Policy Review - An Alternative Approach

to Accounting for Natural Resources: The

Case of Multipurpose Forestry in Australia

Submitted to:
Prof Debdatta Pal
Prepared By:
Group 1

Adithya Krishnan (PGPSM09001)

Himani Gola (PGPSM09016)
Renuka Kakas (PGPSM08031)
Agenda
• Introduction
• An Accounting Perspective on
Environmental Impacts
• Current Environmental Accounting Practice
• A Proposed Alternative Approach to
Environmental Accounting
• An Economic Perspective on Valuation of
Environmental Resources
• Application to the Community Rainforest
Reforestation Program (CRRP)
• Result & Interpretation
• Conclusion
Introduction
• Accounting Reports: The most widely used forms of communication on an
organization's performance to its stakeholders, including existing and potential
investors, regulatory agencies, and lobby groups.

• Challenges:
❖Partial picture of an organization's performance as nonmarket, unpriced events
relating to the management of natural resources are not taken into
consideration.
❖Poorly informed decisions regarding use of resources controlled by
organizations
 Article Aim
Provide a brief overview of the
current state of knowledge of
environmental accounting
Provide a brief outline of an lllustrate the application of such
accounting framework that a reporting framework with
incorporates the accountant's reference to the CRRP.
communication skills and the
economist's valuation
techniques
An Accounting Perspective on
Environmental Impacts…
• Environmental Accounting: Exploration of what accounting might look like if it
were not so artificially constrained by its attachment to accounting entities,
economic events, Financial description and narrowly defined groups of “users”.

• Environmental accounting is characterized by a broad spectrum of theoretical

perspectives, which cover:

(1) Agency theory,

(2) Capital market efficiency theory
(3) Stakeholder theory
(4) Legitimacy theory
(5) “deep green” outlooks concerned with sustainability and radical ecology
…Continued
• Upsurge of interest in social accounting laid the foundations for
Environmental Accounting

• Increased interest due to:

❖ Disenchantment with the “greed is good” culture

❖ Increasing awareness within society of environmental issues, and
political effectiveness of environmental lobby groups
❖ Need for organizations to consider the full impacts of these
activities to ensure that their activities have long-term sustainability
Current Environmental Accounting Practice
• In most countries, environmental reporting is not widely regulated

• The United States is an exception to the extent that environmental

reporting in the late 1980s through to the mid-1990s has been
dominated by mandatory Financial disclosures on environmental
activities

• In the absence of regulation, companies operating in Europe and

Australasia have undertaken voluntary experiments with
environmental disclosures (i.e., aimed at image and advertising
rather than accountability)
Environmental Accounting within external reports have generally been categorized into descriptive
and performance reporting, quantitative environmental accounts, inventory-style reports, and
Financial environmental reporting

❖ Descriptive and performance environmental reports have included short qualitative statements
of good citizenship, assignment of responsibility for environmental issues, statements of
environmental policies and the activities undertaken to achieve these policies, and extracts from
environmental audit reports, disclosures on compliance with external standards (e.g., pollution
emissions), receipt of environment related awards.
❖ Quantitative environmental accounts go beyond disclosure of corporate environmental policies
and the scope of an entity’s environmentally friendly products and typically include some form of
quantitative input output analysis applied to a single product. These accounts attempt to
illustrate the resources used by the company (e.g., all inputs and energy) and how efficiently they
are used to produce an output (e.g., Finished products vs. emissions).
❖ The environ mental report is usually separate from the Financial statements and includes an
inventory of the entity’s environmental inputs (diesel, electricity, wood recycled paper) and
outputs (air emissions, water emissions, oil emissions, scrap paper). This is usually supported by
comparisons with current environmental targets and commitments, progress toward targets and
future targets, and commitments.
Integrated Financial environmental
accounts
Comprehensive picture of an entity’s full interactions with its external environment, in which environmental
and Financial performance are considered conjointly.

Example 1: BSO/ Origin (a Dutch consulting and electrical engineering company) attempted to Financially
quantify its environmental impacts by estimating the monetary costs of its atmospheric emissions, wastewater
emissions, and other wastes (relating to ash, sludge, and other residue). This allowed the negative
environmental impacts of BSO/Origin to be deducted from its Financial gain from economic activities (i.e.,
profit) to produce ““net value added” by the organization

Example 2: The sustainable cost account developed by several UK researchers (e.g., Gray 1992; Gray 1994;
Bebbington and Gray 1997). Here, the amount of money that an organization would have to spend at the end
of the accounting period to place the biosphere back into the position it was in at the start of the accounting
period is estimated. This estimate is included in the income statement as a notional reduction of profit, or
notional addition to operating expenditure, to yield a sustainable income Figure.
Types of environmental audit

Environmental review,
Environmental impact
Environmental survey monitoring, and
assessment
surveillance

Independent
attestation of
The ““eco-audit”
Environmental environmental
(including the British
investigation information (for
Standard 7750)
internal and external
participants)
A Proposed Alternative Approach to
Environmental Accounting
• Accountants lack skills to value environmental resources.
• When preparing Financial statements, accountants rely on actuaries for the
estimation of values for employee superannuation benefits, engineers for the
estimation of the value of specialized plant and equipment, and lawyers for
determining the value of contingent liabilities

• Proposed Plan is a team of accountants and economists

• Accountants: Accountants would have responsibility for the management and
communication of this information to the entity’s stakeholders
• Economists: Economists could be involved in identifying and valuing
nonmarket environmental aspects of an entity’s operations
An Economic Perspective on Valuation of
Environmental Resources
• Nonmarket values have mainly been incorporated into decision-making
processes via extended cost-benefit analysis (CBA) and, to a lesser extent,
natural resource accounting (NRA)1 and environmental impact assessment
(EIA)

• The conceptual framework usually adopted is that of total economic value

(TEV), comprising use value and nonuse value (option and existence value)
• Economists have developed a variety of methods for estimating TEV and its
individual components.
• A good deal of research is being devoted to the stated preference techniques
of contingent valuation, contingent rating, contingent ranking and choice
modeling and surrogate market techniques such as the travel cost and hedonic
price methods.
 Community Rainforest
Reforestation Program (CRRP)
• The CRRP represents a cooperative effort between the Federal
Department of Primary Industries and Energy, Queensland
Department of Natural Resources (DNR), and LGAs (acting
together as the North Queensland Afforestation Program Joint
Board), and private landholders.
• The program has four objectives stated to be of equal
importance:
(1) To develop a private plantation resource base for a
sustainable timber industry in the north of Australia, with
major emphasis on native rain forest species
(2) To address the problem of land degradation in the wet
tropics area, following extensive inappropriate clearing
(3) To provide for improved water quality by establishing
vegetative buffers along rivers and streams
(4) To train a work force to support the long-term practice of
rainforest plantation establishment (CRRP Management
Committee 1996).
A management committee, with an independent chair and two
representatives of each tier of government, had the task of
guiding and coordinating the program.
Current CRRP Reporting Framework
Suggested Environmental Reporting by the
CRRP
Four preliminary issues need to be considered:

What process should be used

What economic valuation
to identify what information is
techniques are appropriate in
important and so should be
the case of the reporting entity
reported in an organization’s
in question.
annual report.

What is the most appropriate

Other reporting considerations
means of communicating this
(e.g., cost-effectiveness)
information to stake holders.
 a. Identification of Relevant Information
Accountants have identified at least two methods of developing an inventory of environmental impacts
of an organization.
Produce an eco-balance
• All inputs to and outputs from an
organization’s activities are identified
and quantified (not necessarily in
financial terms), which assists in
highlighting potential areas of
environmental impact.
• The eco-balance highlights inputs such
as degraded farmland, labor, tree stock
inventory, and fertilizer and pesticides
which ultimately produce outputs such
as employment, vehicle pollution, timber
(sawn logs), and stabilization of areas
vulnerable to erosion.
Identify areas of interest to
stakeholders and internal
management
• The CRRP was developed through a
process of consultation between federal
and state governments, LGAs, and
private landholders, and its operation
depends on cooperation and
involvement of these three groups of
stake holders.
• The CRRP Management Committee
could still provide useful information on
regional issues such as benefits of
increased tourism (due to improving
aesthetics), creation of jobs, and timber
production.
b. Identification of Relevant Economic
Valuation Techniques
• Valuation techniques must be matched to the particular resource or
environmental changes.

• Selection of appropriate economic valuation techniques is guided by at least

four factors, including:
(1) The inventory of environmental impacts to be reported
(2) The availability of economic values for other sites that could be transferred to
the CRRP
(3) The limited resources of the CRRP that could be devoted to reporting
activities
(4) The suitability of economic valuation techniques in terms of their cost and
ease of application.
c. Means of Communicating Environmental
Information
• There are no generally accepted environmental reporting guidelines that are
available for entities such as the CRRP to follow when preparing reports.
Consequently, this situation calls for experimentation with the process of
communicating environmental information.

• A special purpose report on environmental performance that contains

information on several attributes of the CRRP’s environmental impacts is
proposed.

• The special-purpose environmental report could be divided into five sections

based on the four objectives of the CRRP and the perceptions of stakeholders
d. Other Reporting Considerations
• Accounting for both priced and unpriced activities on a systematic basis at regular intervals (e.g.,
annually) ensures maximum benefits from comparability, and fully informed decision making by
affected stakeholders.
• Authors recommended a communication format that allows for information to be added in later
reporting periods as funds become available for reporting, or as the cost of obtaining the
information decreases (e.g., due to advances in technology).
Conclusion
• Traditional accounting methods
overlook the full picture.
• The proposed framework offers
a more comprehensive view.
• Economic valuation empowers
informed decision-making.
• By valuing all benefits, we can
ensure sustainable management
of natural resources.
Thank You!
Prepared by:
Group 1

Adithya Krishnan (PGPSM09001)

Himani Gola (PGPSM09016)
Renuka Kakas (PGPSM08031)