Business Accounting Assignment: Impact Of Environmental Issues On Forester Ltd
Question
Task:
The purpose of this essay on business accounting assignment is to provide an understanding of concepts and principles in business accounting. You also need to support your explanation based on the Australian Conceptual Framework for the presentation of financial statements or other relevant documents such as GAAP (General Accepted Accounting Principles). Furthermore, you should be able to identify the implementation of accounting standard in business practices.
You are finalising the 2020 annual report of Forester Ltd, a company involved in the mining, refining and retail distribution of petroleum products. As part of financial review, you are aware of the following events that have arisen during the financial year ending on 30 June 2020.
On 30 June 2020 an oil tanker owned by the company sank in the rough seas off the coast of Western Australia. The tanker was fully laden and has caused an oil spill stretching for 160 km along the coastline of Western Australia. The tanker was included in the 2019 financial statements at a carrying amount of $25 million. The oil that the tanker was transporting had a carrying amount of $4.5 million.
An initial evaluation of the cost of the clean-up operation is estimated at $16 million. There is also a strong possibility that the local oyster, lobster farmers and fishery industry will be impacted. The farmers will take an action against the company for the loss of oysters and lobsters, fishes and related damage to the local farms. The risk management team of the company has assessed that the possible costs of litigation could reach $59 million.
You are required to review the information given above and comment on any reporting necessary to be included in the annual report.
Answer
Introduction
The current business accounting assignment explores the concept of financial reporting that plays a crucial role in an organization as it involves key information about the major transactions in the company, its profit and loss, and expenditure in other activities. While preparing the financial statement of a fiscal period, an entity needs to follow the reporting guidelines based on GAAP or AASB conceptual framework. This conceptual framework acts as a reporting guideline for the entities based on which the financial report is prepared. In the present essay, the financial reporting of Forester Ltd is critically reviewed in terms of the conceptual framework of financial reporting and the transparency of disclosing company activities and their impact on the environment. The major environmental issue occurred in the company, and its transparency in financial reporting is critically reviewed in the study. The essay also expresses about the selected ASX listed company and its reporting about the environmental issue, and how it affects the investor decision making and security market.
Analysis related to the recording of an oil tanker case in 2020
The annual report of Forester Ltd. is prepared based on AAS or Australian Accounting Standards issued by Corporations Act 2001 and AASB (Australian Accounting Standards Board). Apart from the AAS, the financial reporting of the company is also followed by IFRS (International Financial Reporting Standards). The accounting policies of the company are based on the two regulatory frameworks, and it has followed all the new accounting standards. It is important for a company to highlight the record of key financial impact and the reason behind them. The major issues that occur in a company not only affect the business operation and the reputation of the company but also financially hits hard. Recording the issues is a crucial thing for a company to maintain transparency of its activities. The provided scenario shows that the company faced a major loss on 30th June 2020, which raised the expenses of the company in many ways (Forestersfinancial.com.au, 2020). The first loss is faced due to the tanker leaked and oil spread on the coast, which is not recoverable. The impact of the tanker leakage caused environmental issues such as the impact on the fishery industry. The leakage of such huge oil tank impacts hugely to water life because the oil cannot be totally cleaned from the waterways. The spread of oil endangers the life of creatures that live in water. The clean-up operation of oil estimated as $16 million, and the cost of oil carried by the tanker was $4.5 million. Hence, it is a huge amount that can affect really hard for the financial figures of the company.
Apart from that, the harm caused by the incident significantly affected the local farmers who have the business of lobsters, fishes and oysters. The litigation cost estimated to recover the losses of the farmers is $59 million. The amount of litigation cost is a huge amount, which will affect the financials of the business for the long-term. In an annual report, a company needs to follow the accounting guidelines based on the legislative accounting framework followed by the company. While a company follows certain legislative accounting framework, it is important to consider all the principles in financial reporting. One of the principles of AASB is transparency and accountability (Aicd.companydirectors.com.au, 2019). According to this principle and entity should be accountable for all of its operations and activities and needs to maintain transparency about its operations in the annual report. The annual report is not only a normal disclosure that is published by a company to highlight its position, but it also acts as a reference for the stakeholders (Aicd.companydirectors.com.au, 2019). Investors are a crucial stakeholder group for whom the financial report plays a key role in their investment decisions. It is important to specifically mention about the oil tanker case and its potential impact on the business in the annual report of 2020 (Forestersfinancial.com.au, 2020). Foresters Ltd needs to be very specific about the cost estimation that will be spent as litigation cost and cleaning cost. The estimated costs are huge in number, so it should be specifically mentioned in financial reporting as it brings a huge shift in the figures.
Whenever there are major incidents that occur in a company, it should be reported in the annual report, and the impact of the incident on the financial figure should be illustrated to provide clear information to the stakeholders.
The way how the company should include the costs without governance regulations
The environmental concern of an entity is mostly considered because of the government regulations and guidelines to save the environment. While operating in an industry, it is important for an entity to follow the industry-specific rules, as well as government rules to operate in a safe environment and less harm to nature (Loh, Thomas and Wang, 2017). In the case of mining industry, the chances of environmental effect by the operation are higher, so the entities which belong to mining industry needs to follow the guidelines and regulation developed by the government at each step of business (Bp.com, 2019). In the current case, the incident of oil tanker leakage causes a massive impact on the environment, as the oil spread over the waterways. The spread of the oil may not be fully extracted with the help of cleaning activities. The Oil spill example of BP is the most suitable way to define the long-term environmental impact of oil spread. The oil spill incident of BP happened in 2010, and over 130 million gallons of crude oil released in the Gulf of Mexico (MEINERS, 2020). It was recorded as the major oil spill in US waterways. The incident affected the environment, especially water life in a vast way. Many marine mammals, fish, birds and sea turtles lost their life (MEINERS, 2020). The impact of the devastating incident still not recovered as many species such as sea trout, deep-sea coral, and common loons are still suffering.
The case of BP clearly describes that the impact of such an incident causes a long-term effect on the environment. Based on the guidelines and regulations of the government, an entity that causes such a major incident has to pay the huge penalty and strict actions can be taken against the entity. It is assumed that if there is no such government regulation and guidelines are released for environment safety, but the cost related to the incident still need to be financially recorded (Bp.com, 2019). Mostly, the entities record about the issues in the activities because they are bounded by the regulations. If there is no boundary of such regulation, the company still needs to declare about the actual reason behind the litigation and clean-up cost. The amount that is pent to recover the effects of the incident is huge, which is somehow difficult to cover by other reasons (Loh, Thomas and Wang, 2017). It is better to maintain transparency in the financial recording as the stakeholders hugely follow the annual report of a company.
If the company do not mention about its actual reason behind such expenditure, the stakeholder's groups will get information about the actual incident from other sources such as media. Hence, it is better to maintain transparency in financial recording, no matter if there is any environmental regulation is imposed by the government or not. If there are no environmental regulations or guidelines released by the government, then the company needs not to be accountable to follow any specific regulations related to the environment, but it should be accountable and transparent about its activities.
The involvement of the environmental legislation and its impact on the above scenario
In the case, if the environmental legislations take place in the above situation, then the business needs to carry out the financial recording in a similar way as it may carry in the above situation. The involvement of environmental legislation will majorly impact the area of CSR of the company; as being a part of the society, every company is responsible towards the society as well as responsible for taking care of the environment (Unisa.edu.au, 2021). In the case of financial reporting, the previous answer will not change as the previous response shows that the financial disclose about company activities should be accountable and transparent. Even if the government legislations about the environment are not released, the company needs to aware of the major happenings in the business to its stakeholders (Unisa.edu.au, 2021). If the company does not clear about the actual reason behind the litigation and clean-up cost, there will be major problems to cover up actual reason with other valid reason.
While following the legislative accounting framework such as IFRS or AASB, it is important to follow all the guidelines and principles of the framework. While making the financial statement by following the guidelines of IFRS or AASB, the activities of the company and their related cost should be disclosed properly. Hence, the change in environmental regulations may not bring change in the decision of disclosing the litigation cost and clean-up cost in the annual report of the company.
Review of the environmental issues disclosed by BHP
The environmental impact of BHP’s operations is reported in the annual report of the company many times. One of the major examples is mining waste drained into Rio Doce, which was calculated as 45 million cubic metres of waste polluting 637 kilometres of the Rio Doce. Along with affecting the environment and natural habitats, the incident took the lives of 20 people (Londonminingnetwork.org, 2019). The mining waste affected the environment in severe ways such as fishing, water supply, tourism and agriculture. The lives of people who are depended on farming, fishing and tourism were significantly affected due to the incident. Due to this reason, BHP faced severe lawsuits that cost 155 billion (Londonminingnetwork.org, 2019). The annual report 2016 disclosed by BHP includes clearance about the Samarco Dam failure incident that causes a major impact on the environment. In the annual report, the 1.4 point contains the elaboration about the reason behind the incident and the harm it caused to the environment as well as the livelihood of people (Bhp.com, 2016).
In the report, the on-going support of BHP also illustrated to support the activities of the company showing how it is trying to solve the problems. In the report, the financial figures related to losing, the cost for litigation and cost for supportive action are included, which shows the transparency of the entity (Bhp.com, 2016). Disclosing the things in an effective way in the annual report signifies that BHP maintains transparency and accountability in the financial disclosures, which is a crucial thing for a company. The transparency and its actions to mitigate the problems help the company to represent itself as a socially responsible entity (Bhp.com, 2016).
The investors and securities market takes decisions based on the current financial position of a company and the initiatives a company takes to continue towards growth. While reporting about such a major incident, it is clear that the financial figures of the company really hit hard, which may seem distractive for investors (Abisola and Femi, 2019). Many investors want to divest from the company, and the future investors may not feel reliable to invest in a company that is facing losses. It cannot be denied that the disclosure of major incidents of the company and their negative impact on the environment, society and financials heavily affects the reputation of the company (Dang et al., 2019). The company may find tremendous loss in the long run, but it is important to maintain a transparent relationship with every stakeholder group. While the company revels information about potential actions taken to mitigate the issues along with the impact of the incident, the investors and securitize market somehow feel that the company is working responsibly (Idowu, 2020).
Conclusion
The impact of the company's operations on the environment builds the reputation of an entity, especially when the operations of the company largely bring positive or negative effect on the environment. The study highlights how the disclosure of major environmental issues caused by a company can affect the financial figures and the perception of the stakeholders. Disclosing the major incidents at the company and its impact on financial figures is important for the business to maintain accountable and transparent business. While following the accounting framework like AASB and IFRS, it is important to consider all the guidelines of the framework to develop the annual report.
References
Abisola, A. and Femi, A., 2019. Investors perception and profitability of listed companies: Evidence from Nigeria. Journal of Accounting and Taxation, 11(9), pp.139-144.
Aicd.companydirectors.com.au, 2019. Principle 7: Transparency And Accountability. [online] Aicd.companydirectors.com.au. Available at:
Bhp.com, 2016. Annual Report 2016. [online] Bhp.com. Available at:
Bp.com, 2019. BP Annual Report And Form 20-F 2019. [online] Bp.com. Available at:
Dang, T., Phan, T., Tran, V., Tran, T. and Pham, T., 2019. The impact of accounting disclosures on individual investors’ decision making in Vietnam Stock Market. Management Science Letters, 9(13), pp.2391-2402.
Forestersfinancial.com.au, 2020. Annual Report 2020. [online] Forestersfinancial.com.au. Available at:
Loh, L., Thomas, T. and Wang, Y., 2017. Sustainability reporting and firm value: Evidence from Singapore-listed companies. Sustainability, 9(11), p.2112.
Londonminingnetwork.org, 2019. Six Cases From BHP’S Long Trail Of Disasters. [online] Londonminingnetwork.org. Available at:
MEINERS, J., 2020. Ten Years Later, BP Oil Spill Continues To Harm Wildlife—Especially Dolphins. [online] nationalgeographic.com/. Available at:
Unisa.edu.au, 2021. MANDATORY CORPORATE ENVIRONMENTAL REPORTING: DOES IT REALLY WORK?. [online] Unisa.edu.au. Available at:
