The directors of Kibi Ltd, a bauxite mining company in East Akim Municipal Assembly after reviewing their published financial statements are of the view that their financial statements have a limited environmental information and do not address a broad enough range of users’ needs.
Despite the difficulties in recognising and measuring the financial effects of environmental matters in financial statements, Kibi Ltd discloses the following environmental information in its financial statements:
- Release of minerals and other natural occurring impurities including heavy metals;
- Loss of natural fishing and recreational places;
- Soil erosion and sedimentation, noise and dust.
Required:
i) Explain THREE (3) factors which motivate companies to disclose social and environmental information in their financial statements. (3 marks)
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- Public interest in corporate social responsibility is steadily increasing. Although financial statements are primarily intended for investors and their advisers, there is growing recognition that companies actually have a number of different stakeholders. These include customers, employees and the general public, all of whom are potentially interested in the way in which a company’s operations affect the natural environment and the wider community. These stakeholders can have a considerable effect on a company’s performance. As a result many companies now deliberately attempt to build a reputation for social and environmental responsibility. Therefore the disclosure of environmental and social information is essential.
- There is also growing recognition that corporate social responsibility is actually an important part of an entity’s overall performance. Responsible practice in areas such as reduction of damage to the environment and recruitment increases shareholder value. Companies that act responsibly and make social and environmental disclosures are perceived as better investments than those that do not.
- Another factor is growing interest by governments and professional bodies.
Although there are no IFRSs that specifically require environmental and social reporting, it may be required by company legislation. There are now a number of awards for environmental and social reports and high quality disclosure in financial statements. These provide further encouragement to disclose information.
ii) Identify FOUR (4) specific difficulties in recognising and measuring the financial effects of environmental matters. (6 marks)
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- There is often a considerable delay between the activity that causes an environmental issue such as the contamination of a site due to industrial activity and its identification by the entity or the regulators.
- Accounting estimates do not necessarily have an established historical pattern and can exhibit wide ranges of reasonableness because of the number and nature of assumptions underlying the determination of these estimates.
- Environmental laws and regulations are evolving and interpretation can be difficult or ambiguous. Consultation with an adviser may be necessary to assess their impact on the measurement of assets and liabilities.
- Liabilities can arise other than as a result of legal or contractual obligations, for example, a voluntary commitment.