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Contemporary Issues in Accounting, Special Topics in Accounting, MBA, University of Jordan
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  • 1. Solution Manual to accompany Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Kimberly Ferlauto & Matt Tilling PREPARED BY: Michaela Rankin John Wiley & Sons Australia, Ltd 2012
  • 2. Chapter 11: Sustainability and Environmental Accounting © John Wiley and Sons Australia, Ltd 2012 11.1 CHAPTER 11 SUSTAINABILITY AND ENVIRONENTAL ACCOUNTING Contemporary Issue 11.1: Perfect timingfor world’sfirst: Carbon Neutral Winery 1. Outline the potential costs and benefits of making moves towards carbon neutrality. (J) Costs would include putting a system in place to measure greenhouse gas emissions before they can be managed and mitigated; changing practices and training of staff to mitigate emissions; the cost of changing agricultural practices; changing transport used; costs of certification etc. Benefits would include an increase in sales, particularly to customers specifically interested in the origin of their products; increasing marketing opportunities to different retailers, such as supermarkets signing up to a food miles program; energy savings, and therefore reduction in energy costs. 2. The ‘food miles’ movement is increasing in strength in the United Kingdom, with some major retailers, for example Tesco, asking suppliers to label products with their carbon footprint. Evaluate what impact this move could have on the New Zealand wine industry. (J) New Zealand wineries that embrace the carbon neutral concept and seek certification are likely to increase their market share in the United Kingdom, as they are meeting their requirements for labeling. They are likely to take market share from wineries in other countries, which are not considering these moves. It is likely to act as a marketing opportunity and increase the industry’s exposure to different markets and customers.
  • 3. Solution manual to accompany:Contemporary Issues in Accounting © John Wiley and Sons Australia, Ltd 11.2 Review questions 1. Explain the meaning of sustainability and outline why corporations might consider it in their business operations. Sustainability, or sustainable development, is concerned with development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It refers to three main areas – economic development, environmental development and social development. Corporations might consider their effect on sustainability as they are in control of the majority of the earth’s resources so any moves towards sustainability cannot occur without the support of business. Figure 11.1 presents reasons that BHP Billiton embraces sustainable development. These include: to reduce business risk and enhance business opportunities; to gain an maintain their ‘licence to operate’ – which is also referred to as a social contract; to improve operational performance and efficiency; improved attraction and retention of its workforce; maintain security of operations; enhanced brand recognition and reputation and to enhance their ability to strategically plan for the longer-term. 2. Explain the difference between eco-justice and eco-efficiency, and explain how both might relate to business activities. Eco-justice considers the ability to meet the needs of the current inhabitants, including strategies to alleviate poverty, access to basic water, food and shelter. It also takes a long-term focus where it recognizes that consumption of resources today needs to consider the effect this will have on the quality of life of future inhabitants. These two aspects of eco-justice are referred to as intragenerational equity and intergenerational equity respectively. Eco-efficiency, on the other hand, focuses on how efficiently resources are used to minimize the impact on the environment. Some businesses are larger than some governments. As such, they have a great deal of power over resources. Given businesses control the majority of the world’s resources, entities can put systems in place to contribute to the efficient use of these resources to meet eco-efficiency demands. They also have control over the extent to which resources are depleted to avoid eco-justice considerations relating to intergenerational equity. Many businesses operate globally, so are in a position to be able to assist to alleviate poverty, and ensure their employees in developing countries, and their communities have access to food, clean water and shelter. 3. What reasons can an entity provide for adopting sustainable development? There are a number of reasons that businesses can provide for adopting sustainable development. A good discussion is provided in Figure 11.1, which presents reasons that BHP Billiton embraces sustainable development. These include: to reduce business risk and enhance business opportunities; to gain an maintain their ‘licence to
  • 4. Chapter 11: Sustainability and Environmental Accounting © John Wiley and Sons Australia, Ltd 2012 11.3 operate’ – which is also referred to as a social contract; to improve operational performance and efficiency; improved attraction and retention of its workforce; maintain security of operations; enhanced brand recognition and reputation and to enhance their ability to strategically plan for the longer-term. 4. Identify what information entities are likely to provide if they use triple bottom line reporting. Triple bottom line reporting is also referred to as environmental, social and governance reporting and sustainability reporting. Companies are likely to provide information about their financial performance, their environmental performance and their social performance. 5. Explain the difference between sustainability reporting and traditional financial reporting. Traditional financial reporting focuses on recognising the financial effects of an entity’s transactions. It follows generally accepted accounting principles and accounting standards and is audited by an external auditor. The financial report is limited to transactions that have a financial impact. Sustainability reporting however goes beyond this. It includes reporting on the environmental activities and of the entity as well as its social impacts. These are combined with financial information. 6. What benefits should entities expect from preparing sustainability reports? The following benefits can be gained from preparing sustainability reports:  Embedding sound corporate governance and ethics systems throughout the organisation  Improved management of risk through enhanced management systems and performance monitoring  Formalising and enhancing communication with key stakeholders  Attracting and retaining competent staff  Ability to benchmark performance with other entities. 7. What is international integrated reporting and how does it differ from the current financial reporting systemwe have? Integrated reporting is designed to improve sustainability reporting and integrate it more closely with financial and governance reporting. It is designed to bring together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. It differs from our current financial reporting system as it goes beyond the financial impact of activities, and a general disclosure of
  • 5. Solution manual to accompany:Contemporary Issues in Accounting © John Wiley and Sons Australia, Ltd 11.4 governance to include a framework to integrate environmental and social reporting together in an integrated way. 8. What is the Global Reporting Initiative, and what is its purpose? The Global Reporting Initiative was launched in 1997 as an initiative to develop a globally accepted reporting framework to enhance the quality of sustainability reporting. It provides a framework of principles and performance indicators that organisations can use to measure and report their social and environmental performance. Its purpose is to enhance the transparency, comparability and clarity of sustainability reports. 9. Identify four corporate stakeholders and explain how they affect a business’s operations. Table 11.3 provides examples of a range of stakeholders. These can include: Shareholders – provide funds to the entity. Their support is essential for continued success of the entity, as their support affects share price and corporate value. Customers – major users of the entity’s products and services. A continued and growing supply of customers is essential to the continued success of the entity. Fund investors – like shareholders, they buy shares in the company and support companies for which they see opportunities for growth in value. Community groups – may supply labour to the entity, but need to support the entity’s operations if the entity and community are to exist harmoniously. Media – can impact the views of other stakeholders by voicing concerns and making other groups aware of the businesses operations and activities Government and regulators – monitor mandatory reporting, impose taxes and charges and uphold legislation that the entity needs to follow. 10. For the four corporate stakeholders you have identified above, document how an organisation might engage with them about sustainability issues. Entities can engage with these stakeholders in the following ways: Shareholders – direct emails, provide information in annual reports and stand-alone sustainability reports, website. Customers – directly through email and other written communication. The media and the corporate website would also be useful. Fund investors – direct communication through email, phone, meetings with fund managers, and through providing sustainability information in written form, for example the sustainability report.
  • 6. Chapter 11: Sustainability and Environmental Accounting © John Wiley and Sons Australia, Ltd 2012 11.5 Community groups – can use the media, company website, attending community meetings, and through local government Media – media releases, direct communication through email, phone and by providing copies of sustainability reports. Government and regulators – direct reporting to show are compliant with regulations, email and phone. 11. Identify how ethical investment can affect corporate decision making regarding sustainable business operations. Ethical investment and the growth in ethical funds pose an increasing influence on entities’ corporate sustainability performance and reporting. Increasing demands for social and environmental performance information means that companies are seeking to satisfy their needs to attract funds and support. Being listed on a sustainability index such as one of the Dow Jones Sustainability Indexes means companies can also attract investment and support from fund managers and small investors who are driven in their investment choice by ethical, social and/or environmental considerations. 12. Explain what an environmental management systemis and how it can be used to improve environmental performance. An environmental management system (EMS)is a system that organisations implement to measure, record and manage their environmental performance. It is useful to assist in improving environmental performance because it allows entities to measure and record their performance, set benchmarks or key performance indicators, and put in place mechanisms to meet these benchmarks. It is often said you can’t control what you can’t measure. An EMS allows an entity to measure its environmental outputs in order to look towards controlling and reducing them, thus improving performance. 13. Explain how emissions trading schemes are likely to affect financial reporting. An emissions trading schemes is a system designed to control emissions by allowing participants to trade excess emissions permits. This is likely to affect financial reporting because it will require companies to measure and report emissions permits it holds, through grants from government and those it purchases. There are also likely to be financial implications from the trade of permits. While there are currently no financial reporting guidelines around the operation of an emissions trading scheme it is likely that emissions permits are likely to be reported as either financial instruments or intangible assets, and both are used in jurisdictions which currently have an emissions trading scheme in place.
  • 7. Solution manual to accompany:Contemporary Issues in Accounting © John Wiley and Sons Australia, Ltd 11.6 Application questions 11.1 There are currently no formal accounting standards for the reporting of social and environmental activities. Evaluate what issues this has for preparation of financial reports. (J, K) Given there are currently no formal accounting standards for the reporting of social and environmental activities this means that these activities are not going to be included in the transactions reflected in the financial statements. For example, an entity’s impact on the environment, in terms of pollution is not costed and included as an expense. While entities are required to account for the present value of future cleanup costs of contaminated sites, they do not have to account for the ongoing impact of this contamination on the environment. Similarly, entities are not currently required to account for any social cost which does not have a direct financial impact.. While some disclosures are required concerning employee benefits, 11.2 In this chapter a range of stakeholders have been identified that managers should consider when determining their sustainability performance and reporting. Determine how managers should engage with each one of these stakeholders and document what sustainability issues they would be likely to discuss during this engagement process. (J, K) Shareholders – direct emails, provide information in annual reports and stand-alone sustainability reports, website. The entity would be likely to discuss their sustainable business activities and how these will add to firm value. This might also include how it is addressing legislation on carbon emissions. Customers – directly through email and other written communication. The media and the corporate website would also be useful. Customers may be interested in the source of products, with some actively seeking green or fair trade products. Consequently entities will communicate the environmental credentials of products including the extent to which they are sourced from sustainable sources. Fund investors – direct communication through email, phone, meetings with fund managers and through providing sustainability information in written form, for example the sustainability report. Some investors search out socially responsible companies to invest in. Entities will report their social and environmental activities to attract ethical fund investors. Managers will also discuss how the entity is addressing issues such as carbon emissions disclosure and reduction requirements. Community groups – can use the media, company website, attending community meetings, and through local government. Entities will discuss facilities and services provided to local community groups, and issues such as job creation, health, and emissions information relating to the local environment. Media – media releases, direct communication through email, phone and by providing copies of sustainability reports. Given the media acts as a voice that sets the agenda relating to many issues an entity will wish to advise any positive social and environmental activities.
  • 8. Chapter 11: Sustainability and Environmental Accounting © John Wiley and Sons Australia, Ltd 2012 11.7 Government and regulators – direct reporting to show are compliant with regulations, email and phone. The entity will discuss the potential impacts of legislative changes relating to social and/or environmental activities. 11.3 Obtain the 2011 Sustainability Report for Toyota Ltd. Prepare a report that addresses the following issues:(J, K, CT) The 2011 Sustainability Report for Toyota Ltd is presented for the first time online. (a) Document Toyota’s vision and mission statement, and articulate how these might relate to sustainability, if at all. Our vision Most respected and admired company. Our mission We deliver outstanding automotive products and services to our customers, and enrich our community, partners and environment. Our four core values Customer first Respect for people International focus Continuous improvement and innovation. While the vision does not specifically relate to sustainability, the mission and core values do. In Toyota Ltd’s mission they discuss enriching the community and environment. This will lead to organizational strategies to address these sustainability issues. In addition one of the company’s four core values is respect for people, implying a social focus beyond a profit motive. The company also has a separate environment vision and action plan. (b) Outline Toyota’s stakeholders and explain how they have engaged each of these stakeholder groups. In its sustainability report under ‘Stakeholder Engagement’ the following table highlights stakeholders groups the company engages with and how: Stakeholder Group Key Issues Response and Engagement in 2010/11 Employees Employee satisfaction and job security Working at Toyota,communication broadcasts and employment programs Career and professional development Learning and development programs via Toyota Institute Australia. Read about our Employees Customers Customer service Customer satisfaction surveys Product quality Interaction via dealerships
  • 9. Solution manual to accompany:Contemporary Issues in Accounting © John Wiley and Sons Australia, Ltd 11.8 Customer Experience Program Business partners - dealers Effects of Great East Japan Earthquake and natural disasters in Australia Dealer support during natural disasters Environmental impacts Dealer Environmental Risk Audit Program and Toyota Environmental Dealership Program Ongoing development Dealer training Business partners - suppliers Effects of Great East Japan Earthquake and natural disasters in Australia Annual Supplier conference Self-reliance Supplier Development Programs Community Contribution to local community Local and national community partnerships Community sponsorships Government Ongoing viability of Australian automotive market Regular interaction on key issues such as production of next generation engine at Altona plant Written submissions including NPI, EEO and NGERS Toyota Motor Corporation Efficient operations Regular liaison on operating issues including product quality, sales and marketing The company also discusses a Community Liaison Committee under its Altona Environmental Improvement Plan and a Stakeholder Engagement Survey. (c) Outline governance mechanisms in place on the Board of Directors to address sustainability. Under the ‘Governance’ section of the report the company reports that the board has an Environment Committee and a Health and Safety Committee. Both of these would address sustainability issues. (d) Articulate how Toyota Ltd links sustainability to its risk management systems. Toyota Ltd does not disclose information in its 2011 report on how it links sustainability to its risk management system. A perusal of the 2010 report, however, discussed the Enterprise Risk Management process that is used to develop a risk profile for each business unit, which is then used for planning yearly objectives. The organization was in the process of integrating the risk management process into other business planning and management systems at that time.
  • 10. Chapter 11: Sustainability and Environmental Accounting © John Wiley and Sons Australia, Ltd 2012 11.9 (e) Outline any guidance Toyota Ltd used in implementing environmental and social performance and reporting systems. The company has gained ISO14001 certification for its environ
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