You have been asked to join a team in your company which is looking at the kind of information it should supply on the company's activities.

University Degree Business and Administrative studies

Intermediate Financial Accounting III Page of

Assignment Question

You have been asked to join a team in your company which is looking at the kind of information it should supply on the company’s activities.

What would you include in an annual report?
What would you include in an executive summary?
What would you include in a report specifically prepared for environmentalist?

Note:

Mark would be awarded for:

Style of presentation,
Examples from other companies,
Evidence of original thinking.

Annual Report

Annual report is a book prepared by the corporate of providing the every single corporate performance throughout the whole accounting year, to the shareholders. The corporate performance comprises a great variety of aspects, not only the financial statement but also some important parts in the report as well, where they hold some very significant information. However, the financial statement plays the most vital role in determining the performance of the corporate, which most of the financial users are concerned with. As to whether the corporate is or will encounter any barriers in their future, either they can hinder the growth of the corporate; or having great potential of prospect in the future, which enable the corporate to achieve globalisation or profit maximisation, are hinted through annual report. This indicates that the annual report is capable of providing financial information to the financial users to make economic decision. According to MASB 1, the objective of general purpose of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to wide range of users in making economic decision. Financial statements also show the results of management’s stewardship of the resources entrusted to it.

According to S132 (1) of the Company Act, the director is a person appointed by the shareholders in which the director acts on behalf of the shareholders to manage the company. And this is the duty of the directors to report every single information with the greatest extent of transparency and avoid any abuse of authorities and power by the top management. Therefore, an annual report should free from any fraudulent disclosure.

In the common practice today, annual report consists of the following statements as minimum disclosure.

Corporate information – this is a statement disclosing the board of directors, the location and contact ways of the registered office, the company’s auditors, information of principal bankers, share registrar and stock exchange listing.
Profile of Board of Directors – this is a statement disclosing the background of the directors (non executive and non independent directors, and non executive and independent directors), qualification, experiences and splendid achievement of they attained. This statement constitutes some extent of importance as so whether they can run the business efficiently and effectively depend on their accumulated experiences, age, matching of knowledge to related field of business and etc. The aged directors may have great experiences in handling the business and solve problem easily but they may not have the vigorously health compared to the young. In the management theory, it is believe that the aged will have higher un-avoided absenteeism. By contrasting, the young directors may have great initiative and energy to run the business but they may lack of experiences, where they might lose under the competitive market today.

Corporate profile and structure – this is a statement stating the background of the company, engagement of businesses, business segment structures.

Chairman’s statement – this is a statement written on behalf on the board of directors, stating the financial review of the corporate, from which segments of the whole group contribute to the highest sales, profits, losses as well as tax concerned. Besides, this statement also comprises corporate developments, future prospects and corporate strategy for its future and etc., from which it is likely to hint the strengths and opportunities of the corporate in future; while giving clues on the strategy to enhance the performance of the corporate especially in the sense of profit maximisation, utilisation of resources and the target to achieve globalisation.

Director report – this is a statement about the principal activities of the corporate, which emphasise on the financial information such as dividend, share capital, warrants and options, and the changes of accounting policies with accordance to MASB. Besides, the directors’ interests and benefits are disclosed here as well.

Audit committee report – this is a report done by the external auditors to voice their opinion about the company performance, especially involving the financial figures. In this report, they will state the duties and activities conducted to examine the relevance and reliability of the corporate financial statement. Finally, they will issue and authorise the report (qualified or unqualified) as to whether the financial information disclosed by the corporate represents true and fair view.

Statement on corporate governance – this is a statement showing the extent of transparency of information provided by the directors without concealing any important issues that the directors themselves can take advantage on the non-disclosure. The duties and responsibilities of the directors are stated as well as the directors’ remuneration policy. Besides, the directors must able to prove the independence, both the relationship with shareholders and auditors.

Financial statements – these statements comprise of income statement, balance sheet, statement of changes in equity, cash flow statement and notes to the financial statement. This part plays the most important role as it indicates the financial performance of the corporate in the sense of profitability, liquidity, solvency, assets utilisation, investment, capital structure and etc. This is the part that the external financial users are interested about and also the greatest room for creative accounting to involve.

List of properties – this is a statement describing all the properties hold by the corporate, the location, size of area, tenure and the net book value of the property.

Proxy form – for those who may be unable to attend the AGM – a thoughtful addition.

With the above-mentioned disclosures, it is capable to fulfill the requirement of KLSE and is able to be released to the shareholders.

However, in today’s world, many people do not like to read annual report; even do not know what is actually an annual report as being shareholders of a particular listed company. Some argue that the annual report is extremely detailed and complex. Some elements of the annual report are rarely read and seldom understood, especially the auditors’ report and the other statutory statement. Despite this, many shareholders appear to be aware that such boilerplate is (at least in theory) for their benefits. This lesson to be learned is that such statements can safely relegated to the margins, and that the auditors do not necessarily need an entire page of annual review allocated to the report. As a conclusion, the shorter the document, the more likely it is to be read in full.

Now, let’s determine the usefulness of financial reports.

The usefulness of the annual report has been severely questioned by the proponents of market-based research. A generation of market-based researchers has argued that the annual report is not timely and does not impact upon share prices. They thus doubt its usefulness. However, market-based research has been re-appraised recently and its basic view questioned. The PwC report support this re-appraisal by providing corroborative independent evidence that the annual report is useful. Indeed, it confirms earlier studies, mostly carried out in the 1980s that the annual report is used extensively by analysts and is considered an important source of information. Thus, PwC determine that the majority of both institutional investors (88%) and financial analysts (87%) find the annual report useful, but that only 29% of the investors and 25% of the financial analysts find it very useful. The overall judgment is therefore good, but could be even better!

In order to produce better quality of disclosure in annual report, some aspects should be given attention.

Firstly, it is beneficial to encourage corporate social reporting, as this has been long practicing in the foreign countries such as UK and US. Environmental reporting is such a part of corporate social reporting where we are going to deal in depth in the later part. Corporate social reporting is defined as the reporting of those costs and benefits, which may or may not be quantifiable in money terms, arising from economic activities ad subsequently borne or received by the community at large or particular groups not holding a direct relationship with the reporting entity. Corporate social reporting in the UK is predominantly the province of the larger companies but, even here, remains largely a marginal activity. It appears that, on average, the annual report of a company in the top 1000 in the UK would have somewhere between a page and a page and a half of date on matters concerned with employees, the community, customer welfare and the environment. With the exception of the material concerning employees, the vast majority of this would be narrative. Narrative can, again, be usefully distinguished between the general (wide and sweeping) and the specific (potentially auditable). The considerable majority of UK social reporting would fall into the former category.

Apart from these, the corporate should enclose a statement of turnover and profit or loss contribution by the corporate’s subsidiary companies and associated company. In the general practice today, the turnover figure is computed through the sales transactions of the combination of business segment. Therefore, it does not show a complete picture of which subsidiary companies or associated companies are making high or low turnover, profit or loss and etc. By stating the contribution of each subsidiary and associated companies, we can test the performance measurement of each companies to analyst the potential prospects of each companies. If it is found that those companies are weak which hinder the overall financial performance of the parent company, shareholders can voice out in the AGM to request for the source of such bad performance and implement for improvement. Through this way, the users can gain more advantages as this guarantees for quality financial performance.

In addition, ratio analysis and financial interpretation report should be enclosed in an annual report as well. This is to ease the financial users to make economic decision within a shorter time, as this is a gain of competitive advantage. Different people tend to apply different knowledge of ratios computation as ratios analysis can be categorised into financial accounting and financial management, each of these categories show different method of ratio computation. Therefore, it is ideal for the company itself to prepare the statement of ratios together with the interpretation of these ratios. Moreover, if users were to calculate the ratios themselves, error or mistake might occur, which the mistake of over-valued and under-valued is likely to cause bad decisions and bad investments. It is believed that smart investors normally apply market hypothesis testing to examine the accuracy of their decisions before making any investment. Therefore, ratio analysis and financial interpretation report should be included to ease the financial users to make economic decision and gain competitive advantage of providing useful and relevant knowledge to users in order to make speed decision.

The sensitivity analysis of “what if” question should be included here as well! This analysis emphasises on the possible outcomes (internal management factors or external environmental factors) of the company performance. For instance, what if the sales grow by 15% instead of 25%? What if cost of sales is 84% instead of 86%? It involves systematically changing one of the assumptions on which the pro forma statements are based and observing how the forecast responds. All these are the possibility predictions by the company, which can enhance the confidence of the shareholders to a more stable condition as this analysis enable the company to determine which assumptions most strongly affect the forecast and which are secondary, thus chasing for more advantageous target and leading to successful plan.

For those companies involved in Research and Development (R&D) activities, a statement of R&D investment expenditure should be included together with the information of new product development data and capital expenditure. Here, by disclosing this item, financial users can understand to what extent the R&D has developed; and the possibility of success or failure of the R&D to generate a new product has an influential effect to the financial users. By looking at the financial position of the company, smart investors can easily determine the level of successful of the R&D towards generating a new product by looking at the adequate resources exist in the company, the technical feasibility of the product or process that can be demonstrated and marketable. Besides, it is very important to analyse the investment expenditure vs. the outcomes. The greater the investment expenditure, the higher the risk if the company flunks to generate the marketable product. In 1980s, Rolls-Royce Company, a big, giant company of vehicles manufacturer, applied a great volume of loan to finance its R&D of producing aero-engine. In the level of research stage, it failed to continue the production; while the company capitalise all the R&D costs in the financial statement instead of written off as an expense. This leads to the company encountering a great hardship of surviving due to the large loss of investment. Indirectly, the share price of the company stock dropped tremendously within a particular moment before recovering. Doesn’t this will de-motivate the investors to further pump in their capital? Therefore, it is ideal to include such a statement and the standard should facilitate this new disclosure requirement so as to view greater transparency to the financial users.

This is a preview of the whole essay

Relating to the above, it is ideal to include a sensitivity analysis to the new product development or mega projects. Sensitivity analysis is one method of analysing the risk surrounding a capital expenditure project and enables an assessment to be made of how responsive the project’s NPV is to changes in the variable that are used to calculate that NPV. The NPV could depend on a number of uncertain independent variables such as selling price, sales volume, cost of capital, initial cost, operating costs, benefits and etc. The basic approach of sensitivity analysis is to calculate the project’s NPV under alternative assumptions to determine how sensitive it is to changing conditions. An indication is thus provided of those variables to which the NPV is most sensitive (critical variables) and the extent to which those variables may change before the investment results in a negative NPV. By disclosing this analysis, this shows equity to the stakeholders as to whether the projects undertaken will success or not. This analysis is likely to enhance the users’ confidences towards the company, as this is a measure of future projects that can bring the inflow of economic benefits to the company. When the users are able to determine that the projects undertaken will bring benefits to the company, it hints that the share price of the company will increase as well. Nevertheless, investors will start injecting their risk capital to the company in order to enjoy higher returns in future.

Moreover, corporate can practice to include employment report and statement of future prospects. The need for an employment report was founded on the belief that there is a trust relationship between employers and employees and an economic relationship between employment prospects and the welfare of the community. The intention was that such a report should contain statistical information relating to such matters as numbers, reasons for change, training time and costs, age and sex distribution, and health and safety. The report nevertheless considered it appropriates to publish information of future employment and capital investment levels that could have a direct impact on employees and the local community.

Instead of disclosing additional information, we should also look at the current practice of annual report disclosure, as there are still many weaknesses and loopholes, where it really needed further review and improvement.

Note disclosure is considered to be the weakest part in an annual report. Many companies tend not to pay much attention on the disclosure of notes to account in the current practice today. As to whether or not the listed companies have fulfilled and comply with the requirement of MASB disclosure, this is still a questionable area! By comparing the MASB requirement for disclosure and current company practice, there exists a gap of level of compliance. For instance, MASB ED 28 Goodwill requires companies to capitalise and amortise its goodwill with a rebuttable presumption that the useful economic life should not exceed 20 years. An enterprise can adopt other method of goodwill treatment providing that the other method is much more appropriate in that situation by disclosing the reason for adopting other method. However, there are still many companies select other methods, such as write off goodwill against reserves or permanent capitalise the goodwill, but without disclosing the reason for not adopting the benchmark treatment. Therefore, the accounting profession should emphasise more in the transparent of notes disclosure.

Besides, segmental reporting should be emphasised as there is only a little segmental information disclosed in the general practice today. Segmental reporting should include the detailed business segment as well as the geographical segment information. However, as mentioned, segmental reporting practice nowadays is not given a great attention as many people argue that the disclosure of segmental information is a competitive disadvantage to the company itself. This is because segmental reporting highlights particularly poor or good performance. The competitors will then analyse the corporate strategies of the successful companies, thus duplicate the style of strategies to improve their companies. In particular, Deloitte & Touche are concerned that foreign competitors might gain a competitive advantage in terms of information disclosure. If this is a real corporate concern, persuading companies to reveal sensitive information such as details on new product development may prove an obscure task. However, if the company is strong and stabile enough, detailed disclosure will never be the problem to the company itself. This is proven by the segmental information presented by Coca-Cola Company, which it is still a top market leader in the world.

Many users of financial reports will be interested in the performance and prospects of one particular part if the enterprise rather than the enterprise as a whole. For instance, employees’ security of employment, pay and conditions will generally be more directly dependent upon the performance if the specific division they work for than the performance of the group as a whole. Similarly, governments will be primarily interested in the performance of the part of the group that is located in their countries. Customers, suppliers and creditors will instead be most interested in the subsidiary that they have contracted with. Anyway, a segmental reporting is important to enhance the investor confidence as through the segmental analysis, financial users can have better assess to the company’s risks and prospect.

Another serious weakness of the annual report, which I personally think that, would be the ambiguity of the auditors’ report. As mentioned earlier, the function of this report is to view the opinion of the external auditors as to whether the company is disclosing the true and fair view of financial information. External auditors, act of behalf of the owners of the business (shareholders, not the directors) and report in the financial statement prepared by management for the benefit of shareholders. Therefore, the crux of whether the company is reporting the truth and fairness lie on the duty of the auditors. Frankly speaking, how many people can really understand the intention/purpose of the report wants to reach? Many people argue that the audit report is the most repetitive report and contains hardly understandable terms and jargon. Therefore, auditors’ report should nevertheless simplify and summarise to the lowest extent of reporting as it is believed that many users are definitely ignore this part. But more importantly, auditors’ report should straight to the intended point without explaining a long story of the procedures. It must bear in mind that auditors’ report should make it not only influential but also interesting so that the shareholders will pay a significant attention to this part.

Firms should adopt ‘value reporting’, i.e. companies should voluntarily provide customised reports containing a variety of current and future additional information. Such information would comprise segmental data, research and development investment expenditure, new product development data and capital expenditure and etc. PwC argues that potential benefits from this additional voluntary disclosure are increased investor confidence in management, lower cost of capital and higher share price.

As a conclusion, there is still a wide room for annual reporting to improve. However, some countries such as UK firms already face excessive disclosure in their annual report. If there were additional information needed to be included in an annual report, would the users really read the thick book thoroughly? The particular value of the report is the up-to-date assessment of the key information needs of both the institutional investors and financial analysts. The desire for additional information may nevertheless increase the knowledge of the financial users while enhance their confidence to make a more accurate economic decision; the reluctance to disclose this may be associated more with the fear of competitors gaining competitive advantage than with ignorance. But more importantly, if the company were stable enough in the sense of position and performance, what extent of fear should they worry about? Evidence has shown that most of the giant companies will definitely produce a detailed annual report rather than the few pages length of annual report. Anyway, some information published in the annual report must be limited in detail, to prevent competitors and possible take-over bidders from gaining useful but damaging knowledge of the organisation. But we must bear in mind that the annual report must not only remain its influential after disclosing the information, it must be interesting as well.

Executive Summary

Executive summary is a statement that summarise the whole information of the annual report in order to give the most transparent and fastest effect of understandability to the shareholders, especially those without relevant accounting knowledge, even those with accounting knowledge base shareholders might sometimes find the information hardly to understand. This happened whenever the company deals with complex annual report, which includes some additional and rare report, such as social report and etc. So, it is a need for a reporter to communicate most effectively with its stakeholders and for the users to assess the performance of an organisation both over time and in comparison with other organisations. Therefore, executive summary plays a vital role to convert and explain the information clearly to the shareholders with the most simplest and easiest way of understanding the complexity of an annual report.

However, up until 1990s, companies are required to send all of these shareholders full, detailed annual report. Yet, executive summary is still not a legal requirement and companies will nevertheless ignore it. Companies believed that a substantial number of these reports are simply thrown away unopened. They also believed that those who opened the report and tries to read it rarely got beyond the directors’ report and chairman’s statement. Sending annual report to such people are, on the face of it, a complete waste of time and money.

The TSB group (with over two million shareholders) got together with others with an interest in corporate reporting and lobbied the government for a change in the rules. Two arguments were put forward. First, the annual report was manifestly failing to achieve its objective for many private shareholders; it was failing to communicate financial position and performance, or anything else for that matter. Second, it cost too much to send out.

Therefore, in the early 2000s, the international corporate reporting is much more concerning to include an executive summary which it functions just as almost similar to a summary financial statements, where if the company were not to distribute the annual reports to the shareholders, executive summary is capable to tell every single important information in the fastest and most effective way to the knowledge of the shareholders. Research has shown that over 95% of the shareholders of the privatised companies (and an increasing number of other companies) now receive summary financial statement, rather than the full annual report.

An executive summary as mentioned, it should function like a summary financial statement, where it is ideal to be located in the first part of the full annual report and reported consistency with the full annual report and with compliance to Regulations. The length of an executive summary should be the least page as possible, provided that it must cover all the important and relevant information for financial users to make economic decision accurately based on the every single word there. In my opinion, an executive summary is standard and sounds the best with approximately eight to ten pages. With the existence of executive summary, it is likely to replace those parts, which are not important so as to achieve economic of presentation.

Therefore, let’s view what are likely to be the contents of an executive summary.

Firstly, an executive summary should begin with the CEO statement together with a mission statement. This is a statement describing the key elements of the report by the senior management person. It sounds similar to the chairman’s statement but this would nevertheless review the vision and strategy of the company. Through this part, the shareholders can know what is exactly happened in the company throughout the whole year. The corporate vision is set according to the future, and discussed on how the vision integrates political, economic, socio-cultural and technology (PEST). The corporate strategy may then being reviewed with consistency to the current global challenges. It is important that the goal of the organisation and what it stands for or aims to achieve is stated, preferably as the first item.

Secondly, executive summary should come with a statement of terms and jargon. This is a guide to reading this report. Obviously, in a complex annual report, there are a lot of terms and jargons that are not commonly used in the daily conversation as well as writing. Different companies have different hardly understandable terms and jargons, depending on the industries they fall in. Besides, some accounting terms and jargons, which are the same for all the companies reporting entity, should be explained clearly the definition and its functions. For example, minority interests, extraordinary items, fully diluted EPS and etc. are those words which are only apply in reporting entity. Actually, what are the meanings of these words? If the users seek dictionary for help, they might only get the surface meaning of the words but not the exact meaning wish to be presented by the accountant. As a result, this statement is useful to provide users with relevant information so as to deal with a complex annual report in depth. By constructing strong knowledge of understandable, the economic decision made would prove to be more accurate!

To enhance the quality of the executive summary, a statement of opinion about the corporate performance carried out by rating agency and financial analyst should be enclosed (in summary form) as well as in the annual report (in full format). This enables the increment of investor confidence towards the company. For instance, the executive summary should cover a page where it mentions the information and news about the company (for instance, the potential risk and prospect of the company in the changing world, global competition and the threaten of market substitute items and etc.), where these are being carried out by the rating agency and financial analysts. By having the external moderators to the company, this will again enhance the confidence of the financial users as the quality of professional work guarantee the accuracy of company position, performance, and even the users’ decision making

Besides, disclosing a statement of share price position throughout the year should be encouraged in executive summary (in summary form) as well as in the annual report (in full format). In the normal practice today, it seems that the corporate never pay much concerns to this matter. In this statement, the company should attach the monthly highest and lowest record of share price (boom and recession) and the monthly volume of transaction. By disclosing this statement, stakeholders can easily obtain the financial information, thus comparing the trend of market share price in order to know the stability of the company and the external environment factors which influence market share trend (for instance, the US 911 is such an external environment factor which tremendously affect the stock market and this tragedy is beyond the expectation of the financial users). We believe that those stocks, which are in great demand, will definitely enhance to company’s position and performance, leading the company to be categorised in the popular share board in the stock market.

Next, as mentioned, an executive summary should act like a summary financial statement. Here, it should disclose the summary of income statement, balance sheet, statement of changes in equity and cash flow statement. Simultaneously, pictorial graphics (bar chart, pie chart, curve and etc.) should be presented to ease the understandability of the financial users and make the statements look more interesting and colourful. This disclosure needs not to be represented in full as what the current practice shown in full-detailed. The ultimate way of presenting this summary of financial statements should lie with the vital title, which the financial users pay their greatest attention and interest on it. It is a useful feature to show comparisons over the last few years (suggested 5 years) or so in summary form to enable the progress of the organisation to be seen at a glance. For instance, in an income statement, the summary of financial statement is suggested to disclose these titles and figures without further computation work, such as: [see Appendix for example]

Turnover,
Cost of Sales,
Gross Profit,
Operating Profit,
Profits Before Taxation,
Taxation,
Profit Attributable to Shareholders
EPS

Once the summary of financial statement existed, it is ideal to disclose a report on the trend of the financial performance of the company. The trend should comprise a number of years so as to enable inter-period comparison. The description of trend is not sufficient enough for the users to make accurate economic decision; it should follow by the sources of such changes in trend. By knowing the reason for such changes in the trend, we can compare as to whether the company is improving from its weaknesses, or achieving a more splendid financial performance from the availability of market opportunity. If there is improvement, it means that the management team of the company has the ability to manage the company well, and vice versa.

Besides, an executive summary can include a Report of Question and Answer (Q&A) Session during the AGM, on what the stakeholder told the company and what the company committed to. The agenda for the AGM should be disclosed, especially the part of Q&A session, so that all the shareholders can understand how the company react to their questions to meet the peak satisfactory of the shareholders.

Apart from that, Scenario Analysis should be implemented in the executive summary as it broadens the perspective to look at how a number of assumptions might change in response to a particular PEST event. The first step in a scenario analysis is to identify a few carefully chosen scenarios that might possibly take place in the company. For instance, the loss of major customer, successful introduction of a major new product, entry of an important new competitor, amendment of new legislation, war and etc. Then, for each scenario identified, the company needs to gather information to look for alternative solution for each scenario and select the best alternative out of the possibilities. For instance, what is the rationale reaction of the multinational company does to its major import and export activities, if the war between US and Iraq occurred? Here, the company will look for as much as possible alternatives to rescue its business, and out of the all alternatives, the company must examine the most beneficial alternative towards contributing to its financial position. By having this disclosure, it is believed that the shareholders will have themselves constructed a strong confidence towards the company, as the company is able to prove that it can maintain survival under such threat.

As a conclusion, executive summary plays a vital role to provide information to the shareholders and stakeholders. Let’s assume that the company does not distribute annual report but sending out executive summary as a stand-alone report to the shareholders, the shareholders can still make an accuracy decision as the executive summary as suggested, contains the CEO statement, which the senior management person in the company will talk about the company position and performance in various sense instead of financial aspect. Then, the statement of terms and jargon will again enhance the understandability of the shareholders to those complex words. With the presence of the statement of opinion about the corporate performance carried out by rating agency and financial analyst, financial users can begin to make their decision based on this statement as these professional experts guarantee the reliability of the corporate financial performance and position. Then, by analysing the trends of the share price position, the economic decision made by the financial users is again granted for greater accuracy. Next, the summary of financial statement and the report of the trends of the financial performance provide evidence to support the previous decision-making. Finally, with the existence of Q&A report of AGM and the scenario analysis, these will be the supportive means to ensure the best decision made by the financial users. Doesn’t this executive summary have substituted the characteristics of the annual report, which it provides sufficient room for financial users to make their confident economic decision? Once the executive summary can replace the role of the annual report, it is said that the executive summary has achieved its goal.

Environmental Report

“We do not inherit the Earth from our ancestor, we borrow it from our children. If we are to hand to future generations a planet fit for them, our generation must achieve harmony with the environment”.

Environmental reporting is in a state of evolution ranging from ad hoc comments in the annual report to a more systematic approach again in the annual report to stand-alone environment reports. Environmental investment is no longer seen as an additional cost but as an essential part of being a good corporate citizen and environmental reports are seen as necessary in communicating with stakeholders to address their environmental concerns. Companies are realising that it is their corporate responsibility to achieve sustainable development whereby they meet the needs of the present without compromising the ability of future generations to meet their own needs. Economic growth is important for both shareholders and other stakeholders alike in that it provides the conditions in which protection of the environment can best be achieved, and environmental protection, in balance with other human goals, is necessary to achieve growth that is sustainable.

With the beginning of 21st century, the environment becomes an issue high on the agenda of many individuals, political groupings and commercial organisations. Society could no longer hide from the fact that economic activity was having a significant effect in the world’s natural resources. Hawken went as far as stating, “there is no polite way to say that business is destroying the world”. The value of the environment had been for many years ignored in our pursuance of wealth and GNP, both at a macro and micro business unit level.

A number of issues have been brought to society’s attention in the recent past including:

Global warming;
Protection at the atmosphere, e.g. ozone layer;
Pollution, e.g. aerial (acid rain), marine (sewage and industrial waste disposal);
The use of sustainable resource energy from fossil fuels as opposed to renewable resources, e.g., solar energy;
Sustainable forest management;
Risks associated with nuclear power and its storage and disposal, etc.

Reporting on environmental issues has been, until very recently, almost entirely absent from UK companies. It looks as though only about 10 or 15% of companies even mentioned either environmental or energy issues. The subjects were given less attention than any other subject – the environment would typically receive little more than a sentence in most companies. (Although there are some particular exceptions to this such as BP and ICI, for instance, where the environment features prominently in the Annual Report). More recently there has been a small, but noticeable, rise in the prominence given to environmental issues in Annual Reports. This began with years ending 1988 and, particularly, one might notice the relatively novel intrusion of an occasional specific item of data – we can read, for example, that: BPB handle 650,000 tonnes of recycled waste paper and thus save 10 million trees per annum; Rhone-Poulenc have experienced a 12% drop in waste products; ICI have spent over 11.5 million (pound) on environmental laboratories and the like; and BP received the World Environment Center’s gold award. Even these developments remain marginal exceptional. There are a long cry from anything one would recognise as systematic reporting or formal accounting for the environment.

Currently no accounting or auditing standards are devoted to environmental issues, although explicit references are made to them in a number of auditing standards and in SSAP 13 (Accounting for research and development) where environmental legislation is cited as an important consideration in assessing the commercial viability of deferred development expenditure. Current disclosure requirements, thus, have little noticeable impact on financial statements. What little there is appears in the form of (infrequent) explicit mentions of environmental issues within the statement of accounting policies or in relation to provisions and contingencies. No requirements exist for the separate disclosure of environmental expenditure per se. Most (of the few) references to environmental issues in annual reports tend to be outside the audited financial statements.

There is no statutory requirement in Malaysia requiring public listed companies to disclose environmental information to the public. A review of the current environmental and OSH legislative framework, corporate legal requirements, KLSE listing requirements and Malaysian Accounting standard revealed the following:

There is no specific requirement under the Environmental Quality Act (EQA), 1974 on the disclosure of environmental information to the public.
There are requirements under:

Sub-regulation 17 of Occupational Safety and Health Act (OSHA), 1994 for the disclosure of information with respect to personal safety, which could be interpreted to cover instances that affect both people and environment, and
Sub-regulation 22 of Occupational Safety and Health (Control of Industrial Major Accidents)(CIMAH) Regulations, 1996 for manufactures to disclose ‘information to the public’ relating to ‘the nature of a major accident hazard including its potential effects on the population and the environment’.

Requirement for disclosure of information under the Companies Act, 1965 are finally oriented, with no reference to environmental information.
The newly revised listing requirements of KLSE include specific requirements for Continual Disclosure and Corporate Governance Disclosure. Although there are no specific requirements for disclosure of environmental information, the LRs do require disclosure of information that has the potential to influence the financial performance of a company. The full extent of the type of information to be disclosed, however, and the implications of the newly revised LRs are yet to be fully understood.
MASB has incorporated a new standard to encourage greater disclosure of environment-related financial information including:

Paragraph 10 of MASB 1, which makes explicit reference to ‘environment reports and value added statement’ encouraging companies to present additional information if management believes they will assist users in making economic decisions, and
MASB 20, which sets out accounting and disclosure requirements for the recognition of contingent liabilities and assets, although MASB 20 does not provide specific detail on the types of liability that the companies are required to disclose. It is foreseeable that the environmental liabilities could potential be included within a company’s financial statement.

In Malaysia, it was critical for the accounting profession to be concerned with more than just profit and loss. It should recognise the impact of businesses have in the environment. According to the study commissioned by ACCA in the state of environmental reporting in Malaysia, only 7.7% KLSE main board companies were engaged in some form of environmental reporting in 2001. However, the number of reporting number increased from 25 in 1999 o 35 in 2000 and to 40 in 2001.

Environmental report contains two major parts that is non-financial disclosure and financial disclosure. Today, people tend to concern more on the non-financial disclosure rather than the financial disclosure. So, what is meant by non-financial disclosure of environmental report? It means when a company involved in an environmental matter, (such as throwing chemical wastage that destroy the marine ecological cycle in the sea; the destroy of great volume of trees; smoke emission by manufacturer and etc.), it is the responsibility of the company to respond to the stakeholders on how it will react to such destroy to the environment. For instance, when a company destroyed a great volume of trees, is the company going to replant it? How much would be the investment made by the company to rescue such impact? In this section, the company will disclose the extent of the environmental impact of its operations, products and services, and the efforts of the company to reduce such impacts in the environmental report.

Now, let’s view what should be the ideal contents of the environmental report specifically prepared to the environmentalist:

An environment report may start with statement of potential risk. This is a report that requires the company to be frank to the shareholders as to what extent of risk that the company is encountering and will encounter. Although it sounds a bit ridiculous, where it is likely to de-motivate the confidence of the investors, it shows that the company is responsible to enclose the risks to the public. A company that is brave to enclose the statement of potential risk means that the company has a very stabile position, as if it dares to be frank to the shareholders, it must have a very good backup plan to solve the problems or risks. By showing a statement of potential risk, this is likely to show the information presented contains with the greatest extent of transparency, which in the financial users point of view, they gain the advantages in advance through the analysis of the background of the company. Of course, by hinting the potential risk, the company must enclose some clues of handling these risks efficiently. As a result of this, rationale investors are capable to make much more worth economic decisions. For instance, the British American Tobacco Company disclosed a page of this statement, telling that its products carry risk:

Smoking is, among others, a cause of serious diseases such as lung cancer, pulmonary heart disease, and if you smoke, you may stand a higher risk of contracting these serious illnesses - which drives our often stated position that we market cigarettes only to adult who have made the decision to smoke and aware of the risks associated with smoking.

In trying to be responsible, we believe we have to fully under stand what is considered responsible. This is not to say that we have not played our role as responsible corporate citizens in the past. Our track recording fulfilling our wider Corporate Social Responsibility, through contributing towards economic development, social causes, sound business partnerships, employment opportunities, speak for itself. However, by embedding the principles of Corporate Social Responsibility, and engaging stakeholders in forums such as dialogue, and reporting back to society through our Social Reporting process, we will demonstrate that we are carrying out our commercial activities consistent with reasonable public expectations of a responsible tobacco company.

On the other hand, it also referred to Corporate Social Responsibility. Companies are increasingly recognising the importance of adopting a social, ethical and environmentally responsible approach to business activity and entering into dialogue with all group of stakeholders. Reporting is slowly evolving from simply reporting the amount of charitable donations in the annual report to including additional activities, which the company considers to be of key interest. The reporting might be brief but gives an attractive picture if a company’s social responsibility. For example, the 2001 Kingfisher Annual Report has a brief two pages section for social responsibility in which it gives information on:

Environment issues, e.g. a commitment to sustainable forestry, winning the Business in the Environment award for energy saving; and
Social issues, e.g, from training young unemployed people to recycling electrical goods, making charitable donations that supported the Wool Worth Kid First, You Can Do It and Green Grants schemes; and winning a Business in the Community award for Innovation elating to its work forming partnerships with local disability organisations.

Besides, an Environment Policy Statement should be disclosed. The primary purpose of adopting an environmental policy is as a guide to future action. It therefore needs to be informed by reliable data on the organisation’s environmental interactions, consist of commitments which are as specific as possible and be supported by as many mechanisms for turning the policy into specific targets as can be established. The specific targets, which should be transitory and developing, should be referred to in the policy itself. It makes considerable sense for any initial environmental policy statement to be a draft only. Once the organisation has carried out environmental reviews, assessed its own environmental position and assessed the feasibility of its environmental goals, then it can turn the draft into the ‘real thing’ in the knowledge that the policy is feasible and can be long-lived document. Only then, the organisation can consider publishing the statement. This environmental policy statement, not only do they establish the first approximation for the evolution of environmental objectives, they will reflect the particular orientation of the organisation; signal information to employees, customers and suppliers; as well as provide a hostage to fortune by announcing parameters of acceptable activity within the public domain.

The process of developing the environmental policy is not without its problem. One company, for instance, was concerned that:

this emphasis on environment policy is in danger of overshadowing other areas of policy. Isn’t environmental policy just one more part of the organisation’s general policy? Shouldn’t we be making the same fuss about health and safety for example?

Indeed, it seems most appropriate that the organisation should have a general mission and policy statement, but backed up by detailed policies in the appropriate areas – including environment, health and safety. The best-known recent example is the ‘Valdez Principles’ [see Appendix for Valdez Principles], which it is intended, should be adopted by all companies with aspirations to being ‘green’. The principles were derived by the Social Investment Forum in North America in the wake of the Exxon Valdez tragedy. The group claim the backing of many large investors who claim control of 150 billion dollars of assets. Corporations are invited publicly to sign the principles as a demonstration of their belief in them and their intended adherence to them. The large investor will only invest or continue investing in those corporations who have signed.

Then, it is ideal to include a report of the projects undertaken relating to the environment issues. This report should consist of the definition and objective of the projects undertaken. Besides, under this report, the organisation must identify all the feasible options of the projects undertaken and conduct qualitative and quantitative analysis of options’ environmental impact. There must be a clear, objective presentation of the information relevant to the choice in order to select the Best Practicable Environment Option (BPOE), which provides the most benefit or least damage to the environment as a whole, at an acceptable cost, in the long term as well as the short tem. Next, the organisation mush has choice examined by individuals independent of the initial choice and, implement and monitor performance against expected or desired criterion. The disclosure of activity and performance of what the company is doing, its voluntary undertakings and a statement of its performance against the standards set in law and quasi-law and its own personally set targets, should not be ignored as well! A minimum inclusion here will be emission levels, noise level and toxic waste as well as recycling or ‘clean’ waste activity. For instance, The Shell Report disclosed the level of emissions caused by the business operation to the environment and its effort to reduce this impact:

We recognise that the use of our products, particularly fuels, can contributes to both global and local air emissions. Our efforts to reduce this impact include expanding the availability of unleaded petrol for use in cars with catalytic converters (Shell sells more unleaded petrol than any other oil company), low sulphur petrol and diesel and liquefied petroleum gas (LPG).

Then, there is a need to disclose how efficient use of natural resources by the company, such as energy, water, land and etc. to reduce the costs and respects the needs of future generations. The efficient use of natural resources is believed to be the advantage to the company as this can save cost for maximum utilisation.

Besides, the important of environmental report should lie in the figures and accounting treatments for environmental accounting. Environmental accounting is says to be the financial disclosure which covers:

Accounting for contingent liabilities/risk;
Accounting for asset revaluations and capital projection;
Cost analysis in key areas such as energy, waste and environment projection;
Investment appraisal to include environmental factors;
Development of new accounting and information systems;
Assessing the costs and benefits of environmental improvement programmes;
Developing accounting techniques which express assets and liabilities and costs in ecological (non-financial) terms.

Let’s consider the following list of suggestions for accounting for environment:

A note to the accounts disclosing the policy of the business towards environmental costs. This note might be considered as part of the mission statement of the organisation, expressing intentions rather than pious hopes.
The amount spent during the accounting period to prevent or remedy damage to the environmental caused by company’s activities. This expenditure could be analysed between compulsory and voluntary spending, to show performance against legal and voluntary targets; for example, the reduction of emissions of noxious gases and the purification of chemical effluents.
Amounts provided for future expenditure, to meet contingent liabilities as the law changes, or to clean up a site to be vacated in the future (e.g. mining companies).
More detailed disclosures might cover:

The company’s perception of risks to the environment from its operations and its plans to cover these risks, by insurance or by its own resources. Any shortfall in the insurance coverage would alert shareholders to the risk they are taking;
The amount invested each year by the business to prevent environmental damage, and to protect employees and society in general from harmful features of the company’s business activities;
The extent of standby facilities capable of responding to a disaster, with an estimate of the cost of the full economic consequences of a possible future major disaster and the social benefits derived from the prevention of such harmful events.

Clearly more is required here than the blandishments of the public relation exercise. It will be difficult to estimate some of the figures suggested above, but these difficulties should not frustrate the attempt to qualify such matters. Some will argue that society within which business operates has a right to environmental information, and there can be little doubt of its significance for shareholders. As an example, consider the case of Exxon Valdez oil spillage, which reduced the company’s profits in one quarter alone from $1.2bn to $1602m.

There is a tendency to narrow the scope of discussion of environmental reporting from the items listed above to matters, which can more easily be disclosed in the corporate report – an ascertainable cost as opposed to intentions and statistics. A number of working parties in Canada, USA, Europe and IFAC are developing ideas, and it may be that the development of auditing guidelines and even legislation will increase the pressure for environmental information in corporate reports.

The first logical step is to decide what is meant by the term ‘environmental cost’, which itself can be divided between ‘environmental measures’ and ‘environmental losses’.

‘Environmental measures’ include the costs of prevention, reduction, or repair of damage to the environmental, and the conservation of resources. Cost incurred to conserve energy, and closure costs for environmental reasons are at the periphery of this cost classification. Capital expenditure on improved technology will bring production efficiencies as well as environmental benefits, and the allocation of expenditure to these two classifications s a matter of judgment. A commentary is needed to explain these matters to users of the financial report.

‘Environmental Losses’ cover costs that bring no benefits to the business such as legal damages, fines, penalties paid, and asset which prove irrecoverable for reasons of conversation.

Suggestions for treating these costs are:

Most environmental costs should be charged to the profit and loss account when they are incurred, being regarded as maintenance or repair costs, with material separate items disclosed as exception under FRS 3. Expenditure concerning discontinued activities will be treated accordingly.
Expenditure leading to future economic benefits, to alleviate future environmental damage or conserve resources, can be capitalized as part of the cost of an asset created. Some authorities suggest that even the costs of staff training could be capitalised in this way.
Fines and penalties relating to past activities do not conform to the definition of prior period adjustment in FRS 3 (arising from changes in accounting policy or the correction of fundamental errors), so they will be charged to the profit and loss account on the current year basis. Under this rule, past estimates now adjusted are treated as current period costs, which are significant for estimates of environmental liabilities, which are fraught with uncertainty. For instance, The Shell Report disclosed that:

This year we report fines for not meeting laws, regulations and permits (amounting to just over $1.4 million) which we believe is the best measure of our compliance.

At the end of 2001, total liabilities for environmental clean-up, decommissioning and site restoration were $3069 million.

There are some debates as to the capitalisation of environmental expenditure, to improve safety or reduce emissions from existing capital assets. Capitalization can be supported if it results in economic benefit in future periods in terms of cash flows or output, but the decision is less clear-cut if the expenditure is to conform with new laws and regulations. It is difficult to support the capitalisation of cost, which would result in a carrying value for the asset in excess of its recoverable amount. Measuring expected benefits in these circumstances is subject to great uncertainty.
The recognition of future environmental expenditure may support a provision out of profit to cover that cost, but provisions should only be made if a liability exists to transfer economic benefits. Thus the business must have an obligation to incur environmental cost before a provision can be made. The ASB statement of Principles suggests that a board decision is not enough to generate a liability, but that a legal or irrevocable commitment is needed before a provision can be justified. Until the liability crystallizes, the item is contingent and should be dealt with as such a change in the law to raise standards may cause expenditure to bring existing plant up to standard. Such costs should be charged to profit and loss in the year of expenditure, but provisions suggested in years before the legislation is passed on grounds of prudence breach the principle that no obligation exists before the law is changed. The future effect of expected legislation can be disclosed as a note to the account.

There is still much to be decided before firm rules emerge for the treatment and disclosure of environmental expenditure in the corporate report. Provisions to set aside amounts out of profit to meet future environmental costs are now covered by FRED 14 Provision and Contingencies. The section of environmental liabilities suggests the following rules:

A provision should only be made when the business is obliged legally or ‘constructively’ to undertake rectification in the future. Of an obligation is created to spend more than the legal minimum, the full amount should be provided.
Expenditure provided should only be capitalised is an asset is created, i.e. giving access to future economic benefits. Costs incurred to prevent future contamination or to comply with new laws on smoke emission can be capitalised, but the cost of cleaning up this year’s spillages is a revenue item.
Is a business is granted a license to operate a factory, conditional upon spending money on decommissioning – i.e. cleaning up the site when the factory is abandoned – this is a liability which can be the of a provision. The amount of the provision can be discounted to its present value, with periodic reviews of the estimates made in the face of uncertainty. The cash flows are adjusted for risks and discounted at a risk free rate.

Moreover, a full or summary of environment audit report should be disclosed in the most simplified way of reporting. Environmental auditing is exactly what is says: auditing a business to assess its impact on the environment, or as the CBI expressed it ‘the systematic examination of the interaction between any business operation and its surrounding’. The audit will cover a range of areas and will involve the performance of different types of testing. The scope of the audit must be determined and this will depend in each individual organisation. There are, however, some aspects of the approach to environmental auditing are worth mentioning:

Environmental Impact Assessments (EIAs) are required, under EC directive, for all major projects, which require planning permission and have a material effect on the environment. The EIA process can be incorporated into any environmental auditing strategy.
Environment Surveys are a good way of starting the audit process, by looking at the organisation as a whole in environment terms. This helps to identify areas for further development, problems, potential hazards and so forth.
Environmental SWOT Analysis. A ‘strengths, weaknesses, opportunities, threats’ analysis is useful as the environmental audit strategy is being developed. This can only be done later in the process, when the organisation has been examined in much more detail.
Environment Quality Management (EQM). This is seen as part of TQM (Total Quality Management) and it should be built in to an environmental management system. Such a strategy has been adopted by companies such as IBM, Dow Chemicals and by the Rhone-Poulenc Environmental Index, which has indices for levels of water, air and other waste products.
Eco-audit. The European commission has adopted a proposal for a regulation for a voluntary community environmental auditing scheme, known as the eco-audit scheme. The scheme aims to promote improvements in company environmental performance and to provide the public with information about these improvements. Once registered, a company will have to comply with certain on-going obligations involving disclosure and audit.
Eco-labelling. Developed in Germany, this voluntary scheme will indicate those EC products, which meet the highest environmental standards, probably as a result of an EQM system. It is suggested that eco-audit must come before an eco-label can be given.
BS 7750 Environmental Management System. BS 7750 also ties in with eco-audits and eco-labelling and with the quality BSI standard BS 5750. Achieving BS7750 is likely to be a first step in the eco-audit process.
Supplier audits, to ensure that goods and services bought in by an organisation meet the standards applied by that organisation.

As a conclusion, environmental reporting is continuing to expand and evolve. Whilst current best practice is relatively easy to identify - and an increasing minority of companies can be seen to be operating at this level - some important issues remain. Probably the most important of these are ensuring the widespread practice of environmental reporting - a virtual impossibility in the absence of regulation; developing standards for the completeness of environmental disclosures; establishing best practice in attestation of the reports; and looking forward to the more demanding challenges of reporting about sustainability. One thing seems certain, however, environmental reporting is no passing trend. It is here to stay. Therefore, such proposals could be introduced almost immediately, would force experiment, encourage research and, most importantly, begin the process of moving the external accounting and reporting process into a more environmentally caring role. The only questions are what form it will eventually take and how its adoption by all organisations will be achieved?