Environmental accounting policies and disclosures, their adequacy, and suggested improvements
Finstuen, Debra F.
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This study of environmental accounting was conducted for three purposes: to describe the current state of environmental accounting, to evaluate the adequacy of existing accounting policies and disclosure regulations, and to suggest improvements that would better meet users' needs concerning environmental accounting information. The current state of environmental accounting was shaped and formed primarily as a reaction to the environmental movement. Significant events include the establishment of the Environmental Protection Agency (EPA) and the passage of the Superfund laws. These two events, along with other legislation, resulted in the EPA having the duty to identify contaminated sites for cleanup. The EPA also has the power to name Potentially Responsible Parties (PRPs) and to force these PRPs to pay the costs of cleaning up. The Statement of Financial Accounting Standards Number % (SFAS 5) and the Emerging Issues Task Force Issue Number 90-8 (EITF 90-8) are the major pronouncements serving as guidelines for firms to account for their environmental costs. SFAS 5 states that potential losses should be accrued if they are probable and reasonably estimatable. Otherwise the costs should generally be disclosed. EITF 90-8 says that environmental costs should generally be expensed unless certain criteria are met. The criteria are an increase in the life or capacity of the property, prevention of future damage, or preparation of the property for resale. If any of these criteria are met, the costs should be capitalized. Most disclosure requirements are those of the Securities and Exchange Commission (SEC) . These regulations formerly required companies to disclose any sites that might result in a Superfund cleanup. Now companies have to report any environmental situation unless they can prove it has no material effect on their financial position. The current state of environmental accounting is adequate in some areas, but lacking in others. In order to evaluate the adequacy of existing policies and disclosures, the conceptual framework is considered. The objectives of financial reporting, the characteristics that make accounting information useful, and various principles and constraints make up the conceptual framework issued by the Financial Accounting Standards Board (FASB) . Areas that are inadequate when judged for usefulness of information provided include time frames for amortization of capitalized environmental costs and matching; However, allowance accounts provide useful information despite their disagreement with the conceptual framework. As for disclosures, inadequate areas are the lack of required disclosure of PRP status or general environmental policy, and improper grouping of costs in the financial statements. On the other hand, disclosure requirements for litigation are very sufficient in providing complete information to users. Other items such as the cost estimation model or counsel/client confidentiality also affect the usefulness or availability of information. There are some suggested improvements that might be able to strengthen these as well as the previously mentioned areas. The suggestions call for action by bodies such as the FASB or the SEC to alter their current standards and regulations or to issue new pronouncements