Accounting for an Environmentally Conscious Setting

Abstract

Environmental performance, measurement, and management issues are becoming increasingly important to many different stakeholders such as investors, creditors, customers, employees, competitors, taxing authorities, regulators, environmental interest groups, Environmental Protection Agency, media, neighborhood communities, and general public. All these stakeholders need credible information on environment-related activities of firms to make their own decisions. At the same time, the rate of development-related natural resource consumption has outpaced nature’s regeneration rate, making such development unsustainable. A reversal of this trend requires appropriate managerial incentives at the firm level and meaningful policies at the macro level. Consequently, microlevel intra-firm environmental performance measures, environmental performance disclosures by firms, and ecological auditing have become increasingly important. This has resulted in an increasing demand for sound commonly accepted internal and external environmental accounting practices. A large part of these practices are in an early stage of development. This chapter presents the current status of environmental accounting, which includes both the accounting for financial impact of environment-related activities and nonfinancial measurement of environmental performance. It also presents new developments in accounting, which could facilitate environmental performance evaluation. Finally, it briefly addresses the current research in the area of environmental accounting, reporting, and management.

Appendix

Union Carbide (1998 annual report)

Discussion and analysis part of the report

7.1.1 Costs Relating to Protection of the Environment

Worldwide costs relating to environmental protection continue to be significant, due primarily to stringent laws and regulations and to the corporation’s commitment to industry initiatives such as RESPONSIBLE CARE, as well as to its own internal standards. In 1998, worldwide expenses related to environmental protection for compliance with federal, state, and local laws regulating solid and hazardous wastes and discharge of materials to air and water, as well as for waste-site remedial activities, totaled $91 million. Expenses in 1997 and 1996 were $100 million and $110 million, respectively. In recent years, such environmental expenses have decreased as the corporation has made progress toward completing major remediation projects. In addition, worldwide capital expenditures relating to environmental protection, including those for new capacity and cost reduction and replacement, in 1998 totaled $57 million, compared to $68 million and $43 million in 1997 and 1996, respectively.

The corporation, like other companies in the United States, periodically receives notices from the U.S. Environmental Protection Agency and from state environmental agencies, as well as claims from other companies, alleging that the corporation is a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as Superfund) for past and future cleanup costs at hazardous waste sites at which the corporation is alleged to have disposed of, or arranged for treatment or disposal of, hazardous substances. The corporation is also undertaking environmental investigation and remediation projects at hazardous waste sites located on property currently and formerly owned by the corporation pursuant to Superfund, as well as to the Resource Conservation and Recovery Act and equivalent state laws.

There are approximately 118 hazardous waste sites at which management believes it is probable or reasonably possible that the corporation will incur liability for investigation and/or remediation costs. The corporation has established accruals for those hazardous waste sites where it is probable that a loss has been incurred and the amount of the loss can reasonably be estimated. The reliability and precision of the loss estimates are affected by numerous factors, such as the stage of site evaluation, the allocation of responsibility among PRPs, and the assertion of additional claims. The corporation adjusts its accruals as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made, and to reflect new and changing facts.

On December 31, 1998, the corporation’s accruals for environmental remediation totaled $220 million ($264 million in 1997). Approximately 53% of the accrual (55% in 1997) pertains to estimated future expenditures for site investigation and cleanup, and approximately 47% (45% in 1997) pertains to estimated expenditures for closure and postclosure activities. See Note 17 to the financial statements for a discussion of the environmental sites for which the corporation has remediation responsibility. In addition, the corporation had environmental loss contingencies of $121 million on December 31, 1998.

Estimates of future costs of environmental protection are necessarily imprecise, due to numerous uncertainties. These include the impact of new laws and regulations, the availability and application of new and diverse technologies, the identification of new hazardous waste sites at which the corporation may be a PRP, and, in the case of Superfund sites, the ultimate allocation of costs among PRPs and the final determination of the remedial requirements. While estimating such future costs is inherently imprecise, taking into consideration the corporation’s experience to date regarding environmental matters of a similar nature and facts currently known, the corporation estimates that worldwide expenses related to environmental protection, expressed in 1998 dollars, should average about $110 million annually over the next 5 years. Worldwide capital expenditures for environmental protection, also expressed in 1998 dollars, are expected to average about $50 million annually over the same period. Management anticipates that future annual costs for environmental protection after 2003 will continue at levels comparable to the 5-year average estimates. Subject to the inherent imprecision and uncertainties in estimating and predicting future costs of environmental protection, it is management’s opinion that any future annual costs for environmental protection in excess of the 5-year average estimates stated here, plus those costs anticipated to continue thereafter, would not have a material adverse effect on the corporation’s consolidated financial position.

7.1.2 Footnote Disclosure

Environmental: The corporation is subject to loss contingencies resulting from environmental laws and regulations, which include obligations to remove or remediate the effects on the environment of the disposal or release of certain wastes and substances at various sites. The corporation has established accruals in current dollars for those hazardous waste sites where it is probable that a loss has been incurred and the amount of the loss can reasonably be estimated. The reliability and precision of the loss estimates are affected by numerous factors, such as different stages of site evaluation, allocation of responsibility among potentially responsible parties, and assertion of additional claims. The corporation adjusts its accruals as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new and changing facts. On December 31, 1998, the corporation had established environmental remediation accruals in the amount of $220 million ($264 million in 1997). These accruals have two components, estimated future expenditures for site investigation and cleanup and estimated future expenditures for closure and postclosure activities. In addition, the corporation had environmental loss contingencies of $121 million on December 31, 1998.

The corporation has sole responsibility for the remediation of approximately 37% of its environmental sites for which accruals have been established. These sites are well advanced in the investigation and cleanup stage. The corporation’s environmental accruals on December 31, 1998, included $169 million for these sites ($197 million on December 31, 1997), of which $65 million ($79 million on December 31, 1997) was for estimated future expenditures for site investigation and cleanup and $104 million ($118 million on December 31, 1997) was for estimated future expenditures for closure and postclosure activities. In addition, $66 million of the corporation’s environmental loss contingencies on December 31, 1998, related to these sites. The two sites with the largest total potential cost to the corporation are nonoperating sites. Of the above accruals, these sites accounted for $39 million ($36 million at Dec. 31, 1997), of which $19 million ($17 million on December 31, 1997) was for estimated future expenditures for site investigation and cleanup and $20 million ($19 million on December 31, 1997) was for estimated future expenditures for closure and postclosure activities. In addition, $44 million of the above environmental loss contingencies related to these sites. The corporation does not have sole responsibility at the remainder of its environmental sites for which accruals have been established. All of these sites are in the investigation and cleanup stage. The corporation’s environmental accruals on December 31, 1998, included $51 million for estimated future expenditures for site investigation and cleanup at these sites ($67 million on December 31, 1997). In addition, $55 million of the corporation’s environmental loss contingencies related to these sites. The largest of these sites is a nonoperating site. Of the above accruals, this site accounted for $10 million ($14 million on December 31, 1997) for estimated future expenditures for site investigation and cleanup. In addition, $3 million of the above environmental loss contingencies related to this site. Worldwide expenses related to environmental protection for compliance with federal, state, and local laws regulating solid and hazardous wastes and discharge of materials to air and water, as well as for waste-site remedial activities, totaled $91 million in 1998, $100 million in 1997, and $110 million in 1996.