Environmental Accounting: Disclosure and Measurement of Environmental Liabilities
and Costs
Introduction
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
Accounting standards and practices have historically taken a relatively narrow view of financial
reporting by primarily focusing on quantifiable monetary transactions. However, there has been a
growing recognition within the accounting profession of the need to also consider social and
environmental impacts and costs. This paper will examine issues related to environmental accounting,
with a focus on disclosing and appropriately measuring environmental liabilities and expenditures
within financial statements.
Defining Environmental Accounting
The term "environmental accounting" refers to the identification, collection, analysis and use of two
types of information for corporate decision making and external reporting purposes:
1) Physical data relating to the use, transformation and depletion of natural resources (e.g. water
consumption, waste generation)
2) Monetary data relating to the costs and liabilities associated with corporate environmental
management and policies for compliance, prevention, and remediation of environmental impacts.
The objective of environmental accounting is to internalize environmental costs into business
decisions and convey comprehensive information to stakeholders regarding financial exposures from
environmental risks, regulations, and pollution abatement activities. This contrasts with traditional
accounting which generally does not capture costs unless required by law.
Determining Environmental Liabilities
A major area of focus for environmental accounting involves appropriate identification and
measurement of potential environmental liabilities. These liabilities, also called accrued
environmental costs, relate to situations where a company faces probable future outflows of resources
due to past activities that damaged the environment. Two key standards provide guidance:
- FASB Statement No. 5, Accounting for Contingencies, requires accrual of estimated losses from
environmental remediation and damage claims if future cash outflows are probable and reasonably
estimable.
- FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, clarifies that if range
of losses can be reasonably estimated, provision should be made for best estimate or minimum
amount if no single estimate is better.
Under these standards, environmental liabilities should be recognized for obligations stemming from:
1) Remediation of sites contaminated by company operations or waste, e.g. soil clean-ups
2) Fines or penalties from past violations of environmental laws and regulations
3) Legal claims and proceedings involving compensation for environmental damages
To estimate accrued liability amounts, companies should consider things like investigation and
cleanup cost assessments, remediation technology options, prior experience, and applicable legal
requirements. Uncertainties are disclosed through reasonable possible loss ranges or contingencies.
Measuring Environmental Costs
Beyond liability recognition, a challenge for environmental accounting involves accurately capturing
various types of environmental protection and preservation expenditures companies may incur:
- Prevention costs - Expenditures to avoid potential environmental damages, e.g. pollution control
equipment investments.
- Operating costs - Extra costs to integrate environmental management into production activities like
waste treatment or recycling.
- Legacy costs - Expenses to rectify past environmental harms like soil remediation, dam
decommissioning.
- Conservation costs - Investments in managing wildlife habitats, reforestation programs on company
land.
In many cases, portions of these costs are embedded within traditional expense accounts and difficult
to isolate. Several measurement methods attempt to separate environmental costs:
- Full cost accounting - Allocates all overhead and infrastructure costs to environmental protection
and restoration activities.
- Activity-based costing - Traces indirect environmental expenditures like support staff time to
specific prevention or compliance activities.
- Marginal cost accounting - Isolates direct variable costs of additional pollution mitigation or impact
reduction efforts.
Regardless of approach, policies are needed to consistently capture this data for internal management
and external communication to the financial community.
Disclosure of Environmental Information
Given uncertainties and judgment involved, full disclosure of environmental policies, cost estimation
methodologies, risk exposures, and contingent liabilities is essential to provide transparent
information to financial report users. The FASB and SEC have issued guidelines on enhancing
environmental disclosures:
- MD&A requirements in Regulation S-K compel discussion of material events, trends, demands and
uncertainties including environmental matters.
- EITF 93-5 provides disclosure principles for estimating remediation liabilities and reevaluation of
estimates over time.
- SAB No. 92 requires discussion of reasonably likely changes to estimates and future anticipated
costs from environmental contingencies.
- SAB No. 96 recommends discussion of future capital costs for environmental control facilities.
- SOP 96-1 provides guidance on disclosing loss contingencies, reserve estimates and clean-up
commitments.
At a minimum, publicly traded companies should disclose in footnotes: nature of activities causing
liabilities, clean-up methods/technologies considered, amount of accrued remediation costs and
related productive assets, any insurance recoveries, and sensitivity of estimates to key assumptions.
Comparative statistics also prove valuable.
International Developments in Environmental Reporting
While GAAP provides a baseline framework, advances in environmental accounting practices are also
emerging internationally through new reporting guidelines:
- Global Reporting Initiative (GRI) - Voluntary framework emphasizing quantitative indicators on
topics like energy use, emissions, effluents, waste and environmental compliance to enhance
sustainability reporting.
- International Organization for Standardization (ISO) 14000 standards - Provide structure for
environmental management systems covering aspects policies, planning, implementation, monitoring,
corrective action and management review.
- Carbon Disclosure Project (CDP) - Collects standardized climate change, water and forest-risk
related data from companies to assess environmental impacts and risks in value chains.
- Climate Disclosure Standards Board (CDSB) - Issues framework combining financial and climate-
related information to promote understanding of climate risks and low-carbon opportunities.
Adopting concepts from these evolving international standards can strengthen disclosures and connect
environment, social and governance reporting practices. Integration with financial statements remains
a work in progress.
Tax Accounting for Environmental Expenditures
Lastly, a review of environmental accounting would be incomplete without mention of relevant tax
rules which influence incentives for certain environmental initiatives and liabilities:
- Capital expenditures for property, plants and equipment (PP&E) that control, prevent or reduce
pollution are eligible for bonus depreciation and accelerated methods.
- Routine operating pollution control expenses like waste treatment or recycling costs are tax
deductible as ordinary and necessary business expenses.
- Certain environmental remediation costs may qualify as deductible expenses or be
capitalized/amortized depending on nature/timing under IRC Section 198.
- Superfund excise taxes and certain state/local green taxes are deductible business expenses.
- Legal fines or penalties are not tax deductible but related clean-up costs are deductible.
Proper accounting treatment between capitalization, deductibility and timing differences aims to be
revenue-neutral while encouraging environmental stewardship through the tax code where possible.
The savings can partially offset compliance expenditures.
Conclusion
In summary, environmental accounting offers a framework to enhance traditional financial reporting
by considering the economic impact that corporate activities have on natural resources and the
environment. With growing emphasis on sustainability and risk disclosure, properly identifying and
reporting environmental liabilities, costs, risks and uncertainties will take on increasing importance.
Adopting standards and best practices from the evolving field of environmental accounting can help
internalize these issues and provide full transparency to stakeholders.
