US GAAP – Generally Accepted Accounting Principles IFRS – International Financial Reporting Standards Adoption of International Financial Reporting Standards by US Companies will change the role of finance professionals. On November 14, 2008, the SEC released its proposed roadmap for the adoption of IFRS in the US thus affirming SEC focus on moving towards global accounting standards. In the Roadmap, the SEC did not set a definitive adoption date, but rather set forth several milestones that, if achieved, could lead to the required use of IFRS by US issuers beginning in 2014. Early adoption is permitted for the qualified companies for the period ending as early as December 15, 2009. Following are the major highlights of the roadmap-

SEC Roadmap 2009 – Early adoption permitted for qualified companies for periods ending December 15 , 2009 2011 -SEC will evaluate the success of early adopters and progress against the pre-defined mile stones. 2014 – IFRS filing for large accelerated filers for Fiscal years ending on or after December 15, 2014. 2015 – IFRS filing for accelerated filers for Fiscal years ending on or after December 15, 2015 2016 – IFRS filing for non- accelerated filers for Fiscal years ending on or after December 15, 2016.

Regardless of the date US companies are required to adopt IFRS, in the near-term one can see continued convergence between US GAAP and IFRS accounting standards, followed by ultimate conversion to IFRS. An agreement between the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”), called the Memorandum of Understanding (“MoU”) pledges to improve both US GAAP and IFRS in 11 major topical areas such as revenue recognition, leasing, consolidation, financial instruments, debt and equity. The effects of these accounting changes reach far beyond just financial reporting. We believe that the adoption is inevitable and would also be in the best interest of investors and companies as they move towards a single set of robust global accounting standards ensuring better transparency across nations.

Impact of IFRS on US Companies Better transparency. Initial assessment of the differences in GAAP and IFRS accounting is necessary within a company Advanced accounting and financial systems needed for IFRS accounting Transitioning will require lot of work such as maintenance of dual ledgers, better information and reporting systems and increased costs While IFRS implementation is focused on public companies, soon private companies will adopt too if they have overseas subsidiaries, foreign based operations or foreign based investors etc.  Differences between IFRS and GAAP More than 200 differences exist between IFRS and GAAP accounting. For example:-   IFRS does not allow extraordinary items, in contrast to GAAP. R & D development is capitalized under IFRS and expensed under GAAP does not allow LIFO inventory costing, whereas GAAP does. IFRS is described as “Principles Based Accounting” while GAAP is more “Rules based” Some of these differences such as eliminating LIFO as an inventory costing methodology under IFRS will affect corporate income-tax expense, as the U.S. Internal Revenue Services allows LIFO accounting if the company also uses it for financial reporting. In addition, IFRS requires more disclosures in the financial statements. When preparing for IFRS, however, it is not possible to determine what future financial results will look like, as calculation of some balance sheet items depend on current interest rates.  Steps to be taken by US Companies to get IFRS Ready  Understand the change – CEOs and CFOs of companies should know about the impact of IFRS on the entity as the change affects not just financial statements but also other regulatory, legal or operational obligations that rely on financial reporting.  Perform an Initial assessment – Hire IFRS advisors to do a detailed and in depth assessment on the current process and practices.  Impact on foreign subsidiaries – Consider how new adoption of standards will influence business across international boundaries. There might be a need to re-visit long term strategies, international taxation, financing and other processes.  Corporate GRC (Governance, Reporting and Compliances– Starting early is the key to avoid huge costs later.  Solid planning – Companies need to consider the short term and long term effect of conversion and prepare a timeline to effectively integrate them into existing processes.  Advantages of IFRS  Global Comparison – A business can compare its financial statements to its foreign competitors more easily when they comply with the same accounting standard  One set of Standards – Multinational companies need not maintain books as per different accounting standards. Better consolidation resulting into time and cost savings.  Global Financing opportunities – Companies can reach the global capital market to raise their funds because of easy comparability of its financial data to foreign competitors for the prospective investors.  Greater transparency – Greater transparency of information and the similar events are treated similarly by different companies  Disadvantages of IFRS Transition to IFRS will involve huge cost and time like adapting changes in accounting software, training accounting professional in IFRS etc.  Accounting profitability of the company may get affected during the initial phase of IFRS  Investors in the transition period will undoubtedly be somewhat confused as they have to compare similar companies with different accounting standards. Our trained IFRS consultants can help you understand the change and gear you up for future reporting and compliances. Contact us to do an evaluation of impact of IFRS on your company’s critical areas.

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Green Accounting-

A Movement Towards Sustainability

What is this “Green Accounting” that we’re hearing about? Is it important to your company?

“Green Accounting” is a term used to describe accounting practices which attempt to factor environmental costs into the financial results of a company’s, or a country’s operations.

The term “Green Accounting” first came into common use because of economist Professor Peter Wood, more than twenty years ago. At that time, Wood was among those who argued that the “gross domestic product” measure ignored the environment and our impact on it, and thus decision-makers needed a revised model of financial condition, one that incorporated “green accounting” or “green national accounting” into the mix. “Green Accounting” aims to help us all measure the true costs of our “operations” on the earth, and to track the sustainability of our way of life on this little green planet.

“Green Accounting practices” can include reducing a company’s consumption of natural resources. Some companies focus on using less paper, “going paperless” as much as possible, and many support their employees in telecommuting, which saves time, uses smaller quantities of natural resources, and produces less environmental pollution.

On a larger scale, countries are being urged to do “Green Accounting,” which integrates environmental and economic accounting, and is also known as “Green Accounting .” The United Nations Environmental Program is doing extensive work in this area, and provides many resources to assist countries in implementing and using a wide array of tools and analytical measures for engaging in national “Green Accounting.”

Growing pressures on the environment and increasing worldwide environmental awareness have emphasized the importance of having countries attempt to accurately value and account for their assorted environmental and natural resources, as a means of formulating appropriate and sustainable economic, trade and social policies.

Existing systems of national “accounts” seldom take account of the impacts of economic and trade activities on natural resources. These traditional national accounts have included physical capital as an asset that depreciates over time, but they ignore the depletion of natural resources, or “natural capital,” and treat these resources merely as sources of current income. Likewise, conventional national accounts do not reflect important social factors such as income distribution or poverty eradication. To provide the appropriate policy makers with more accurate information on their national progress towards sustainability on all levels, it is important to integrate the physical environment into national accounts.

The System of Integrated Environmental and Economic Accounting (SEEA) is a tool that helps interested parties and countries track environmental degradation and natural resource depletion.

And, here are some additional “Green Accounting” points to ponder from The Native Forest Council of Eugene, Oregon:

“Yet some would argue that (even adding in) environmental accounting doesn’t go far enough. Redefining Progress, a San Francisco-based progressive think tank, maintains that we also need to incorporate activities such as crime and divorce as negatives and community life and volunteer activity as positives in a true measure of well-being–a ‘genuine progress indicator.’ Maybe so. After all, we tend to treasure what we measure.” Time will tell how “Green” we are willing and able to make our personal, corporate, and national accounting. Today, “Green Accounting” is on the rise in the USA and around the earth.

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What is Carbon foot print/Environmental accounting and why is it needed?

Carbon footprint is the amount of greenhouse gases produced in our day-to-day lives through burning fossil fuels for electricity, heating and transportation, etc.” Carbon footprint accounting measures these greenhouse gas emission in terms of carbon dioxide equivalent (CO₂e).

Environmental accounting is a broader term and is aimed to introduce a methodology to account for full environmental costs, integrate them into budgeting, proactive decision making and comply with future mandates of sustainability reporting.

EA (Environmental Accounting) is seen by corporate and environmental advocates as a necessary complement to improved environmental decision making which will in turn help corporate identify and implement financially desirable environmental innovation.’

Provides an incentive for companies to improve data management about their eco-efficiency and accountability for environmental impacts and thus have an edge over competition.

What is the current US stand on carbon accounting?

The largest single contributor to climate change is carbon dioxide. The Kyoto Protocol in 1997 has established mandatory emissions reductions of carbon dioxide for participating nations. The participating nations were European Unions, USA, Canada, Russia, Japan and Australia. By agreement, this treaty will not come into force until there were enough ratifiers to constitute at least 55% of 1990 emissions report. Russia in 2005 had ratified this treaty, whereas US which accounts for nearly quarter of carbon dioxide emission refused to ratify the treaty under Bush Administration. Within weeks of taking office, President Obama has radically shifted the global equation, placing the United States at the forefront of the international climate effort. His chief climate negotiator, Todd Stern, said that the United States would be involved in the negotiation of a new treaty — to be signed in Copenhagen in December — “in a robust way.” Obama administration has promised to push through federal legislation this year to curb carbon dioxide emissions in the United States.

Which countries have mandated the carbon accounting?

Currently Thirty-seven developed countries, including Japan, Australia and nations in the European Union, ratified the accord, agreeing to reduce or limit the growth of carbon dioxide emissions by specified amounts. All UK companies should disclose their total national emissions, for example. Emissions from industrial processes, heating, transport and refrigerant and all electricity consumption should also be included.

What are current standards on environmental reporting?

Regulators to date have opted for a relatively “non-interventionist” approach to environmental accounting reform. The U.S. Environmental Protection Agency, for instance, through surveys and case studies, has identified weaknesses in private sector environmental accounting and promotes the diffusion of accounting “best practices.” This outreach- and communication-based approach may be expanded upon in the future, however. There currently are calls from some environmental advocates for more aggressive regulatory actions in this area, such as mandated environmental accounting. And several states have commenced experiments in this area. Pollution prevention statutes, in particular, are seen as a potential legislative vehicle for mandated environmental accounting.

Yet, despite progress in the identification of problems and the development of improved methodologies — and the possibility of regulatory initiatives that feature mandated environmental accounting — the field lacks a methodology for evaluating the social and private benefits of improved environmental accounting. Whether regulators continue to motivate EA indirectly via outreach to the private sector, or more directly via incentives such as tax breaks or mandates, private sector resources and regulatory attention should be focused on initiatives that promise the greatest benefit.

What are measures required by the company to implement carbon accounting?

The first and foremost thing is to have improved information flow- Environmental accounting is more than just accounting for environmental benefits and costs. It is accounting for any costs and benefits that arise from changes to a firm’s products or processes, where the change also involves change in environmental aspects. It is any information with explicit or implicit financial content that is used as an input to a firm’s decision making.
Information is better if it corrects a pre-existing inaccuracy. Information is better if it reduces uncertainty surrounding some future cost or benefit. Information is better if it is more detailed.

How can Environmental Accounting save money for businesses?

Business transactions today must include consideration of environmental issues. Complex law can impose significant environmental liabilities on purchasers, sellers and lenders involved in a financial transaction, whether or not they caused the environmental impacts or own the assets. Environmental liabilities associated with merger, acquisitions, and similar business transactions can present substantial risk and environmental accounting is an excellent risk management tool and improving company image at the same time.

For those reasons, it is essential to use Environmental Due Diligence as a tool for determining environmental liabilities when financial transactions are being negotiated. This not only provides greater management assurance over the transaction, but also enhances the organization’s credibility in the eyes of the skeptical shareholders.

Adopted from KPMG 2002 Research Report on Environmental Liabilities in South Africa

Direct & indirect emissions?

Direct GHG emissions are emissions from sources that are owned or controlled by the reporting entity and Indirect GHG emissions are emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity.

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