Environmental Liabilities and Diversity in Practice Under International Financial Reporting Standards

Forthcoming in Accounting, Auditing and Accountability Journal

2014 Canadian Academic Accounting Association (CAAA) Annual Conference

37 Pages Posted: 16 Jan 2014 Last revised: 3 May 2016

See all articles by Giovanna Michelon

Giovanna Michelon

University of Bristol

Thomas Ervin Schneider

Independent

Michael S. Maier

University of Alberta - Alberta School of Business

Date Written: December 1, 2015

Abstract

Our purpose is to encourage accounting regulators to address diversity in practice in the reporting of environmental liabilities. When Canada changed to IFRS in 2011, Canadian regulators asked the IFRS Interpretations Committee to interpret whether the discount rate to value environmental liabilities should be a risk-free discount rate. Old Canadian GAAP, and current U.S. GAAP, allow for a higher discount rate, resulting in commensurately lower liabilities. International regulators refused to address this issue expecting no diversity in practice in Canada. We investigate discount rate choices for a sample of Canadian oil and gas and mining firms and we show the expectation of no diversity in practice was wrong. Significant diversity in practice is evident: about one third of the sample firms choose a higher discount rate, avoiding a major increase in environmental liabilities on transition to IFRS. The evidence suggests that these firms had relatively larger environmental liabilities and that the discount rate decision is a strategic choice. The current diversity in practice in accounting for environmental liabilities is not acceptable as it is not consistent with the enhancing qualitative characteristic of comparability under the Conceptual Framework. Accounting regulators should act to create consistent and comparable reporting practice. Firms and managers facing larger environmental liabilities can choose to minimize environmental liabilities under IFRS, while it is the general public and society at large that bear the ultimate risk. The paper pushes forward the debate on whether recognised environmental liabilities should reflect the interests of equity investors, or if other investors and stakeholders should be taken into account.

Keywords: environmental accounting, environmental liabilities, environmental provisions, IAS 37, discount rate

Suggested Citation

Michelon, Giovanna and Schneider, Thomas Ervin and Maier, Michael, Environmental Liabilities and Diversity in Practice Under International Financial Reporting Standards (December 1, 2015). Forthcoming in Accounting, Auditing and Accountability Journal, 2014 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2379573 or http://dx.doi.org/10.2139/ssrn.2379573

Giovanna Michelon

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom
BS8 1PQ (Fax)

Michael Maier

University of Alberta - Alberta School of Business ( email )

2-30C Business Building
Edmonton, Alberta T6G 2R6
Canada
7802481275 (Phone)

HOME PAGE: http://https://business.ualberta.ca/about/contact-us/school-directory/michael-maier

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