Part A: IFRS Usefulness

Describe about the Accounting Theory and Contemporary Issues for IFRS Sustaining Report.

In the current business environment, most of the companies’ board of directors, management team, and executives are investing more time and resources on the sustainability issue. The main environmental  issues include carbon, use of water, biodiversity, use of technologies that are energy efficient, etc (CDSB, 2013). An effective step towards the implementation of sustainability practices throughout the world is the requirement of ensuring the environmental and sustainability accounting and reporting. For many academics, to examine the role of IFRS in supporting sustainability reporting is one of the interested areas. There are also various studies in the academic literature, which have researched the usefulness of IFRS to contribute in making the future of reporting. The main aim of this report is to critically analyzes the available literature that reflects on the utility of IFRS for sustainability reporting from both current and future perspectives. The report contains two parts, the first part presents the literature on the identified issue, and the second part deals with a specific country of the choice in order to discuss both current and potential use of the accounting standards to support sustainability reporting. The selected country for this report is Japan.

It is assessed that for the purpose of financial reporting, ‘International Financial Reporting Standards’ (IFRS) have become the real global standard. The increasing use of this standard by different countries validates its quality to ensure the compliance with different national and international regulatory frameworks (IFRS 2015). But, at the same time, it is difficult to determine the usefulness of IFRS for sustainability reporting. The below section presents an analysis of the available literature, which suggests the IFRS’s effectiveness in concern to the environmental reporting.

The study by Hendrik and Wieriks (2013) discusses the potential usefulness of IFRS for the purpose of sustainability reporting. By referencing to the IFRS, the authors argued that there are likely important benefits in the framework of financial reporting for the environmental and sustainability reporting (ESR). It is because it provides the context within which effective practices for the reporting of sustainability issues can be developed and operated. The authors contended that the different requirements of IFRS including the reporting objectives, the users, measurements, and the qualitative features are relevant to the ESR in a similar way as they are to the monetary information. It shows the potential  usefulness of IFRS for ESR.

Part 2: Accounting Standards in Japan

At the same time, Apergis, Eleftheriou, and Payne (2013) argued that IFRS is beneficial for the sustainability reporting because it provides incentives for a environmental sustainable firm. For instance, the scholars illustrated that the IFRS authorities partly act an organizational eco-innovation that permits companies to follow new regulatory structures and environmental schemes in order to cut down the industrial pollution and waste as well as getting better the quality of the products/services through the introduction of inputs of the production that are environmentally superior. They also argued that IFRS as a mandatory regulation forces companies to embrace eco-innovating systems. For the reason, firms, which are not environmental sustainable can face many penalty risks as they have not reduced their pollution level. It shows that IFRS can be effective to promote the reporting for sustainability issues by firms worldwide. 

Concurrently, it is also evaluated from the study by Barbu, Dumontier, Feleag, and Feleag (2011)  that mandatory disclosures such as IFRS address both monetary and non-monetary information and mention a firm’s operations environmental impact including water, emissions, etc. IFRS is also beneficial to show a company’s commitment to the environmental protection as well as the limitation of contrary effects of the economic activities on the natural environment. It suggests that the use of IFRS can be helpful to contribute in improving the effectiveness of sustainability reporting. At the same time, the authors also state that the IFRS compliance in relation to the environmental issues depends on the tradition that a firm follows in relation to the reporting of  environmental disclosure. The authors also found that the size of the firms as well as national regulatory requirements matter in relation to the environmental reporting. They also conclude that the application of IFRS in relation to the environmental reporting can vary among different companies as well as in various countries.

Thus, on the basis of above authors’ views, it can be discussed that although IFRS is effective to support companies on the reporting of environmental issues, however as per the firm’s current disclosure requirements and national conditions, a company can decide to use the IFRS for the reporting purpose.

Similarly, Falkner (2013) suggests through his study that IFRS currently uses a high threshold for the firms to record risks and liabilities related to environmental issues in the financial statements. The main significance of this is that only in limited cases, the firms that have caused harm to environmental issues are being likely to report these as risks or liabilities. The author also confirms that IFRS does not discourage investors to divest from the firms that are not environmental sustainable or invest more in those firms that create benefits to the environment. It also reflects  the high usefulness of IFRS for the sustainability reporting from both current and future positions.

Additionally, it is also reviewed from the literature that IFRS provides various complete standards that renders a useful basis for assessing assets, expenditures, and liabilities related to environment. At the same time, as the IFRS as an accounting practice is featured by identification, measurement and disclosure, it has the potential to bring accountability in the context of sustainability reporting. Concurrently, as more than  100 countries provide legal support to IFRS, it has also capability to contribute in environmental reporting and accountability into both regulatory frameworks and financial markets (Beatty and Samuelson, 2012).

Overall, it can be discussed that IFRS can be useful for improving the effectiveness of sustainability reporting. It is because it suggests ways to adopt effective environmental strategies, provide a solid background for the accounting and reporting purpose, and ensure the increased accountability in this area.

Overview

It is assessed that in Japan, since 1998, the number of companies issuing environmental reports are rapidly increasing. At the same time, it is also found that the companies are also providing monetary environmental accounting information in the sustainability reporting. There are several reasons behind the increasing trend towards environmental reporting. It is evaluated that government initiatives are the main reason behind increasing sustainability reporting and disclosure of environmental accounting information. To support corporate ESR, the Ministry of Environment in Japan has issued ‘Environmental Reporting Guidelines: Guidance for Publishing Environmental Reporting: Fiscal year 2000 version’ (Saka, 2003). These guidelines draft the reporting principle, content and the structure of the sustainability report. Additionally, there are also other reasons such as award system for environmental reporting, rating agencies, growth of eco-fund, certifications ÍSO14001′, and credibility of environmental information that result in increasing ESR in Japan.  

In the world, Japan is the third largest economy and remains to be a major capital market worldwide. A range of measures have introduced by Government agencies, business organizations and groups of investor in Japan that encourage companies to report on the risks related to their climate change as well as performance, strategies, and opportunities (CDSB, 2013). Japan moves one step ahead to support sustainability reporting with the introduction of Climate Disclosure Standards Board (CDSB) in the year 2012. CDSB depends on and adopts applicable principles from reporting practices that are exist already and also from established financial and governance reporting practices in order to support sustainability reporting (CDSB, 2013).

In a general way, Japan has also contributed in the area of sustainability reporting and in a specific manner, in the field of environmental accounting and auditing. ‘The Japanese Institute of Certified Public Accountants’ (JICPA) developed an ‘environmental auditing subcommittee’ that was followed by other different committees including greenhouse gas emissions, CSR information technical and CSR assurance, etc (Visser, 2012). The data also demonstrates that Japan continues to be among the leading environment and sustainability reporter in the world (Visser, 2012). It shows that the government in Japan is a major factor to promote environmental accounting, auditing, and reporting. The below section defines the accounting standards that are currently used and have the potential to support ES reporting.

In Japan, other than publically authorized and government recommended environmental accounting methods, some privately adopted standards such as JEPIX are used increasingly for sustainability reporting (Schaltegger, Bennett, and Burritt, 2006). It is evaluated that many leading companies in Japan have introduced JEPIX as an eco-efficient and ecological accounting system for preparing sustainability reporting. The benefit of following this standard is that it allows to reveal environmental and sustainability data with greater reliability, relevancy, and comparability.

The 2005 Mandatory GHG accounting system is the main standard that assists sustainability reporting in Japan. It was introduced under ‘the 2005 Act on Promotion of Global Warming Countermeasures’ (Kauffmann, Less, and Teichmann, 2012). The main aim of this accounting standard of Japan is to declare and visualize greenhouse gas emissions information in public in order to encourage business people to take voluntary actions. There are four kinds of GHG reporting schemes in Japan that can be followed by companies for reporting purpose. These include ‘Japanese Voluntary Emission Trading Scheme (JVETS) (2005), Mandatory GHG Accounting and Reporting System (2006), Experimental Emissions Trading Scheme (2008), and Tokyo ETS (2010)’ (Kauffmann, Less, and Teichmann, 2012). Among all these standards JVETS and EETS are voluntary schemes while GHG accounting system and Tokyo ETS are compulsory systems. It is evaluated that after the implementation of GHG accounting standard, the disclosure of carbon emissions and other information about sustainability and environment have increased in Japan. It shows that this accounting standard plays an important role to support reporting on environment since 2005.

GRI sustainability reporting framework is the most widely followed model. The GRI model is an accumulation of different documents on the reporting guidance. All these documents were developed through a process, which involve multi-stakeholders as well as global review perspectives. Additionally, it is beneficial because its design supports firms in developing sustainability reports and environment, social, and governance (ESG) disclosures (EY and Boston College Center for Corporate Citizenship, 2013). The main usefulness of GRI for preparing sustainability reports is that on one hand, it provides a standard format of reporting, and on the other hand, it renders effective guidance related to material issues (Deloitte, 2014). The main emphasize of GRI is that the firms consider those social and environmental aspects that are most important to the stakeholders as well as can have the significant impacts on the business. Concurrently, as many investors globally want assurance about sustainability information, the use of GRI framework can be beneficial for enhancing assurance about sustainability reporting in Japan.

Moreover, around the world, the guideline by GRI are specified as a practical manual that outlines reporting principles, standards for disclosure, as well as approaches to strengthen the sustainability reporting. It is assessed that GRI guidelines emphasize on human rights, labor patterns, and fair working terms, But, these are not common issues in Japan, which is the reason that only a few firms make references of these in their sustainability reporting. It is also evaluated that in the context of ESG, Japanese companies incline to be strong in the environment (E), but weaker in the areas like social (S) and governance (G) (Naomichi, 2016). It indicates that the focus on socially responsible management will be a challenge for companies in Japan in relation to sustainability reporting. The report by Naomichi (2016) also suggests that as nowadays, Japanese companies are the part of global economy, it will create the need for most of the companies to follow standards and the disclosure requirements that are accepted internationally for the purpose of sustainability reporting. It also demonstrates that GRI guidelines are not thoroughly followed in Japan for sustainability reporting, but there is need to ensure compliance with these guidelines in order to ensure the success at global marketplace.

The use of accounting standards to prepare sustainability reports provide several benefits to companies. These benefits are effective to indicate the potential use of these standards to support sustainability reporting in Japan. The below section summarizes these benefits.

Efficiency, Innovation, and Management of Waste:

The use of accounting standards like GRI and IFRS in preparing environmental reports can be beneficial for a firm to develop new ways to gather data as well as to think differently to adopt long-held practices. Furthermore, the collected data from the reports may support firms to adopt innovative process, know about growth areas, and reduce waste. For instance, IFRS is an effective standard that encourages companies to adopt innovative environmental processes to reduce the adverse impact and make sure about the long-term business survival (Hull and Rothenberg, 2008). It shows that the adoption of this standard can be beneficial to support sustainability reporting in Japan.

Employee Loyalty and Financial Performance:

It is also assessed that when companies use international accounting standards for sustainability reporting, it also provides them several tangible and intangible benefits. The main intangible benefits include reputation, increased customer satisfaction, and employee loyalty (EY and Boston College Center for Corporate Citizenship, 2013). In this, it is assessed that environmental reporting positively influences employees’ to perform better and contribute in increasing overall business productivity. It also provides a tool to the company to improve current recruitment practices as it develops firm’s reputation in disclosure and responsibilities areas. At the same time, the development of such reports is also supportive to attain customers’ trust and develop loyalty as nowadays, many consumers believe in a sustainable organization. In addition to these benefits, preparation of sustainability reports is also beneficial to improve overall financial performance. It is helpful to improve firm’s liquidity position as well as share price resulting in increasing the financial performance (Lang, Lins, and Maffett, 2012).

Management of the Risk:

Accounting standards also reflect that the firms that report on organizational environment and sustainability can be better able to forecast and manage different business risks. It is because the development of sustainability reporting may permits firms to predict and organize for issues related to communities of operations, enhance alertness in process improvement, and forecast for future materials scarcity (EY and Boston College Center for Corporate Citizenship, 2013). For example, many global firms follow GRI standard in order to consider issues related to supply chain sustainability. Thus, it shows that the use of international standards in preparing sustainability reports can be beneficial for effective risk management.

Thus, it is clear from the above discussion that the adoption of GRI frameworks and other standards for reporting provide transparency that further offers many social and financial benefits. In contrast, it is also assessed that the development of sustainability reports as par international standards like GRI and others require lot of work that can increase the total business cost. But, at the same time, as the benefits of these standards outweigh their cost, these can be supportive to promote the use of sustainability reporting in Japan.

Conclusion

From the above discussion, it can be summarized that IFRS is useful for sustainability reporting. It can be summarized that IFRS provides an effective framework for developing reports. It can also be stated that IFRS’s requirements related to the objectives, measures, and qualitative comparison characteristics can be effective to prepare both financial and non-financial reports. It is the reason that IFRS has the potential to prepare effective sustainability reporting. At the same time, it can also be concluded that as the international standards such as IFRS assists companies to adopt effective strategies and techniques to ensure environmental sustainability, these can be useful in future for making effective reports in the area of environment and sustainability.

In addition to this, it can also be stated that the use of accounting standards can be beneficial to support sustainability reporting in Japan. It is found that currently, GHG accounting standard supports environmental and sustainability reporting in Japan. It can also be concluded that GHG is an effective standard for assisting in reporting about sustainability in Japan. In last, it can also be concluded that in regard to the future, the use of international standards such as IFRS, GRI, etc. can be beneficial. It is because as currently, most of the Japanese companies operate their business globally, the application of these standards will be beneficial to enhance the credibility towards the reports.

References

Apergis, N., Eleftheriou, S. and Payne, J. E. (2013) The relationship between international financial reporting standards, carbon emissions, and R&D expenditures: Evidence from European manufacturing firms. Ecological Economics 88, pp. 57–66.

Barbu, E., Dumontier, P., Feleag, N. and Feleag, L. (2011) Mandatory environmental disclosures by companies complying with IAS/IFRS: The case of France, Germany and the UK. Available at: https://halshs.archives-ouvertes.fr/halshs-00658734/document [Accessed: 22nd September, 2016].

Beatty, J. F. and Samuelson, S. S. (2012) Business Law and the Legal Environment, Standard Edition. USA: Cengage Learning.

CDSB (2013) Corporate climate change reporting: Japan Focus. Available at: https://www.cdsb.net/sites/cdsbnet/files/cdsb_japan_report.pdf [Accessed: 24th September, 2016].

Deloitte (2014) Navigating the Evolving Sustainability Disclosure Landscape. Available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-aers-sustainability-reporting-landscape.pdf [Accessed: 24th September, 2016].

EY and Boston College Center for Corporate Citizenship (2013) Value of sustainability reporting. Available at: https://www.ey.com/Publication/vwLUAssets/EY_-_Value_of_sustainability_reporting/%24FILE/EY-Value-of-Sustainability-Reporting.pdf [Accessed: 24th September, 2016].

Falkner, R. (2013) The Handbook of Global Climate and Environment Policy. USA: John Wiley & Sons.

Hendrik R. and Wieriks, Y. (2013) The Landscape of Sustainability Assurance. Eburon Uitgeverij B.V.

Hull, C. E. and Rothenberg, S. (2008) Firm Performance: The Interactions of Corporate Social Performance with Innovation and Industry Differentiation. Strategic Management Journal, 29(7), pp. 781–789.

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Kauffmann, C., Less, C. T., and Teichmann, D. (2012) Corporate Greenhouse Gas Emission Reporting: A Stocktaking of Government Schemes. OECD Publishing. Available at: https://www.oecd.org/daf/inv/investment-policy/WP-2012_1.pdf [Accessed: 24th September, 2016].

Lang, M., Lins, K. V. and Maffett, M. (2012) Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most. Journal of Accounting Research, 50(3), pp. 729–774.

Saka, C. (2003) ENVIRONMENTAL ACCOUNTING IN JAPAN – RECENT EVIDENCE. Available at: https://www.unisa.edu.au/Global/business/centres/cags/docs/apcea/APCEA_2003_9(4)_Saka_Burritt.pdf [Accessed: 24th September, 2016].

Schaltegger, S., Bennett, M., and Burritt, R. (2006) Sustainability Accounting and Reporting. Germany: Springer Science & Business Media.

Visser, W. (2012) The Quest for Sustainable Business: An Epic Journey in Search of Corporate Responsibility. Greenleaf Publishing.