting and Finance Departments of 130 Indian

companies listed on BSE & NSE. The final sample included 59 firms identified as being involved

in environmentally sensitive industries and 32 in less sensitive industries. In the conclusion, he has

argued that ‗environmentally sensitive‘ firms are more likely to develop environment accounting

procedure is only supported for activities that are associated with significant environment related

issues for the specific industries. Where issues are of general nature it appears that these firms are

no more likely to develop such accounting processes. Hence the study provides no conclusive

evidence that the environmental sensitivity of the firm‘s operations will necessarily result in

increased likelihood of the development environment accounting procedures of general

environmental issues. Such a result suggests that observations as to what motivates the external

reporting process may not hold true for the development of internal management practices,

indicating the need for further research as to what motivates firms to develop environmental

accounting, auditing and reporting.

Heba Y M &Yousuf (2010) examined the concepts of environmental accounting by exploring the

techniques to develop the environmental reporting that enables the government to utilize and

making businesses more responsible for their externalities. Moreover, as the consideration for the

environmental accounting increases, there is a parallel increase in measuring the environment

performance (Yajhou and Doreweiler, 2004). In this study the integration of environmental and

business policy has been considered to a great extent. The author reveals that the public‘s

consideration for the environmental accounting and government led incentive based regulation are

the main reason for the study. In upcoming years the companies will be facing challenges with

respect to establishing and implementing business strategies that are concerned with environmental

accounting.

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The work of Lehman (2011) establishes the art of interpretation to management accounting, to be a

way to think about the natural world. The main objective of Interpretive Accounting Research

(IAR) has been determined to be influenced by the desire to understand how accounting disciplines

like management accounting are related to existing issues like global warming, carbon emissions

and sustainability considerations. The issue for management accountants is to keep in mind the

need to broaden and conceptualize how we theorize cultural and environmental dilemmas that

confront the discipline. The art of interpretation with respect to accounting research is a technique

that highlights responsibilities to our shareholders and the natural world. The report of

International Federation of Accounts (IFA) (2005) on EMA evaluates the physical and monetary

accounting process of EMA. The association between material balances, material flow accounting

and physical environment performance indicators (EWPIs) are detailed in the physical accounting

section. Over the past few years, sustainability was incorporated with policy statements of various

organizations (Jasch and Stasiskiene, 2005).

Nasir Zameer Qureshi et.al(2012 )in their research paper, environmental accounting and reporting:

an essential component of business strategy, describes the environmental component of the

business strategy, producing the required performance reports and recognizing the multiple skills

required to measure, compile and analyze the requisite data. Special emphasis of the research is on

generation of reports and their standards, for the range of business and regulatory purposes. They

also identified the major obstacles for environmental accounting and reporting and concluded that

for sustainable development of country, a well-defined environmental policy as well as proper

follow up and proper accounting procedure is a must. Unless common people of India are not

made aware about environmental damages and safety, development of accounting in this regard is

really becomes difficult.

Research Problem

The existence of environmental management accounting is a first step to improve environmental

as well as economic performance. Sustainability Reporting by leading Indian firms indicate their

commitment for improvement of environmental performance. In light of this information it is

likely that business firms have evolved their accounting system to provide information for

environmental related decision making. The Environmental Management Accounting system,

being designed for effective internal management of environmental and economic performances

may be existing in organizations but may not be formally documented and/ or reported as it is not

mandatory or felt necessary by organizations. The industries should focus and set aside a part of

their funds for environmental protection and ecological balance. Thus business organizations are

expected to account for the use of substances which may damage the Environment. Green

accounting is in preliminary stage in India. Indian Corporate are now introducing a separate a firm

environmental policy such as taking steps for pollution control, comply with the related rules and

regulations, mention adequate details of environmental aspects in the annual statements.

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There are several challenges of Green accounting and reporting such as Green accounting method,

social values in applicable assumptions, economic value and lack of reliable industrial data.

Therefore, a need has been felt to study the environmental management accounting system among

Indian companies and suggest improvement if any.

Objectives of this paper

The key objectives of this paper is to know the meaning and importance of Green accounting, and

at the same time, understand the reasons behind the opposition to it, especially in the developing

countries. The paper also examines the steps that could be adopted to incorporate Green

Accounting in companies.

Methodology of study

The study is based on the secondary data collected from sources like websites, trade publications,

books, and articles in newspapers, magazines, and journals.

Meaning and Need of Green Accounting:

A new system of sustainable accounting, known as Green Accounting, has emerged.

“It permits the computation of income for a nation by taking into account the economic

damage and depletion in the natural resource base of an economy.”

Green accounting is a type of accounting that attempts to factor environmental costs into the

financial results of operations. It has been argued that gross domestic product ignores the

environment and therefore policymakers need a revised model that incorporates green accounting.

The major purpose of green accounting is to help businesses understand and manage the potential

quid pro quo between traditional economics goals and environmental goals. It also increases the

important information available for analyzing policy issues, especially when those vital pieces of

information are often overlooked. Green accounting is said to only ensure weak sustainability,

which should be considered as a step toward ultimately a strong sustainability.

The term was first brought into common usage by economist and Professor Peter Wood in the

1980s.

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Objectives of Green Accounting

1. Segregation and elaboration of all environment related flows and stock of traditional

accounts: The segregation of all flows and stocks of assets related to environment permits the

estimates of the total expenditure for the protection of the environment. A further objective of this

segregation is to identify that part of gross domestic product that reflects the costs necessary to

compensate for the negative impacts of economic growth, that is, the defensive expenditures.

2Linkage of physical resources accounts with monetary environmental accounts: Physical

resources accounts cover the total stock or reserves of natural resources and changes. There in,

even if those resources are not affected by the economic system. Thus natural resources accounts

provide the physical counterpart of the monetary stock and flow accounts of System of

Environmental Economic Accounting. (SEEA)

3. Assessment of environment costs and benefits: The SEEA expands and complements the

SNA with regard to costing:

a) The use (depletion) of natural resources in production and final demand.

b) The changes in environmental quality, resulting from pollution and other impacts of

production, consumption and natural events, on the one hand, and environmental protection,

on the other.

4. Accounting for the maintenance of tangible wealth:

The SEEA extends the concepts of capital to cover not only human-made but also natural capital.

Capital formation is correspondingly changed into a broader concept of capital accumulation

allowing for the use or consumption and discovery of environmental assets.

5. Elaboration and Measurement of Indicators of Environmentally Adjusted Product and

Income: The consideration of the costs of depletion of natural resources and changes in

environmental quality permits the calculation of modified macro-economic aggregates, notably an

environmentally adjusted net domestic product. (NDP)

Need of Environmental Accounting at Corporate Level

It helps to know whether corporation has been discharging its responsibilities towards

environment or not. Basically, a company has to fulfill following environmental responsibilities.

Meeting regulatory requirements or exceeding that expectation.

Cleaning up pollution that already exists and properly disposing of hazardous material.

Disclosing to the investors both potential & current, the amount and nature of the

preventative

Measures taken by the management.

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Operating in a way that those environmental damages do not occur.

Promoting a company having wide environmental attitude.

Control over operational & material efficiency gains driven by the competitive global

market.

Control over increases in costs for raw materials, waste management and potential

liability.

Scope of Green Accounting

The scope of Green Accounting is very wide. It includes corporate level, national & international

level. The following aspects are included in.

1) From Internal Point of view investment made by the corporate sector for minimization of

losses to environment. It includes investment made into the environment saving equipment

devices. This type of accounting is easy as money measurement is possible

.

2) From External point of view all types of loss are indirectly due to business operation

activities. It mainly includes:

a) Degradation and destruction like soil erosion, loss of bio diversity, air pollution, water

pollution, voice pollution, problem of solid waste, coastal and marine pollution.

b) Depletion of nonrenewable natural resources i.e. loss emerged due to over exploitation

of non renewable natural resources like minerals, water, gas, etc.

3) Deforestation and Land uses. This type of accounting is not easy, as losses to environment cannot be measured exactly

in monetary value. Further, it is very hard to decide that how much loss was occurred

to the environment due to a particular industry. For this purpose approximate idea can be

given or other measurement of loss like quantity of non-renewable natural sources used.

Green accounting involves estimation of environmental expenditures/cost, capitalization of those

environmental expenditures, and identification of environmental liabilities and measurement of

environmental liabilities.

Environmental expenditures/costs:

These are expenses or costs related to environmental measures including production-related costs

and product research and development expenditures which are incurred primarily for ensuring

protection of environment. Total environmental expenditures can be classified into six categories

such as capital investment, operating costs, research and development cost, environment

administration and planning, expenditures for remedial measures and recovery measures.

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Capitalization of Environmental expenditures: Capitalization of environmental expenditure is justifiable if the cost extends the life, increase the

capacity or improve the efficiency or safety of the property owned by the company, the costs

mitigate or prevent environmental contamination, the costs improve the property/resource in

comparison to its condition at the time of acquisition, the costs are incurred in connection with

preparing the property for sale.

Environmental liabilities:

Obligation to pay future expenditure to remedy environmental damage that has occurred due to

past events, activities or transactions or to compensate a third party that has suffered from damage.

It may even include a contingent environmental liability that depends on occurrence or non-

occurrence of one or more future uncertain events or to compensate a third party that has suffered

from such damage.

Measurement of Environment liabilities:

Environmental liability may be a quantifiable one or non-quantifiable one. If it a quantifiable one –

that is if we can measure its value accurately, give it in the Balance sheet otherwise give a footnote

explaining the nature of such liability.

GREEN ACCOUNTING AND REPORTING PRACTICES IN INDIA

Green Accounting and reporting in India is in developing stage both at the corporate level and at

the national level. The entire process of Green Accounting encompasses three distinctive phases

Physical Accounting

Determines the state of the resources types and extent in spatial and temporal terms.

Monetary Valuation

Valuation of resources - tangible and intangible in terms of its monetary aspects

Integration with Economic Accounting

Integration of money value of environmental resources with that of other resources

Practice – In terms of economics

It is a measure of sustainable income level that can be secured without decreasing the stock of

natural assets. This requires adjustment of the System of National Accounts (SNA) in terms of

stock of natural assets. In SNA, allowance is made for capital consumption or man-made capital

while calculating Net Domestic Product (NDP).

Net Domestic Product (NDP) = GDP- Depreciation.

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SNA has three main defects:

(1) It neglects the depletion of natural capital such as farmland, forests, fishing stock, minerals, etc.

(2) Environmental degradation mainly from pollution,

(3) Defensive expenditures which the society incurs in facing the external effects of environmental

degradation.

To overcome these drawbacks of SNA, the Statistical Division of UN has developed the

System of Environmental Economic Accounting (SEEA). The SEEA focuses on:

Accounting for the depletion of scarce natural resources, and

Measuring the costs of environmental degradation and its prevention.

Thus the computation of Green NDP (or EDP) has been replaced by a measure of national product

which includes the economic cost of degrading natural resources which are required to produce

goods and services directly and indirectly.

SNA defines Net Domestic Product as:

Environmental responsibility is a potent issue among businesses in this modern age. It has become

necessary for corporation to formulate methods of promoting green causes for the present and the

future. Green accounting helps promote a sustainable future for businesses as it brings green public

procurement and green research and development into the big picture. Penalties for polluters and

incentives (such as tax breaks, polluting permits, etc.) are also a crucial part of this type of

accounting. The System of National Accounts (SNA) defines Net Domestic Product (NDP) as:

NDP = Net Exports + Final Consumption (C) + Net Investment (I)

Thus, the NDP is newly defined as Green NDP, or also known as EDP. The green accounting

formula is

NDP = Net exports (X – M) + Final consumption (C) + Net capital accumulation (I).

To arrive at Green NDP (Or EDP), if net capital accumulation (I) is replaced by net capital

accumulation of produced and non-produced economic assets minus net accumulation of non-

produced natural assets, the identity becomes

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EDP = (X-M) + С + NAp. ec + (NAnp.ec-NAnp.n)

Where

EDP = Environmental domestic product.

(X-M) = Exports-imports

С = Capital accumulation

Nap.ec = Net accumulation of produced economic assets.

NAnp.ec = Net accumulation of non-produced economic assets

NAnp.n = Net accumulation of non-produced natural assets.

Preparation of SEEA or Green Accounting:

Table 1.1 shows the basic structure of SEEA or Green Accounting in the form of a matrix. It

also explains the derivation of SNA aggregates in columns and rows from 1 to 4.

The explanation of columns of Table 1.1 is given below:

Column (1): Production side covering output, intermediate consumption, consumption of fixed capital (CFC),

net domestic product (NDP) and use of non-produced natural assets in production.

Column (2): Rest of the world (ROW) account includes exports minus imports (X-M)

Column (3): Final consumption (C).

Column (4): Produced assets as a part of economic assets that have come into existence as output from

processes. This includes not only tangible fixed assets but also intangible fixed assets such as

mineral exploration. It includes net accumulation of produced assets and other changes in the

volume of produced assets i.e., gross capital formation.

Column (5): Non-produced economic assets are defined as non-financial assets that have come into existence in

ways other than the process of production. This includes tangible non-produced assets like land

and sub-soil assets. Intangible non-produced assets like patented entities, leases, and transferable

contract

Column (6): Records the effects of economic activities on non-produced natural assets such as air, water and

virgin forests that are not included as economic assets in the stock of natural assets.

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The explanation of rows of Table 1.1 is given below:

Row (1): It records the entries of opening stock of produced assets being the value of stocks of man-made

capital produced and the value of stocks of natural resources, such as oil, gas and cultivated forests

etc.

Row (2): It records total domestic production and the value of imports.

Row (3): Economic uses including elements of intermediate consumption, exports, final consumption

expenditure and gross capital formation.

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Row

Column

Economic activities Economic assets Environment

1.Production

2. Rest of world

(row)

3. Final

consumption

4. Produced

Assets

5. Non-Produced

Economic Assets

6. Non-Produced

Natural Assets

1.Opening Stock

Of Assets

- - - Opening stock of

produced

economic assets

Opening stock of

non -produced

economic assets

-

2.Supply Production Imports(M) - - - --

3.Economic uses Intermediate

consumption

Exports(X) Final

consumption

(C)

Gross capital - -

4.Consumption of

fixed capital (CFC)

CFC - - (-)CFC - -

5.NDP NDP Net exports

(X-M)

Final

consumption

( C)

Net capital

- -

6.Use of non-

produced natural

assets

Use of non-

produced

natural

assets in

production

- - Accumulation(I) (-)Use of non -

produced

economic natural

assets

(-) Degradation of

non economic

natural assets

7.Accumulation of

non-produced

natural assets

- - - - Change in stock

of non-produced

economic assets

(-) Reduction in

natural assets

other than

economic assets

8.Environmentally

adjusted

aggregated in

monetary

environmental

accounting

EDP Net Exports

(X-M)

Final

Consumption

( C)

Net

Accumulation of

Produced Assets

(Nap.ec)

Net Accumulation

of Non-Produced

Economic Assets

(NAnp.ec)

(-) Net

Accumulation of

Non Produced

Natural Assets

(NAnp.n)

Row (4): Consumption of fixed capital (CFC) also appears as a negative item. Therefore, Net Investment (I)

= Gross Investment (Ig) -CFC.

Row (5): Net domestic product (NDP) represents the elements that define the national income accounts

identity between net domestic product (NDP) and expenditure categories:

Net Domestic Product (NDP) = Net exports (X-M) + Final consumption expenditure (C) + Net

capital accumulation or Investment (I)

Row (6): It includes the elements for the use of non-produced natural assets by depletion of economic

natural assets and degradation of non-economic natural assets.

Row (7): It relates to accumulation of non-produced natural assets which include change in stock of

economic assets and reduction on natural assets relating to environment.

Row (8): It relates to environmentally adjusted aggregates in monetary environmental accounting. These

macro-economic aggregates of EDP = Net exports (X—M) + Final consumption (C) + Net

accumulation of produced economic assets (NAp.ec) + Net accumulation of non-produced

economic assets (NAnp.ec)-Net accumulation of non-produced natural assets (NAnp.n)

Approaches to environmental accounting

Environmental Management Accounting (EMA) It means integration of business strategy with sustainability strategy by accounting for financial

and non-financial information of a body corporation. EMA is defined as the generation, analysis

and use of financial and relevant non-financial information, to support the management. EMA

integrates corporate environmental and business policies, and thereby provides guidance on

building a sustainable business. ‗EMA means the management of environmental and economic

performance through the development and implementation of appropriate environment related

accounting systems and practices. While this may include reporting and auditing in some

companies, EMA typically involves life-cycle costing, benefits assessment, and strategic planning

for environmental management‘ (Mohamed, 2002).

Environmental Cost Accounting (ECA) In ECA, costs are accounted for by their specific causes. ECA directly places a cost on every

environmental aspect, and determines the cost of all types of related action. Environmental actions

include pollution prevention, environmental design and environmental management.

Environmental costs comprise both internal and external costs and relate to all costs relevant to

environmental damage and protection.

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Environmental Financial Accounting (EFA) Environmental financial accounting (EFA), collects, analyses, records and reports data about

financial events. EFA data involves environmental cost. Environmental information of business is

shown in financial statements by means of EFA. It mostly focuses on reporting environmental

liability costs and other major environmental costs. It is used to provide information needed by

external stakeholders on a company‘s financial performance. This type of accounting allows

companies to prepare financial reports for investors, lenders and other interested parties. Various

benefits are derived from different aspects of accounting (Anuradha, 2014).

Corporate Environmental Accounting (CEA) This can be closely linked to the development and use of an environmental management system or

producing a corporate sustainability report. Environmental accounting can be defined as the

identification, collection, estimation, analysis, internal reporting and the use of materials and

energy flow information, environmental cost information, and other cost information for both

conventional and environmental decision making within an organisation (Varghese). CEA is an

approach to control and improve an organisation‘s cost structure and environmental performance.

It can be further subdivided into environmental management accounting and environmental

financial accounting (Anuradha, 2014). Corporate environmental disclosure must be taken as a part

of CEA and it should be defined as a channel to disseminate environmental information to

stakeholders

Natural Resource Accounting and Ecological Accounting

Natural resource accounting means incorporation of environmental aspects into the system of

national accounts (SNA). It means giving proper weight to environmental concerns in calculating

GNP & GDP. The focal point of SNA is natural resources and their exploitation. ‗In many cases,

the term ecological accounting is used to refer to the preparation of accounts according to physical

data only. In addition, ecological accounting is the type of environmental accounting (a dedicated

type for natural resource accounting at local administration level)‘ (Mohamed, 2002). The main

purpose of environmental reporting is to transparently provide information about the corporate

environmental impacts and efforts done by companies to reduce harmful effects (Gray, Owen, and

Adams, 1996). Environmental accounting means reporting of environment specific cost such as

liability cost and waste disposal costs. It is accounting for any costs and benefits that arise from

change to a firm‘s products and processes where the change also involves a change in

environmental impact (Gupta and Mehra, 2002)

Theoretical Background of Environmental Management Accounting (EMA)

The fact that environment costs are not fully recorded often leads to distorted calculations for

improvement options. Environment protection projects aiming to prevent emissions and waste at

the source (avoidance option) by better utilizing raw and auxiliary materials and requiring less

(harmful) operating materials are not recognized and implemented. The economic and ecological

advantages to be derived from such measures are not used. The people in charge are often not

aware that producing waste and emissions is usually more expensive than disposing of them. There

are also other reasons in interest in the Environmental Accounting like: If existing accounting

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systems does not provide financial data on the environmental performance of organizations that

will help non-complying organizations/entities to pollute environment and spoil resource and yet

appear more economic efficient than other which incur costs to protect the environment. Many of

the environmental activities are of quantitative and accordingly of financial nature and have a

major effect on organizations costs, assets and liabilities. Environmental risks may result in huge

environmental liabilities and subsequently the organization/entity may be obliged to outlay large

payments which may affect seriously the liquidity and the financial position of the organization.

Environment Accounting (EA) being in developing stage, the language used for environmental

accounting is not standardized. Even within a particular subset of EA, such as EMA, terminology

differs among organizations and countries. For example, EMA has been variously called EA,

EMA, Environmental Cost Accounting (ECA), Full Cost Accounting (FCA), Total Cost

Assessment (TCA) ,Green Accounting (GA) etc. Thus, in discussing any type of environmental

related accounting within an organization or elsewhere, it is important to clarify the definition and

languages being used.‖ Environmental Management Accounting has no single, universally

accepted definition. According to IFAC‘s Statement Management Accounting Concepts, ―EMA is

the management of environmental and economic performance through the development and

implementation of appropriate environment-related accounting systems and practices. While this

may include reporting and auditing in some companies, environmental management accounting

typically involves life-cycle costing, full-cost accounting, benefits assessment, and strategic

planning for environmental management.‖ A complementary definition is given by the United

Nations Expert Working Group on EMA, which more distinctively highlights both the physical

and monetary sides of EMA. This definition was developed by international consensus of the

group members, representing 30+ nations. According to the UN group EMA is broadly defined to

be the identification, collection, analysis and use of two types of information for internal decision

making

• Physical information on the use, flows and destinies of energy, water and materials (including

wastes)

• Monetary information on environment-related costs, earnings and savings.

At the Micro (organization) level, EA takes place in the context of both management accounting

(assessment of an organization‘s expenditures on pollution control equipment; revenues from

recycled materials; annual monetary savings from new energy-efficient equipment) and financial

accounting (evaluation and reporting of the organization‘s current environment-related liabilities).

Application fields for the use of EMA data are assessment of annual environmental costs /

expenditure, product pricing, budgeting, investment appraisal, calculating investment options,

calculating costs, savings and benefits of environmental projects, design and implementation of

environmental management systems, environmental performance evaluation, indicators and

Benchmarking Setting quantified performance targets, cleaner production, pollution prevention,

supply chain management and design for environment projects, external disclosure of

environmental expenditures, investments and liabilities, external environmental or sustainability

reporting, and other reporting of environmental data to statistical agencies and local authorities.

EMA was defined in the second and third meeting of the expert working group on ―improving the

role of Government in the promotion of EMA‖ of the United Nations Division for Sustainable

Development to cover the issues in the two middle columns of the table namely – MEMA and

PEMA. Figure 1 shows the framework of EMA developed by the said group.

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FIGURE 1.2: FIGURE SHOWING FRAMEWORK OF ENVIRONMENTAL MANAGEMENT ACCOUNTING

Source: United Nation Division for Sustainable Development, (2001) Environmental Management Accounting Procedures and

Principles, United Nation Publication, New York. Internet http://www.un.org/esa/sustdev/publications/proceduresandprincipal

Physical Environment Management Accounting (PEMA) is an information tool for internal

management decisions. It includes materials and materials-driven costs like use of energy, water,

generation of waste and emissions.

PEMA as an internal physical environmental accounting approach serves as:

• An analytical tool designed to detect ecological strengths and weakness

• A decision-support technique concerned with highlighting relative environmental quality

• A measurement tool for that is an integral part of other environmental measures such as eco-

efficiency

• A tool for direct and indirect control of environment consequences

• An accountability tool providing a neutral and transparent base for internal and, indirectly,

external communication

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Accounting in Monetary Units Accounting in Physical Units

ENVIRONMENTALMANAGEMENT ACCOUNTING

Conventional Accounting

MEMA Monetary EMA PEMA Physical EMA Other Assessment Tools

DATA ON THE CORPORATE LEVEL

Conventional bookkeeping Transition of environmental part from

bookkeeping and cost accounting

Material flow balances on the

corporate level for mass,

energy and water flows

Production planning systems,

stock accounting systems

DATA ON THE PROCESS/COST CENTRE AND PRODUCT/COST CARRIER LEVELS

Cost accounting Activity based material flow cost

accounting

Material flow balances on the

process and product levels

Other environmental

assessments, measures and

evaluation tools

BUSINESS APPLICATION

Internal use for statistics,

indicators, calculating savings,

budgeting and investment

appraisal

Internal use for statistics, indicators,

calculating savings, budgeting and

investment appraisal of

environmental costs

Internal use for environmental

management systems and

performance evaluation,

benchmarking

Other internal use for

cleaner production projects

and eco design.

External financial reporting

External disclosure of environmental

expenditures, investments and

liabilities

External reporting (EMA

statement, corporate

environmental report,

sustainability report)

Other external reporting to

statistical agencies, local

governments, etc

NATIONAL APPLICATION

National income accounting by

statistical agency

National accounting on investments

and annual environmental costs of

industry, externalities costing

• A tool with a close and complementary fit to the set of tools being developed to help promote

ecologically sustainable development. This physical accounting information does not provide all of

the data needed for effectively managing all potential environmental impacts, but is essential

information that the accounting functions can provide. Monetary approach emerged due to the fact

that the Physical Approach does not fulfill the requirements of the Environmental Accounting.

Nevertheless, the physical approach is very important to get physical information about the

resources which enables to prepare the environmental statistics and is considered the first step in

the monetary approach. Despite the difficulties associated with the monetary approach, it gained a

lot of interest as such data will enable to know the profit and loss associated with environmental

operations and to get environmentally adjusted economic indicators. It deals with the

environmentally induced impacts on a company expressed in monetary terms like costs or fines for

braking environment laws, investment in capital budgeting. It contributes to strategic and

operational planning, provides the main basis for decisions about how to achieve desired goals,

and act as a control and accountability device.

As per IFAC (2005) to achieve environment and economic performance cost-categories could be

used, which induce environmental-related cost information. The environment cost categories

include

1. Materials costs of product outputs

2. Materials costs of non-product outputs

3. Waste and emission control costs

4. Prevention and other environmental management costs

5. Research and development costs

6. Less tangible costs.

The Opposition To Green Accounting

The concept of green accounting, till date, has been only been voluntary. Companies, in their

eagerness to rake in better profits, are neglecting the impact of their activities on the environment.

There is a pressing need to make them accountable for their activities in the form of green

accounting, besides the usual financial accounting that records the economic activities of the

business. There has been a grudging opposition to green accounting by most companies. Following

are some points to consider.

The concept is new and is still in its infancy. It‘s a new kid on the accounting block and

more efforts are required to make the concept popular. Traditional accountants do not

accept the concept of factoring in environmental costs and benefits.

There is no proper universally accepted valuation method for environment factors.

It cannot be denied that regular collection of information for different activities, their

effect on the environment, and their measurement is a herculean task.

Green Accounting may also lead to an increase in costs visa-vis benefits. At the same time

there is a possibility of more exposure. The company‘s reputation may take a hit because it

will be publishing the damage it caused to the environment.

There is no incentive on part of the government to incorporate green accounting.

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In India, there has been a guarded approach to green accounting, largely on philosophical

grounds. People here are hesitant to attach a value to natural resources. It is considered

unethical to value soil, water, air and other natural resources, in terms of money.

There are no proper methods for valuation of environmental factors. Most of the

environmental valuation methods try to measure these factors based on the expectations of

stakeholders. Hedonic pricing, productivity approach, and replacement method are some

of the commonly accepted methods. Natural resources are invaluable, and at the same

time, are limited and must be protected. Today, even a common man knows the value of

money.

An entrepreneur knows it even better. Thus, when environmental factors are identified and

measured in terms of money, the value of the natural resources will become more profound and

clearer. If companies begin to realise the value of their environmental costs and the effect on

profitability, there will be automatically more concern to reduce expenses, leading to the protection

of the environment.

Steps to incorporating environment accounting. It has been argued that accountability of environmental policies of a business corporate is the

basic requirement for a secure future. Accounting for economic performance, and its

environmental impacts, is the first step towards this goal. It, however, is not so easy. For

companies that willing to incorporate environmental accounting, here

While are some suggested steps.

A company before starting green accounting must clearly define its accounting goals and

environmental policies.

Identify the stakeholders, the relationship that the organizations has with it and also the

level of risk involved.

Identify the environmental factors involved, their mode of measurement, and cost of

achieving the goals.

Identify the resource efficiency and cost saving techniques by encouraging innovative

ideas.

Keep record of how environmental costs decline over time with continuous green

accounting.

The change should start from within. Every organisation should constantly promote new

ideas and change at an internal level.

The income statement should include cost and benefits attributable to ecological factors.

An additional ecological value added statement should be prepared. It should include all

operational costs related to environmental management, regulatory costs, revenue

generated, cost savings, grants, subsidies received and similar factors.

The balance sheet of the company should mention the intangible assets (capabilities and

competencies that make up the organization‘s competitive advantage) and also the shadow

liabilities and provisions. Most importantly, accountants must broaden their horizon and

establish a dialogue with social and ecological professionals to forge a common

acceptable accounting framework.

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Suggestions

Environmental accounting practice should be made mandatory in India.

The accounting framework should be prepared to measure and report environmental

information.

There is a need to generate awareness regarding environmental accounting and reporting

to business groups and the general public.

An environmental performance indicator should be developed to render data in a more

understandable and comparable manner.

There is a need for more environment legislations, norms and bureaus.

Companies should submit the whole information regarding environmental issues. Else,

appropriate authority must take action against the company.

Professional bodies must create an accounting standard for environmental accounting and

reporting practice. Reporting should be made compulsory for all manufacturing industries.

Companies should adopt a proper environment policy and set aside a part of its fund for

environment promotion. They must concentrate on environmental sustainability.

Accounting method is the best suitable pattern for disclosing company‘s environmental

accounting information.

A separate account should be opened for environmental expenditures. It will help to

measure and report environmental expenditure and environmental performance of each

company as well as the whole sector.

Most of the CAs suggested that all manufacturing units should follow green accounting.

The company should disclose its environmental accounting information in the annual

report and corporate brochure.

Scope of further study

This paper is fully based on secondary information collected from open sources. There is,

however, a lot of scope for more research on Green accounting. The concept of Green accounting

is still in its infancy and being continuously researched upon.Given the tremendous importance of

the environmental issues for social welfare, future research is desired to gain more insights in to

the issues raised in the study. Future research in this can be extended to empirical analysis of the

figures. A comparative analysis of the environmental reporting systems of the private and public

limited companies can help the diversified stakeholders in making the informed decisions. Last but

not the least, a study developing ways to recognize and measure social costs and benefits can be

another pioneering research area.

Conclusion

The findings of the study suggest that the disclosure of environment related information is

mandatory in nature if the companies operate in environment prone segments. Besides, there

should be proper accounting which determines environmental related costs, liabilities and

expenditure. All companies provided only information about environmental issues, environmental

expenditure and costs. But at the same time, there is also a lack of quantitative information. There

should be proper accounting pronouncements from regulatory authorities. Environment is an

inseparable part of us.It is said that there are three ‗P‘s that should concern a business. The

proprietor and/or owners are always concerned with only one of them i.e. ‗P‘ for profits.

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But with greater accessibility to information, environmentalists and social activists have become

more concerned with the other two ‗P‘s: people i.e. human beings, and planet or environment.

Corporates should not endanger environmental balance but should greatly contribute towards

sustainable development. Environmental accounting, as a part of social and management

accounting practices, should apprise the top management of the costs involved in pollution and

degradation. Besides providing information to all, environmental accountants should generate

consciousness about environmental issues in the company. The time has come for corporates to

prepare a firm environmental policy, take steps for pollution control, comply with the norms and

mention adequate details of environmental aspects in their annual report. A well-defined

environmental policy, with proper follow-ups and proper accounting, is necessary for the country.

It is high time that countries across start recognising the responsibilities of corporate both large and

small in saving the earth. Hence, there is a genuine need to develop a concrete guideline for the

Environmental Accounting or Green Accounting in India.

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Of Management Indore, India.

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Business

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DOI: 10.1002/bse.395

www.icmai.inDecember2015,

Krupa VD Faculty and Chaitra SM Faculty, Kuvempu University

Sarvesha Dhaimodkar Assistant Professor GVM‘s GGPR College of Commerce & Economics,Goa

Rob Gray and Centre for Social and Environmental Accounting Research Department of

Accounting

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