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GREEN ACCOUNTING - A NEW CHALLENGE FOR ACCOUNTING

SYSTEM AND RESPONSIBILITY TOWARDS ENVIRONMENT

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

Sunitha.S
Assistant Professor,
New Horizon College,
Kasturinagar
Bangalore-43
sunithaparamesh5@gmail.com

Abstract

Green accounting is on an expansion path. With increasing social focus on the environment,
accounting lls an expectation role, to measure environmental performance. The status of
environmental awareness provides a dynamic for business reporting its environmental
performance. The business rms strategy includes responding to capital and operating costs of
pollution control equipment. This is caused by increasing public concerns over environmental
issues. Green accounting is a management tool for the better consideration of environmental costs.
Many organizations are uncertain about the outcomes of Green accounting and are therefore
reluctant to implement such a tool. In order to help organizations to evaluate the need of Green
accounting this research paper aims to identify real advantages of implementation of Green
accounting within an economic entity. Further through its external reporting process
accountability is extended to stakeholder's on the company's financial performance (which has
been subject to an auditing function), enabling them to make economically useful decisions. The
appearance of environmental problems impacts every area of science globally, as a result,
accounting has to answer these challenges as well, one way of which is Green accounting. Recent
years have witnessed rising concern for environmental degradation, which is taking place mainly
in the form of pollution of various types, viz. air, water, sound, soil erosion, deforestation, etc.
Even though Indian corporate comply with the rules and regulations with regard to environmental
protection, till now no clear cut policies are framed and formulated at the National, State or even
at the company level, for ensuring the level of compliance to environmental norms. This study was
intended to find out the major environmental parameters reported by Indian Corporate as part of
their Environmental reporting practice. The study also focuses on the practice and voluntary
environmental reporting with regard to the environmental parameters identified. The main aim of
the study is to explore the roots and the tendencies of the development of Green accounting
Responsibility towards environment has become one of the most crucial areas of social
responsibility.

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


performance, environmental accounting, environmental Reporting.
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Look deep into nature, and then you will understand everything better. Albert Einstein

Introduction
In the last few years, there has been a growing awareness of the need to discover the art of living in
harmony with nature. It is also realized that the environment is not a permanent asset. Rapid
industrialization, in spite of its positive effect on economic development has very seriously
threatened the worlds natural environmental balance. There is a growing pressure from
environmentalists, government, society, customers, employees, and competitors on business firms
to be environmentally accountable. Proper balancing of economic development and environment
protection is gradually being recognized by all concerned. Green accounting is considered one of
the important management systems to enable improvement of economic and environmental
performance of a business firm. Countries like Germany, U K, Japan, USA, and Canada have
issued guidelines for preparation of environmental accounting.

The wind of change caused by sustainability issues is palpable in every aspect of the world. It is
hard for a person to watch television or read newspapers without being informed or acknowledged
with information that related with environmental issues or world sustainability. Align with this
phenomenon, accounting field also moves to the new direction by trying to explore and measures
the contribution of nature or environment in business process that well known as Green or
Environmental Accounting.

The concept of Green Accounting is raising a glimmer interest not only within the academic but
also from the government, business society, social and environmental activist
(Niemann&Tichkiewitch, 2009). However, the implementation of this concept in India still
consider as a difficult concept due to the lack of comprehensive information for the stakeholders
that raising the concern of the implementation effects and the additional cost expenditure that
recognized as a unnecessary cost in the perspective of conventional accounting (Nurhayati, Brown,
& Tower, 2006).. Study by Prasad (2009) in Indian context has thrown some light on availability
of environmental information for decision making. In this background this study makes an attempt
to explore the extent of Green accounting system practiced by Corporate in India. The availability
of this information can help to further strengthen the systems to meet the challenges of improving
environmental and economic performance of business firms.

Green accounting is an inclusive eld of accounting. It provides reports for both internal use,
generating environmental information to help make management decisions on pricing, controlling
overhead and capital budgeting, and external use, disclosing environmental information of interest
to the public and to the nancial community. While Indian companies are complying with the
environmental norms, clear cut policies are yet to be introduced for ensuring the level of
compliance. This study intended to find out the major environmental parameters reported by
Indian corporate as part of their environmental reporting practice.

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The good man is the friend of all living things. Mahatma Gandhi

Review of Literature
Prasad (2009), studied corporate environmental sensitivity in selected Indian companies. The
objective of this study has been 1) To demonstrate the present practice of environmental
accounting and reporting among Indian companies, 2) To establish environmental sensitivity of
Indian companys visa-a-vis less environmental sensitivity of companies. 3) To analyze to what
extent environmental sensitivity influence adoption of environmental accounting and reporting
among Indian companies and 4) To provide a platform for further research and to stimulate Indian
companies to adopt environmental accounting and reporting. The study was undertaken with two
hypotheses namely H1 firms in environmentally sensitive industries are more likely to introduce
environmental accounting procedures than firms in less environmentally sensitive industries and 2.
Firms in environmentally sensitive industries are more likely to externally disclose environmental
information than firms in less environmentally sensitive industries. The data was collected through
a mailed questionnaire to the Chief of Accounting and Finance Departments of 130 Indian
companies listed on BSE & NSE. The final sample included 59 firms identified as being involved
in environmentally sensitive industries and 32 in less sensitive industries. In the conclusion, he has
argued that environmentally sensitive firms are more likely to develop environment accounting
procedure is only supported for activities that are associated with significant environment related
issues for the specific industries. Where issues are of general nature it appears that these firms are
no more likely to develop such accounting processes. Hence the study provides no conclusive
evidence that the environmental sensitivity of the firms operations will necessarily result in
increased likelihood of the development environment accounting procedures of general
environmental issues. Such a result suggests that observations as to what motivates the external
reporting process may not hold true for the development of internal management practices,
indicating the need for further research as to what motivates firms to develop environmental
accounting, auditing and reporting.

Heba Y M &Yousuf (2010) examined the concepts of environmental accounting by exploring the
techniques to develop the environmental reporting that enables the government to utilize and
making businesses more responsible for their externalities. Moreover, as the consideration for the
environmental accounting increases, there is a parallel increase in measuring the environment
performance (Yajhou and Doreweiler, 2004). In this study the integration of environmental and
business policy has been considered to a great extent. The author reveals that the publics
consideration for the environmental accounting and government led incentive based regulation are
the main reason for the study. In upcoming years the companies will be facing challenges with
respect to establishing and implementing business strategies that are concerned with environmental
accounting.

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The work of Lehman (2011) establishes the art of interpretation to management accounting, to be a
way to think about the natural world. The main objective of Interpretive Accounting Research
(IAR) has been determined to be influenced by the desire to understand how accounting disciplines
like management accounting are related to existing issues like global warming, carbon emissions
and sustainability considerations. The issue for management accountants is to keep in mind the
need to broaden and conceptualize how we theorize cultural and environmental dilemmas that
confront the discipline. The art of interpretation with respect to accounting research is a technique
that highlights responsibilities to our shareholders and the natural world. The report of
International Federation of Accounts (IFA) (2005) on EMA evaluates the physical and monetary
accounting process of EMA. The association between material balances, material flow accounting
and physical environment performance indicators (EWPIs) are detailed in the physical accounting
section. Over the past few years, sustainability was incorporated with policy statements of various
organizations (Jasch and Stasiskiene, 2005).

Nasir Zameer Qureshi et.al(2012 )in their research paper, environmental accounting and reporting:
an essential component of business strategy, describes the environmental component of the
business strategy, producing the required performance reports and recognizing the multiple skills
required to measure, compile and analyze the requisite data. Special emphasis of the research is on
generation of reports and their standards, for the range of business and regulatory purposes. They
also identified the major obstacles for environmental accounting and reporting and concluded that
for sustainable development of country, a well-defined environmental policy as well as proper
follow up and proper accounting procedure is a must. Unless common people of India are not
made aware about environmental damages and safety, development of accounting in this regard is
really becomes difficult.

Research Problem
The existence of environmental management accounting is a first step to improve environmental
as well as economic performance. Sustainability Reporting by leading Indian firms indicate their
commitment for improvement of environmental performance. In light of this information it is
likely that business firms have evolved their accounting system to provide information for
environmental related decision making. The Environmental Management Accounting system,
being designed for effective internal management of environmental and economic performances
may be existing in organizations but may not be formally documented and/ or reported as it is not
mandatory or felt necessary by organizations. The industries should focus and set aside a part of
their funds for environmental protection and ecological balance. Thus business organizations are
expected to account for the use of substances which may damage the Environment. Green
accounting is in preliminary stage in India. Indian Corporate are now introducing a separate a firm
environmental policy such as taking steps for pollution control, comply with the related rules and
regulations, mention adequate details of environmental aspects in the annual statements.

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There are several challenges of Green accounting and reporting such as Green accounting method,
social values in applicable assumptions, economic value and lack of reliable industrial data.
Therefore, a need has been felt to study the environmental management accounting system among
Indian companies and suggest improvement if any.

Objectives of this paper


The key objectives of this paper is to know the meaning and importance of Green accounting, and
at the same time, understand the reasons behind the opposition to it, especially in the developing
countries. The paper also examines the steps that could be adopted to incorporate Green
Accounting in companies.

Methodology of study
The study is based on the secondary data collected from sources like websites, trade publications,
books, and articles in newspapers, magazines, and journals.

Meaning and Need of Green Accounting:


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

It permits the computation of income for a nation by taking into account the economic
damage and depletion in the natural resource base of an economy.

Green accounting is a type of accounting that attempts to factor environmental costs into the
financial results of operations. It has been argued that gross domestic product ignores the
environment and therefore policymakers need a revised model that incorporates green accounting.

The major purpose of green accounting is to help businesses understand and manage the potential
quid pro quo between traditional economics goals and environmental goals. It also increases the
important information available for analyzing policy issues, especially when those vital pieces of
information are often overlooked. Green accounting is said to only ensure weak sustainability,
which should be considered as a step toward ultimately a strong sustainability.

The term was first brought into common usage by economist and Professor Peter Wood in the
1980s.

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Objectives of Green Accounting
1. Segregation and elaboration of all environment related flows and stock of traditional
accounts: The segregation of all flows and stocks of assets related to environment permits the
estimates of the total expenditure for the protection of the environment. A further objective of this
segregation is to identify that part of gross domestic product that reflects the costs necessary to
compensate for the negative impacts of economic growth, that is, the defensive expenditures.

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


resources accounts cover the total stock or reserves of natural resources and changes. There in,
even if those resources are not affected by the economic system. Thus natural resources accounts
provide the physical counterpart of the monetary stock and flow accounts of System of
Environmental Economic Accounting. (SEEA)

3. Assessment of environment costs and benefits: The SEEA expands and complements the
SNA with regard to costing:
a) The use (depletion) of natural resources in production and final demand.
b) The changes in environmental quality, resulting from pollution and other impacts of
production, consumption and natural events, on the one hand, and environmental protection,
on the other.

4. Accounting for the maintenance of tangible wealth:


The SEEA extends the concepts of capital to cover not only human-made but also natural capital.
Capital formation is correspondingly changed into a broader concept of capital accumulation
allowing for the use or consumption and discovery of environmental assets.

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


Income: The consideration of the costs of depletion of natural resources and changes in
environmental quality permits the calculation of modified macro-economic aggregates, notably an
environmentally adjusted net domestic product. (NDP)

Need of Environmental Accounting at Corporate Level

It helps to know whether corporation has been discharging its responsibilities towards
environment or not. Basically, a company has to fulfill following environmental responsibilities.
Meeting regulatory requirements or exceeding that expectation.
Cleaning up pollution that already exists and properly disposing of hazardous material.
Disclosing to the investors both potential & current, the amount and nature of the
preventative
Measures taken by the management.

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Operating in a way that those environmental damages do not occur.
Promoting a company having wide environmental attitude.
Control over operational & material efficiency gains driven by the competitive global
market.
Control over increases in costs for raw materials, waste management and potential
liability.

Scope of Green Accounting


The scope of Green Accounting is very wide. It includes corporate level, national & international
level. The following aspects are included in.

1) From Internal Point of view investment made by the corporate sector for minimization of
losses to environment. It includes investment made into the environment saving equipment
devices. This type of accounting is easy as money measurement is possible
.
2) From External point of view all types of loss are indirectly due to business operation
activities. It mainly includes:
a) Degradation and destruction like soil erosion, loss of bio diversity, air pollution, water
pollution, voice pollution, problem of solid waste, coastal and marine pollution.
b) Depletion of nonrenewable natural resources i.e. loss emerged due to over exploitation
of non renewable natural resources like minerals, water, gas, etc.

3) Deforestation and Land uses.


This type of accounting is not easy, as losses to environment cannot be measured exactly
in monetary value. Further, it is very hard to decide that how much loss was occurred
to the environment due to a particular industry. For this purpose approximate idea can be
given or other measurement of loss like quantity of non-renewable natural sources used.

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


environmental expenditures, and identification of environmental liabilities and measurement of
environmental liabilities.

Environmental expenditures/costs:
These are expenses or costs related to environmental measures including production-related costs
and product research and development expenditures which are incurred primarily for ensuring
protection of environment. Total environmental expenditures can be classified into six categories
such as capital investment, operating costs, research and development cost, environment
administration and planning, expenditures for remedial measures and recovery measures.

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Capitalization of Environmental expenditures:
Capitalization of environmental expenditure is justifiable if the cost extends the life, increase the
capacity or improve the efficiency or safety of the property owned by the company, the costs
mitigate or prevent environmental contamination, the costs improve the property/resource in
comparison to its condition at the time of acquisition, the costs are incurred in connection with
preparing the property for sale.

Environmental liabilities:
Obligation to pay future expenditure to remedy environmental damage that has occurred due to
past events, activities or transactions or to compensate a third party that has suffered from damage.
It may even include a contingent environmental liability that depends on occurrence or non-
occurrence of one or more future uncertain events or to compensate a third party that has suffered
from such damage.

Measurement of Environment liabilities:


Environmental liability may be a quantifiable one or non-quantifiable one. If it a quantifiable one
that is if we can measure its value accurately, give it in the Balance sheet otherwise give a footnote
explaining the nature of such liability.

GREEN ACCOUNTING AND REPORTING PRACTICES IN INDIA


Green Accounting and reporting in India is in developing stage both at the corporate level and at
the national level. The entire process of Green Accounting encompasses three distinctive phases

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

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

Integration with Economic Accounting


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

Practice In terms of economics

It is a measure of sustainable income level that can be secured without decreasing the stock of
natural assets. This requires adjustment of the System of National Accounts (SNA) in terms of
stock of natural assets. In SNA, allowance is made for capital consumption or man-made capital
while calculating Net Domestic Product (NDP).

Net Domestic Product (NDP) = GDP- Depreciation.

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SNA has three main defects:

(1) It neglects the depletion of natural capital such as farmland, forests, fishing stock, minerals, etc.
(2) Environmental degradation mainly from pollution,
(3) Defensive expenditures which the society incurs in facing the external effects of environmental
degradation.

To overcome these drawbacks of SNA, the Statistical Division of UN has developed the
System of Environmental Economic Accounting (SEEA). The SEEA focuses on:

Accounting for the depletion of scarce natural resources, and


Measuring the costs of environmental degradation and its prevention.

Thus the computation of Green NDP (or EDP) has been replaced by a measure of national product
which includes the economic cost of degrading natural resources which are required to produce
goods and services directly and indirectly.

SNA defines Net Domestic Product as:

Environmental responsibility is a potent issue among businesses in this modern age. It has become
necessary for corporation to formulate methods of promoting green causes for the present and the
future. Green accounting helps promote a sustainable future for businesses as it brings green public
procurement and green research and development into the big picture. Penalties for polluters and
incentives (such as tax breaks, polluting permits, etc.) are also a crucial part of this type of
accounting. The System of National Accounts (SNA) defines Net Domestic Product (NDP) as:

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


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

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

To arrive at Green NDP (Or EDP), if net capital accumulation (I) is replaced by net capital
accumulation of produced and non-produced economic assets minus net accumulation of non-
produced natural assets, the identity becomes

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EDP = (X-M) + + NAp. ec + (NAnp.ec-NAnp.n)
Where
EDP = Environmental domestic product.
(X-M) = Exports-imports
= Capital accumulation
Nap.ec = Net accumulation of produced economic assets.
NAnp.ec = Net accumulation of non-produced economic assets
NAnp.n = Net accumulation of non-produced natural assets.

Preparation of SEEA or Green Accounting:

Table 1.1 shows the basic structure of SEEA or Green Accounting in the form of a matrix. It
also explains the derivation of SNA aggregates in columns and rows from 1 to 4.

The explanation of columns of Table 1.1 is given below:

Column (1):
Production side covering output, intermediate consumption, consumption of fixed capital (CFC),
net domestic product (NDP) and use of non-produced natural assets in production.

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

Column (3):
Final consumption (C).

Column (4):
Produced assets as a part of economic assets that have come into existence as output from
processes. This includes not only tangible fixed assets but also intangible fixed assets such as
mineral exploration. It includes net accumulation of produced assets and other changes in the
volume of produced assets i.e., gross capital formation.

Column (5):
Non-produced economic assets are defined as non-financial assets that have come into existence in
ways other than the process of production. This includes tangible non-produced assets like land
and sub-soil assets. Intangible non-produced assets like patented entities, leases, and transferable
contract

Column (6):
Records the effects of economic activities on non-produced natural assets such as air, water and
virgin forests that are not included as economic assets in the stock of natural assets.

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The explanation of rows of Table 1.1 is given below:

Row Economic activities Economic assets Environment

Column
1.Production 2. Rest of world 3. Final 4. Produced 5. Non-Produced 6. Non-Produced
(row) consumption Assets Economic Assets Natural Assets

1.Opening Stock - - - Opening stock of Opening stock of -


Of Assets produced non -produced
economic assets economic assets

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

3.Economic uses Intermediate Exports(X) Final Gross capital - -


consumption consumption
(C)
4.Consumption of CFC - - (-)CFC - -
fixed capital (CFC)

5.NDP NDP Net exports Final Net capital - -


(X-M) consumption
( C)
6.Use of non- Use of non- - - Accumulation(I) (-)Use of non - (-) Degradation of
produced natural produced produced non economic
assets natural economic natural natural assets
assets in assets
production
7.Accumulation of - - - - Change in stock (-) Reduction in
non-produced of non-produced natural assets
natural assets economic assets other than
economic assets

8.Environmentally EDP Net Exports Final Net Net Accumulation (-) Net
adjusted (X-M) Consumption Accumulation of of Non-Produced Accumulation of
aggregated in ( C) Produced Assets Economic Assets Non Produced
monetary (Nap.ec) (NAnp.ec) Natural Assets
environmental (NAnp.n)
accounting
Row (1):
It records the entries of opening stock of produced assets being the value of stocks of man-made
capital produced and the value of stocks of natural resources, such as oil, gas and cultivated forests
etc.

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

Row (3):
Economic uses including elements of intermediate consumption, exports, final consumption
expenditure and gross capital formation.
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Row (4):
Consumption of fixed capital (CFC) also appears as a negative item. Therefore, Net Investment (I)
= Gross Investment (Ig) -CFC.

Row (5):
Net domestic product (NDP) represents the elements that define the national income accounts
identity between net domestic product (NDP) and expenditure categories:
Net Domestic Product (NDP) = Net exports (X-M) + Final consumption expenditure (C) + Net
capital accumulation or Investment (I)

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

Row (7):
It relates to accumulation of non-produced natural assets which include change in stock of
economic assets and reduction on natural assets relating to environment.

Row (8):
It relates to environmentally adjusted aggregates in monetary environmental accounting. These
macro-economic aggregates of EDP = Net exports (XM) + Final consumption (C) + Net
accumulation of produced economic assets (NAp.ec) + Net accumulation of non-produced
economic assets (NAnp.ec)-Net accumulation of non-produced natural assets (NAnp.n)

Approaches to environmental accounting

Environmental Management Accounting (EMA)


It means integration of business strategy with sustainability strategy by accounting for financial
and non-financial information of a body corporation. EMA is defined as the generation, analysis
and use of financial and relevant non-financial information, to support the management. EMA
integrates corporate environmental and business policies, and thereby provides guidance on
building a sustainable business. EMA means the management of environmental and economic
performance through the development and implementation of appropriate environment related
accounting systems and practices. While this may include reporting and auditing in some
companies, EMA typically involves life-cycle costing, benefits assessment, and strategic planning
for environmental management (Mohamed, 2002).

Environmental Cost Accounting (ECA)


In ECA, costs are accounted for by their specific causes. ECA directly places a cost on every
environmental aspect, and determines the cost of all types of related action. Environmental actions
include pollution prevention, environmental design and environmental management.
Environmental costs comprise both internal and external costs and relate to all costs relevant to
environmental damage and protection.

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Environmental Financial Accounting (EFA)
Environmental financial accounting (EFA), collects, analyses, records and reports data about
financial events. EFA data involves environmental cost. Environmental information of business is
shown in financial statements by means of EFA. It mostly focuses on reporting environmental
liability costs and other major environmental costs. It is used to provide information needed by
external stakeholders on a companys financial performance. This type of accounting allows
companies to prepare financial reports for investors, lenders and other interested parties. Various
benefits are derived from different aspects of accounting (Anuradha, 2014).

Corporate Environmental Accounting (CEA)


This can be closely linked to the development and use of an environmental management system or
producing a corporate sustainability report. Environmental accounting can be defined as the
identification, collection, estimation, analysis, internal reporting and the use of materials and
energy flow information, environmental cost information, and other cost information for both
conventional and environmental decision making within an organisation (Varghese). CEA is an
approach to control and improve an organisations cost structure and environmental performance.
It can be further subdivided into environmental management accounting and environmental
financial accounting (Anuradha, 2014). Corporate environmental disclosure must be taken as a part
of CEA and it should be defined as a channel to disseminate environmental information to
stakeholders

Natural Resource Accounting and Ecological Accounting


Natural resource accounting means incorporation of environmental aspects into the system of
national accounts (SNA). It means giving proper weight to environmental concerns in calculating
GNP & GDP. The focal point of SNA is natural resources and their exploitation. In many cases,
the term ecological accounting is used to refer to the preparation of accounts according to physical
data only. In addition, ecological accounting is the type of environmental accounting (a dedicated
type for natural resource accounting at local administration level) (Mohamed, 2002). The main
purpose of environmental reporting is to transparently provide information about the corporate
environmental impacts and efforts done by companies to reduce harmful effects (Gray, Owen, and
Adams, 1996). Environmental accounting means reporting of environment specific cost such as
liability cost and waste disposal costs. It is accounting for any costs and benefits that arise from
change to a firms products and processes where the change also involves a change in
environmental impact (Gupta and Mehra, 2002)

Theoretical Background of Environmental Management Accounting (EMA)


The fact that environment costs are not fully recorded often leads to distorted calculations for
improvement options. Environment protection projects aiming to prevent emissions and waste at
the source (avoidance option) by better utilizing raw and auxiliary materials and requiring less
(harmful) operating materials are not recognized and implemented. The economic and ecological
advantages to be derived from such measures are not used. The people in charge are often not
aware that producing waste and emissions is usually more expensive than disposing of them. There
are also other reasons in interest in the Environmental Accounting like: If existing accounting

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systems does not provide financial data on the environmental performance of organizations that
will help non-complying organizations/entities to pollute environment and spoil resource and yet
appear more economic efficient than other which incur costs to protect the environment. Many of
the environmental activities are of quantitative and accordingly of financial nature and have a
major effect on organizations costs, assets and liabilities. Environmental risks may result in huge
environmental liabilities and subsequently the organization/entity may be obliged to outlay large
payments which may affect seriously the liquidity and the financial position of the organization.
Environment Accounting (EA) being in developing stage, the language used for environmental
accounting is not standardized. Even within a particular subset of EA, such as EMA, terminology
differs among organizations and countries. For example, EMA has been variously called EA,
EMA, Environmental Cost Accounting (ECA), Full Cost Accounting (FCA), Total Cost
Assessment (TCA) ,Green Accounting (GA) etc. Thus, in discussing any type of environmental
related accounting within an organization or elsewhere, it is important to clarify the definition and
languages being used. Environmental Management Accounting has no single, universally
accepted definition. According to IFACs Statement Management Accounting Concepts, EMA is
the management of environmental and economic performance through the development and
implementation of appropriate environment-related accounting systems and practices. While this
may include reporting and auditing in some companies, environmental management accounting
typically involves life-cycle costing, full-cost accounting, benefits assessment, and strategic
planning for environmental management. A complementary definition is given by the United
Nations Expert Working Group on EMA, which more distinctively highlights both the physical
and monetary sides of EMA. This definition was developed by international consensus of the
group members, representing 30+ nations. According to the UN group EMA is broadly defined to
be the identification, collection, analysis and use of two types of information for internal decision
making
Physical information on the use, flows and destinies of energy, water and materials (including
wastes)
Monetary information on environment-related costs, earnings and savings.

At the Micro (organization) level, EA takes place in the context of both management accounting
(assessment of an organizations expenditures on pollution control equipment; revenues from
recycled materials; annual monetary savings from new energy-efficient equipment) and financial
accounting (evaluation and reporting of the organizations current environment-related liabilities).
Application fields for the use of EMA data are assessment of annual environmental costs /
expenditure, product pricing, budgeting, investment appraisal, calculating investment options,
calculating costs, savings and benefits of environmental projects, design and implementation of
environmental management systems, environmental performance evaluation, indicators and
Benchmarking Setting quantified performance targets, cleaner production, pollution prevention,
supply chain management and design for environment projects, external disclosure of
environmental expenditures, investments and liabilities, external environmental or sustainability
reporting, and other reporting of environmental data to statistical agencies and local authorities.
EMA was defined in the second and third meeting of the expert working group on improving the
role of Government in the promotion of EMA of the United Nations Division for Sustainable
Development to cover the issues in the two middle columns of the table namely MEMA and
PEMA. Figure 1 shows the framework of EMA developed by the said group.

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FIGURE 1.2: FIGURE SHOWING FRAMEWORK OF ENVIRONMENTAL MANAGEMENT ACCOUNTING
Accounting in Monetary Units Accounting in Physical Units

ENVIRONMENTALMANAGEMENT ACCOUNTING
Conventional Accounting MEMA Monetary EMA PEMA Physical EMA Other Assessment Tools

DATA ON THE CORPORATE LEVEL


Conventional bookkeeping Transition of environmental part from Material flow balances on the Production planning systems,
bookkeeping and cost accounting corporate level for mass, stock accounting systems
energy and water flows

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


Cost accounting Activity based material flow cost Material flow balances on the Other environmental
accounting process and product levels assessments, measures and
evaluation tools

BUSINESS APPLICATION
Internal use for statistics, Internal use for statistics, indicators, Internal use for environmental Other internal use for
indicators, calculating savings, calculating savings, budgeting and management systems and cleaner production projects
budgeting and investment investment appraisal of performance evaluation, and eco design.
appraisal environmental costs benchmarking

External financial reporting External disclosure of environmental External reporting (EMA Other external reporting to
expenditures, investments and statement, corporate statistical agencies, local
liabilities environmental report, governments, etc
sustainability report)

NATIONAL APPLICATION
National income accounting by National accounting on investments
statistical agency and annual environmental costs of
industry, externalities costing

Source: United Nation Division for Sustainable Development, (2001) Environmental Management Accounting Procedures and
Principles, United Nation Publication, New York. Internet http://www.un.org/esa/sustdev/publications/proceduresandprincipal

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


management decisions. It includes materials and materials-driven costs like use of energy, water,
generation of waste and emissions.
PEMA as an internal physical environmental accounting approach serves as:
An analytical tool designed to detect ecological strengths and weakness
A decision-support technique concerned with highlighting relative environmental quality
A measurement tool for that is an integral part of other environmental measures such as eco-
efficiency
A tool for direct and indirect control of environment consequences
An accountability tool providing a neutral and transparent base for internal and, indirectly,
external communication
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A tool with a close and complementary fit to the set of tools being developed to help promote
ecologically sustainable development. This physical accounting information does not provide all of
the data needed for effectively managing all potential environmental impacts, but is essential
information that the accounting functions can provide. Monetary approach emerged due to the fact
that the Physical Approach does not fulfill the requirements of the Environmental Accounting.
Nevertheless, the physical approach is very important to get physical information about the
resources which enables to prepare the environmental statistics and is considered the first step in
the monetary approach. Despite the difficulties associated with the monetary approach, it gained a
lot of interest as such data will enable to know the profit and loss associated with environmental
operations and to get environmentally adjusted economic indicators. It deals with the
environmentally induced impacts on a company expressed in monetary terms like costs or fines for
braking environment laws, investment in capital budgeting. It contributes to strategic and
operational planning, provides the main basis for decisions about how to achieve desired goals,
and act as a control and accountability device.

As per IFAC (2005) to achieve environment and economic performance cost-categories could be
used, which induce environmental-related cost information. The environment cost categories
include
1. Materials costs of product outputs
2. Materials costs of non-product outputs
3. Waste and emission control costs
4. Prevention and other environmental management costs
5. Research and development costs
6. Less tangible costs.

The Opposition To Green Accounting


The concept of green accounting, till date, has been only been voluntary. Companies, in their
eagerness to rake in better profits, are neglecting the impact of their activities on the environment.
There is a pressing need to make them accountable for their activities in the form of green
accounting, besides the usual financial accounting that records the economic activities of the
business. There has been a grudging opposition to green accounting by most companies. Following
are some points to consider.

The concept is new and is still in its infancy. Its a new kid on the accounting block and
more efforts are required to make the concept popular. Traditional accountants do not
accept the concept of factoring in environmental costs and benefits.
There is no proper universally accepted valuation method for environment factors.
It cannot be denied that regular collection of information for different activities, their
effect on the environment, and their measurement is a herculean task.
Green Accounting may also lead to an increase in costs visa-vis benefits. At the same time
there is a possibility of more exposure. The companys reputation may take a hit because it
will be publishing the damage it caused to the environment.
There is no incentive on part of the government to incorporate green accounting.

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In India, there has been a guarded approach to green accounting, largely on philosophical
grounds. People here are hesitant to attach a value to natural resources. It is considered
unethical to value soil, water, air and other natural resources, in terms of money.
There are no proper methods for valuation of environmental factors. Most of the
environmental valuation methods try to measure these factors based on the expectations of
stakeholders. Hedonic pricing, productivity approach, and replacement method are some
of the commonly accepted methods. Natural resources are invaluable, and at the same
time, are limited and must be protected. Today, even a common man knows the value of
money.
An entrepreneur knows it even better. Thus, when environmental factors are identified and
measured in terms of money, the value of the natural resources will become more profound and
clearer. If companies begin to realise the value of their environmental costs and the effect on
profitability, there will be automatically more concern to reduce expenses, leading to the protection
of the environment.

Steps to incorporating environment accounting.


It has been argued that accountability of environmental policies of a business corporate is the
basic requirement for a secure future. Accounting for economic performance, and its
environmental impacts, is the first step towards this goal. It, however, is not so easy. For
companies that willing to incorporate environmental accounting, here
While are some suggested steps.
A company before starting green accounting must clearly define its accounting goals and
environmental policies.
Identify the stakeholders, the relationship that the organizations has with it and also the
level of risk involved.
Identify the environmental factors involved, their mode of measurement, and cost of
achieving the goals.
Identify the resource efficiency and cost saving techniques by encouraging innovative
ideas.
Keep record of how environmental costs decline over time with continuous green
accounting.
The change should start from within. Every organisation should constantly promote new
ideas and change at an internal level.
The income statement should include cost and benefits attributable to ecological factors.
An additional ecological value added statement should be prepared. It should include all
operational costs related to environmental management, regulatory costs, revenue
generated, cost savings, grants, subsidies received and similar factors.
The balance sheet of the company should mention the intangible assets (capabilities and
competencies that make up the organizations competitive advantage) and also the shadow
liabilities and provisions. Most importantly, accountants must broaden their horizon and
establish a dialogue with social and ecological professionals to forge a common
acceptable accounting framework.

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Suggestions

Environmental accounting practice should be made mandatory in India.


The accounting framework should be prepared to measure and report environmental
information.
There is a need to generate awareness regarding environmental accounting and reporting
to business groups and the general public.
An environmental performance indicator should be developed to render data in a more
understandable and comparable manner.
There is a need for more environment legislations, norms and bureaus.
Companies should submit the whole information regarding environmental issues. Else,
appropriate authority must take action against the company.
Professional bodies must create an accounting standard for environmental accounting and
reporting practice. Reporting should be made compulsory for all manufacturing industries.
Companies should adopt a proper environment policy and set aside a part of its fund for
environment promotion. They must concentrate on environmental sustainability.
Accounting method is the best suitable pattern for disclosing companys environmental
accounting information.
A separate account should be opened for environmental expenditures. It will help to
measure and report environmental expenditure and environmental performance of each
company as well as the whole sector.
Most of the CAs suggested that all manufacturing units should follow green accounting.
The company should disclose its environmental accounting information in the annual
report and corporate brochure.

Scope of further study


This paper is fully based on secondary information collected from open sources. There is,
however, a lot of scope for more research on Green accounting. The concept of Green accounting
is still in its infancy and being continuously researched upon.Given the tremendous importance of
the environmental issues for social welfare, future research is desired to gain more insights in to
the issues raised in the study. Future research in this can be extended to empirical analysis of the
figures. A comparative analysis of the environmental reporting systems of the private and public
limited companies can help the diversified stakeholders in making the informed decisions. Last but
not the least, a study developing ways to recognize and measure social costs and benefits can be
another pioneering research area.

Conclusion
The findings of the study suggest that the disclosure of environment related information is
mandatory in nature if the companies operate in environment prone segments. Besides, there
should be proper accounting which determines environmental related costs, liabilities and
expenditure. All companies provided only information about environmental issues, environmental
expenditure and costs. But at the same time, there is also a lack of quantitative information. There
should be proper accounting pronouncements from regulatory authorities. Environment is an
inseparable part of us.It is said that there are three Ps that should concern a business. The
proprietor and/or owners are always concerned with only one of them i.e. P for profits.
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But with greater accessibility to information, environmentalists and social activists have become
more concerned with the other two Ps: people i.e. human beings, and planet or environment.
Corporates should not endanger environmental balance but should greatly contribute towards
sustainable development. Environmental accounting, as a part of social and management
accounting practices, should apprise the top management of the costs involved in pollution and
degradation. Besides providing information to all, environmental accountants should generate
consciousness about environmental issues in the company. The time has come for corporates to
prepare a firm environmental policy, take steps for pollution control, comply with the norms and
mention adequate details of environmental aspects in their annual report. A well-defined
environmental policy, with proper follow-ups and proper accounting, is necessary for the country.
It is high time that countries across start recognising the responsibilities of corporate both large and
small in saving the earth. Hence, there is a genuine need to develop a concrete guideline for the
Environmental Accounting or Green Accounting in India.

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Business
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Krupa VD Faculty and Chaitra SM Faculty, Kuvempu University
Sarvesha Dhaimodkar Assistant Professor GVMs GGPR College of Commerce & Economics,Goa
Rob Gray and Centre for Social and Environmental Accounting Research Department of
Accounting
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