01     technical
           environmental
                                management
                       relevant to acca qualiFication PaPer F5 From june 2011 
        The new Paper F5 syllabus, which is          students should note that the PaPer F5 
        effective from June 2011 onwards,            syllabus examines ‘environmental management 
        introduces the area of environmental 
        management accounting for the first          accounting’ rather than ‘environmental 
        time. It has, so far, been examined          accounting’. environmental accounting is a 
        only in Paper P5 but, with its growing 
        importance, it seemed appropriate to         broader term that encomPasses the Provision 
        introduce it at an earlier level. The two    oF environment-related inFormation both 
        requirements of the Paper F5 syllabus 
        are as follows:                              externally and internally.
        ¤ discuss the issues businesses 
           face in the management of 
           environmental costs                          The aim of this article is to give        an introduction to 
        ¤ describe the different methods a           a general introduction on the area           environmental management 
           business may use to account for its       of environmental management                  accounting (ema)
           environmental costs.                      accounting, followed by a discussion         Many of you reading this article 
                                                     of the first of the two requirements         still won’t be entirely clear on what 
        You should note that the Paper F5            listed above. The second of them             environmental management accounting 
        syllabus examines ‘environmental             has already been covered in a high           actually is. You will not be alone! There 
        management accounting’ rather                level of detail in Shane Johnson’s           is no single textbook definition for it, 
        than ‘environmental accounting’.             article of June 2004 (www.accaglobal.        although there are many long-winded, 
        Environmental accounting is a broader        com/students/student_accountant/             jargon ridden ones available. Before 
        term that encompasses the provision          archive/2004/42/1073480), so                 we get into the unavoidable jargon, the 
        of environment-related information           I will only provide a summary of             easiest way to approach it in the first 
        both externally and internally. It focuses   the four main environmental cost             place is to step back and ask ourselves 
        on reports required for shareholders         accounting techniques                        what management accounting itself 
        and other stakeholders, as well of the                                                    is. Management accounts give us 
        provision of management information.                                                      an analysis of the performance of a 
        Environmental management                                                                  business and are ideally prepared on a 
        accounting, on the other hand, is a                                                       timely basis so that we get up-to-date 
        subset of environmental accounting.                                                       management information. They break 
        It focuses on information required                                                        down each of our different business 
        for decision making within the                                                            segments (in a larger business) in a 
        organisation, although much of the                                                        high level of detail. This information is 
        information it generates could also be                                                    then used to assess how the business’ 
        used for external reporting.                                                              historic performance has been and, 
                                                                                                  moving forward, how it can be improved 
                                                                                                  in the future.
                                                              student accountant issue 15/2010                                          02
                                                                                               Studying Paper F5? 
                                                     Performance objectives 12, 13 and 14 are relevant to this exam
          accounting
             Environmental management                   Once the costs have been identified            In addition to these savings to the 
           accounting is simply a specialised           and information accumulated on how           company, however, are the all-important 
           part of the management accounts that         many customers are using the gym, it         savings to the environment since 
           focuses on things such as the cost of        may actually be established that some        less power and cotton (or whatever 
           energy and water and the disposal            customers are using more than one            materials the towels are made from) 
           of waste and effluent. It is important       towel on a single visit to the gym. The      is now being used, and the scarce 
           to note at this point that the focus of      gym could drive forward change by            resources of our planet are therefore 
           environmental management accounting          informing customers that they need           being conserved. Lastly, the gym 
           is not all on purely financial costs. It     to pay for a second towel if they need       is also seen as an environmentally 
           includes consideration of matters such       one. Given that this approach will be        friendly organisation and this, in turn, 
           as the costs vs benefits of buying from      seen as ‘environmentally-friendly’, most     may attract more customers and 
           suppliers who are more environmentally       customers would not argue with its           increase revenues. Just a little bit of 
           aware, or the effect on the public image     introduction. Nor would most of them         management accounting (and common 
           of the company from failure to comply        want to pay for the cost of a second         sense!) can achieve all these things.
           with environmental regulations.              towel. The costs to be saved by the            While I always like to minimise the 
             Environmental management                   company from this new policy would           use of jargon, in order to be fully versed 
           accounting uses some standard                include both the energy savings from         on what environmental management 
           accountancy techniques to identify,          having to run fewer washing machines         accounting is really seen by the 
           analyse, manage and hopefully reduce         all the time and the staff costs of          profession as encompassing today, it is 
           environmental costs in a way that            those people collecting the towels and       necessary to consider a couple of the 
           provides mutual benefit to the company       operating the machines. Presumably,          most widely accepted definitions of it. 
           and the environment, although                since the towels are being washed less       In 1998, the International Federation 
           sometimes it is only possible to provide     frequently, they will need to be replaced    of Accountants (IFAC) originally 
           benefit to one of these parties. For         by new ones less often as well.              defined environmental management 
           example, activity-based costing may                                                       accounting as:
           be used to ascertain more accurately 
           the costs of washing towels at a                                                          ‘The management of environmental 
           gym. The energy used to power the                                                         and economic performance through 
           washing machine is an environmental                                                       the development and implementation 
           cost; the cost driver is ‘washing’.                                                       of appropriate environment-related 
                                                                                                     accounting systems and practices. 
                                                                                                     While this may include reporting 
           environmental management accounting is                                                    and auditing in some companies, 
                                                                                                     environmental management 
           a sPecialised Part oF the management accounts                                             accounting typically involves lifecycle 
           that Focuses on the cost oF energy and                                                    costing, full cost accounting, benefits 
                                                                                                     assessment, and strategic planning for 
           water and the disPosal oF waste and eFFluent.                                             environmental management.’
        03     technical
          Then, in 2001, The United Nations            To summarise then, for the purposes       ¤ Environmental prevention costs: the 
        Division for Sustainable Development        of clarifying the coverage of the              costs of activities undertaken to 
        (UNDSD) emphasised their belief that        Paper F5 syllabus, my belief is that           prevent the production of waste.
        environmental management accounting         EMA is internally not externally focused     ¤ Environmental detection costs: 
        systems generate information for            and the Paper F5 syllabus should,              costs incurred to ensure that 
        internal decision making rather than        therefore, focus on information for            the organisation complies with 
        external decision making. This is in line   internal decision making only. It              regulations and voluntary standards.
        with my statement at the beginning          should not be concerned with how             ¤ Environmental internal failure costs: 
        of this article that EMA is a subset of     environmental information is reported          costs incurred from performing 
        environmental accounting as a whole.        to stakeholders, although it could             activities that have produced 
        The UNDSD make what became a                include consideration of how such              contaminants and waste that 
        widely accepted distinction between         information could be reported internally.      have not been discharged into 
        two types of information: physical          For example, Hansen and Mendoza                the environment.
        information and monetary information.       (1999) stated that environmental costs       ¤ Environmental external failure 
        Hence, they broadly defined EMA to be       are incurred because of poor quality           costs: costs incurred on activities 
        the identification, collection, analysis    controls. Therefore, they advocate the         performed after discharging waste 
        and use of two types of information for     use of a periodical environmental cost         into the environment.
        internal decision making:                   report that is produced in the format 
        ¤ physical information on the use, flows    of a cost of quality report, with each       It is clear from the suggested format of 
          and destinies of energy, water and        category of cost being expressed             this quality type report that Hansen and 
          materials (including wastes)              as a percentage of sales revenues or         Mendoza’s definition of ‘environmental 
        ¤ monetary information on                   operating costs so that comparisons          cost’ is relatively narrow.
          environment-related cost, earnings        can be made between different periods 
          and savings.                              and/or organisations. The categories of      managing environmental costs
                                                    costs would be as follows:                   There are three main reasons why the 
        This definition was then adopted by an                                                   management of environmental costs 
        international consensus group of over                                                    is becoming increasingly important in 
        30 nations and thus eventually adopted                                                   organisations. First, society as a whole 
        by IFAC in its 2005 international                                                        has become more environmentally 
        guidance document on ‘environmental                                                      aware, with people becoming 
        management accounting’.                                                                  increasingly aware about the ‘carbon 
                                                                                                 footprint’ and recycling taking place 
                                                                                                 now in many countries. A ‘carbon 
        the management oF environmental costs can  footprint’ (as defined by the Carbon 
                                                                                                 Trust) measures the total greenhouse 
        be a diFFicult Process. this is because First,                                           gas emissions caused directly and 
        just as ema is diFFicult to deFine, so too are                                           indirectly by a person, organisation, 
        the actual costs involved. second, having                                                event or product. 
        deFined them, some oF the costs are diFFicult 
        to seParate out and identiFy. third, the costs 
        can need to be controlled but this can only 
        be done iF they have been correctly identiFied.
                                                                student accountant issue 15/2010                                             04
           Companies are finding that they can            much oF the inFormation that is needed to 
           increase their appeal to customers             PrePare environmental management accounts 
           by portraying themselves as 
           environmentally responsible. Second,           could actually be Found in a business’
           environmental costs are becoming               general ledger. 
           huge for some companies, particularly 
           those operating in highly industrialised 
           sectors such as oil production. In 
           some cases, these costs can amount             deFining environmental costs                  Neither of these definitions contradict 
           to more than 20% of operating                  Many organisations vary in their              each other; they just look at the costs 
           costs. Such significant costs need             definition of environmental costs.            from slightly different angles. As a 
           to be managed. Third, regulation is            It is neither possible nor desirable          Paper F5 student, you should be aware 
           increasing worldwide at a rapid pace,          to consider all of the great range            that definitions of environmental costs 
           with penalties for non-compliance also         of definitions adopted. A useful              vary greatly, with some being very 
           increasing accordingly. In the largest         cost categorisation, however, is that         narrow and some being far wider.
           ever seizure related to an environmental       provided by the US Environmental 
           conviction in the UK, a plant hire firm,       Protection Agency in 1998. They stated        identiFying environmental costs
           John Craxford Plant Hire Ltd, had to           that the definition of environmental          Much of the information that is needed 
           not only pay £85,000 in costs and fines        costs depended on how an organisation         to prepare environmental management 
           but also got £1.2m of its assets seized.       intended on using the information. They       accounts could actually be found in 
           This was because it had illegally buried       made a distinction between four types         a business’ general ledger. A close 
           waste and also breached its waste              of costs:                                     review of it should reveal the costs of 
           and pollution permits. And it’s not            ¤ conventional costs: raw material            materials, utilities and waste disposal, 
           just the companies that need to worry.           and energy costs having                     at the least. The main problem is, 
           Officers of the company and even junior          environmental relevance                     however, that most of the costs will 
           employees could find themselves facing         ¤ potentially hidden costs: costs             have to be found within the category 
           criminal prosecution for knowingly               captured by accounting systems              of ‘general overheads’ if they are to be 
           breaching environmental regulations.             but then losing their identity in           accurately identified. Identifying them 
             But the management of                          ‘general overheads’                         could be a lengthy process, particularly 
           environmental costs can be a difficult         ¤ contingent costs: costs to be incurred      in a large organisation. The fact that 
           process. This is because first, just             at a future date, eg clean up costs         environmental costs are often ‘hidden’ 
           as EMA is difficult to define, so too          ¤ image and relationship costs: costs         in this way makes it difficult for 
           are the actual costs involved. Second,           that, by their nature, are intangible,      management to identify opportunities 
           having defined them, some of the                 for example, the costs of preparing         to cut environmental costs and yet it is 
           costs are difficult to separate out and          environmental reports.                      crucial that they do so in a world which 
           identify. Third, the costs can need to be                                                    is becoming increasingly regulated 
           controlled but this can only be done if        The UNDSD, on the other hand,                 and where scarce resources are 
           they have been correctly identified in         described environmental costs as              becoming scarcer.
           the first place. Each of these issues is       comprising of:
           dealt with in turn below.                      ¤ costs incurred to protect the 
                                                            environment, eg measures taken to 
                                                            prevent pollution and
                                                          ¤ costs of wasted material, capital 
                                                            and labour, ie inefficiencies in the 
                                                            production process.