In recent years, the discourse has shifted from Corporate Social Responsibility to Sustainability Reporting. Indeed, some critics would argue that there is very little difference between the two. However, sustainability in this context is a complex and contested concept as it is about ensuring that there are sufficient resources available for future generations. It is very difficult for this to be addressed at individual level of the firm. There are huge external pressures for companies to disclose information in relation to their impacts on carbon emissions, waste management, protection of biodiversity and health and safety. Expectations of key users (stakeholders) are changing.
Required:
i) Identify FOUR limitations of financial reporting in the context of reporting the social and environmental impacts of corporate activity to users of financial statements. (6 marks)
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• Financial accounting focuses on information needs of suppliers of capital and those making resource allocation decisions. (IASB – under the conceptual framework documents have decided who the key users are?).
• Problem of measurability – reasonable accuracy is not possible for many social and environmental impacts and so they are not recognised.
• Accountability is narrowly defined and corporate organisations are seen as being accountable to shareholders.
• Focus on single economic bottom line (i.e. financials)
• Ignores social and environmental externalities (e.g. BP deep water horizon spillage)
• Materiality used to make decisions as to whether to include items in financial statements
• Discounting of future liabilities for inclusion in financial statements or impairment testing does not make sense in the context of providing for environmental and social impacts.
• Entity assumption – of transaction does not impact the entity it is ignored for accounting purposes
• Recognition of assets depends on “control” hence environmental resources such as sir and water cannot be considered assets.
ii) What are companies currently doing to report their social and environmental performance? (4 marks)
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• Reporting on what is known as the Triple Bottom Line (i.e. economic, social and environmental). Problem with this is measuring social impacts – would any organisation seriously report that they are “unsustainable” in terms of their impacts on society and environment.
• Many of the top companies are now producing separate Sustainability Reports in addition to their annual financial statements. Should such reporting be mandatory?
• Global Reporting Initiative (GRI) guidelines – set out the key indicators organisations should report on. The Global Reporting Initiative is an international, multi-stakeholder effort to create a common framework for voluntary reporting of the economic, environmental, and social impact of organization-level activity. Its mission is to improve the comparability and credibility of sustainability reporting worldwide.