Comparative analysis of mandatory environmental disclosures by companies complying with IAS/IFRS. The case of France, Germany and UK

Elena M. Barbu Associate Professor University of Grenoble, France CERAG 150, rue de la Chimie 38040 Grenoble Cedex 9 Elena.Barbu@iae-grenoble.fr Pascal Dumontier Professor University of Grenoble, France CERAG 150, rue de la Chimie 38040 Grenoble Cedex 9 Pascal.Dumontier@iae-grenoble.fr Niculae Feleagă Professor Academy of Economic Studies, Bucharest, Romania Cladirea Ion N. Angelescu, Piata Romana nr. 6, sector 1, Bucuresti, cod 010374 nfeleaga@yahoo.com Liliana Feleagă Professor Academy of Economic Studies, Bucharest, Romania Cladirea Ion N. Angelescu, Piata Romana nr. 6, sector 1, Bucuresti, cod 010374 liliana_malciu@yahoo.com Phone: +40.722.938.328 Acknowledgements This research was funded by the University of Grenoble (Institut d’Administration des Entreprises – IAE and Centre d’Etudes et de Recherches Appliquées à la Gestion – CERAG&CNRS) and the Romanian National Research Council (CNCSIS) PN2-IDEAS Code 1859, contract no. 837/2009.

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Comparative analysis of mandatory environmental disclosures by companies complying with IAS/IFRS. The case of France, Germany and UK

ABSTRACT The study is aimed at determining whether the application of the same set of accounting standards may result in differences in the information provided because of discrepancies in institutional factors in the countries where the reporting firms are located. The methodology used is a comparative content analysis in a cross-sectional perspective. Firstly, we analyzed all IAS/IFRS standards and IFRIC interpretations in order to identify instruments or information for the recognition, measurement and disclosure of environmental impacts. Secondly, this identification helped us create a grid of environmental information that was used to analyze the 2007 annual reports of 114 German, French and UK companies listed on Stoxx 600. Thirdly, we used this scoring grid and the regression function to quantify the mandatory environmental disclosures found in annual reports realized using IAS/IFRS. Results indicate that firms located in countries with constraining regulation for environmental disclosures (i.e. France and UK) report more descriptive and monetary information on environmental matters than firms located in countries with weakly constraining regulation. Such results support the view of those who claim that international differences will survive in financial reporting, despite the generalized adoption of IAS-IFRS, notably because of discrepancies in national legal requirements, penalizing thus the comparability of accounting information. This contribution should provide a managerial advantage to firms seeking to adopt the best practice in the area of environmental accounting regulation, while it should also impact the regulatory policies of countries seeking to enhance their environmental accounting strategy. Key words: environmental disclosure; environmental accounting regulations; International Accounting Standards/International Financial Reporting Standards (IAS/IFRS); France; Germany; UK.

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1. Introduction The article lies at the intersection of two dimensions: that of international accounting harmonization and that of environmental disclosure. On the one hand, the accelerated process of globalization, the increased interdependence of financial markets and the high mobility of capital have contributed to acknowledging the necessity of an international set of accounting standards, namely International Accounting Standards/International Financial Reporting Standards (IAS/IFRS), mandatory for all European companies from 2005. On the other hand, motives and opportunities for differences in financial reporting remain because of the flexibility provided by accounting standards and of differences in national legal, taxation and financing systems. To determine whether national characteristics may affect environmental information reported by firms complying with IAS-IFRS, in a first step we analyzed all IAS-IFRS standards and IFRIC interpretations to indentify the reporting constraints related to IAS-IFRS. This analysis led to a grid aimed at providing a score in order to quantify the mandatory environmental information available in annual reports. In a second step, we analyze the regulatory environmental framework prevailing in France, Germany and the UK, the 3 countries under study, in order to determine the magnitude of information requirements related to the environmental regulation of each country. In a last step, we compare the environmental disclosure scores in each country to see whether the scores increase with the environmental disclosures related to the national regulations. The review of the literature was conducted on the two dimensions of our study. Thus, Branco and Rodrigues (2007) have presented the state of the literature on corporate and environmental reporting, from several methodological and theoretical standpoints, while Baker and Barbu (2007) have identified over 200 articles related to the process of international accounting harmonization, as to present the evolution of accounting research from the 1960s until 2005 (i.e. the year of the implementation of IFRS in Europe). From these two literature reviews, one can draw the conclusion that there are no articles linking environmental reporting with the process of international accounting convergence, in the setting of either the international or the national standards. Up until 2010, it appears that there are no mainstream scientific contributions on the comprehensiveness and quality of national and international accounting standards in relation to the sensitive issue of corporate environmental impacts. The level and quality of environmental disclosure is generally dependent on the legal, social, financial, cultural and political contexts in which the company operates (Adams et al., 2000). The main instruments for enhancing environmental communication are thought to be: the existence of a high-quality set of standards, external audit and the efficiency of the accounting system. The standard-setter’s contribution to environmental reporting is focused on reducing the disparities between the companies which are voluntary reporters, and companies which are reluctant to implementing transparency guidelines (Larrinaga et al., 2002). The external auditor’s role is to check the conformity between the data presented in corporate reports and the relevant legislative framework, aiming to increase the credibility level of environmental reports (McConomy, 1998). Finally, accounting standards have a substantial impact on the nature and quantity of disclosed environmental information (Deegan and Rankin, 1996, 1997; Owen et al., 1997).

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The scientific literature has significantly contributed to formulating the dilemma concerning voluntary disclosures versus regulated environmental information. Some researchers are strong supporters of voluntarism, highlighting the fact that regulatory demands on corporate disclosures generate high compliance costs. In this respect, it is a common phenomenon for companies to communicate certain types of information that directly responds to the demands of corporate constituencies (Donaldson and Preston, 1995; Gray et al., 1996; Deegan, 2002) or which legitimizes their existence as responsible actors (Patten, 1992; Buhr, 1998; Cormier and Magnan, 2003). This cross-sectional comparative presentation is a contribution to the accounting environmental literature. A majority of studies concerning the UK, France or Germany are longitudinal in design (e.g. for the UK: Toms, 2002; Campbell, 2004; Cole et al., 2005; Elsayed, 2006; Murray et al., 2006; for France: Cormier and Magnan, 1999; Mikol, 2001; Rhouma and Cormier, 2007; Déjean and Martinez, 2009; Damak-Ayadi, 2010a, 2010b; for Germany: Cormier et al., 2005). Longitudinal research adopts a historical perspective on a topic, and is less concerned with the comparative implications at national and international level. As opposed to the longitudinal perspective, there are only few studies adopting a cross-sectional approach to environmental aspects present in the selected countries. Comparative discussions have been concerned with handling national issues such as those specific to the US and Canada (Adams and Kuasirikm, 2000; Holland and Foo, 2003; Aerts et al., 2006; Aerts et al., 2008), or between multinational companies from Europe and the United States (Zeghal and Dammak, 2007; Damak-Ayadi, 2009). However, no prior study has provided a cross-sectional perspective on the three countries of interest for the present paper. Thus, the subsequent normative discussion will provide comparative evidence on environmental aspects connected to the national accounting systems and to the relevant regulatory framework. The remainder of this paper is divided into 4 parts. The first part presents the sample by country and by sector and explains the choice of the three countries. The second one explains the methodology and the creation of the analysis grid. The third part presents our results and in the last one, we interpret them taking in account the specificity of national regulatory environmental framework and the differences between national environmental accounting regulations. 2. Sample: German, French and UK companies of European Stoxx 600 This paper analyses the annual reports of German, French and UK companies included in the Stoxx 600. These three countries are the only EU Member States whose standard-setters had initially established a formal liaison relationship with the International Accounting Standards Board (IASB), the issuer of IAS/IFRS. Every one of these countries has a tradition in environmental protection; thus, the UK is the first country which has issued an environmental management standard (BS7750 of 1994); France is one of the first countries in Europe to have implemented ecological measures and a relevant regulatory framework; and Germany is the first country where companies have recruited specialized auditors for their environmental reports (Zeghal and Dammak, 2007). Moreover, the UK, France and Germany are the largest European economies, their contribution to the Community’s budget amounting to approximately 48%. At the same time, these three countries are the largest individual polluters in the EU, the top scores being dominated by Germany, the United Kingdom and France, respectively, accounting for a cumulative 43% of total EU-27 greenhouse gas emissions (EEA, 2010).

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The sample selection was based on three criteria: quoted companies in an index not very used in accounting research (Stoxx), companies applying IAS/IFRS from at least 2005, industrial sector with environmental impact (ISAR guidelines) and to avoid not well represented sectors. Firstly, after the application of the first two criteria, we have identified 39 companies from Germany, 58 from France and 117 from UK. Secondly, we have chosen only well represented sectors and obtained a sample of 35 companies from Germany, 41 from France and 76 from UK. Thirdly, we have randomly selected 38 UK companies in order to obtain a sample of the same size as the one for Germany and France. Therefore, the final sample includes 35 companies from Germany, 41 from France and 38 from UK, operating in 5 supersectors: basic materials, technology, healthcare, industrials and cyclical consumer goods and services. The sample is described in Table 1.

*** Insert Table 1*** 3. Methodology: Content analysis of annual reports realized in IAS/IFRS The article is based on a constructivist research philosophy and the methodology used is a comparative content analysis in a cross-sectional perspective. Firstly, we analyzed all IAS/IFRS standards and IFRIC interpretations in order to identify instruments or information for the recognition, measurement and disclosure of environmental impacts. Secondly, this identification helped us create a grid of environmental information that was used to analyze the 2007 annual reports of 114 German, French and UK companies. Thirdly, we used this scoring grid to quantify the mandatory environmental disclosures found in annual reports realized using IAS/IFRS. The analyze of IAS/IFRS shows up that no international standard is exclusively dedicated to the provisions of such information, in spite of numerous direct and indirect remarks on the topic of environmental accounting. Such elements as environmental assets, liabilities or expenditure are described by the following standards:

• IAS 16 Property, plant and equipment indicates that some fixed assets may be acquired for safety or environmental reasons. The acquisition of such elements, even in the absence of future economic benefits, may be necessary for the uncompromised use of other operating fixed assets. In this case, it is clear that the acquisition of environmental assets is outside the scope of the general definition of an asset. This derogation is based on the fact that future economic benefits may be compromised in the absence of certain environmental assets, even though the latter are only accessories to the main operation. As an example, the standard presents the case of a chemical plant which is forced to introduce new substance manipulation processes, in order to conform to current legal obligations; the operational improvements are capitalized as environmental assets, since the firm would not be able to produce and sell its chemicals without these processes. IAS 16 also requires the incorporation of future dismantling and decommissioning costs into the value of the fixed asset. These costs are estimated at the beginning of the asset’s useful life, and are assimilated to a provision in compliance with IAS 37. The future expenses with dismantling and site restoration may also be derived as a consequence of the continuous use of an asset whose environmental impact is not negligible. However, PriceWaterhouseCoopers (2004) considers that, whenever environmental degradation is outside the industrial parameters for the use of a certain asset, the supplementary expenses should be incurred immediately.

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• IAS 37 Provisions, Contingent Liabilities and Contingent Assets proposes a definition for several elements which are intimately linked with the prudence principle in accounting. A provision is a liability whose value and date of payment are uncertain and which is recognized whenever: (a) the company has a current obligation (e.g. of an environmental nature) from a past event; (b) an outflow of future economic benefits is to be expected in this circumstance; and (c) a good estimate can be provided for this obligation. Unlike ordinary liabilities, the standard defines a constructive obligation as an uncertain liability imposing the recognition of a provision. For example, a company conducts its extractive operations in a country with no environmental legislation. However, the company has publicized its environmental policy, which states that any remediation expenses arising from polluting activities will be supported by the firm. In case such incidents occur, the company has a constructive obligation, and implicitly a provision, for the best estimate of these future expenses. However, the standard does not provide any details on the type and magnitude of an event that is deemed to trigger a constructive obligation.

• IFRS 6 Exploration for and Evaluation of Mineral Resources is linked to extractive activities, which are widely acknowledged as environmentally-sensitive. The standard is a guide to the recognition of exploration expenses, including the recognition of mineral resources as assets. It also imposes the recognition of any dismantling and relocation obligations as a result of the exploration of mineral resources.

• IAS 38 Intangible Assets is linked to the recognition and measurement of environmental assets such as development expenses or emission rights, either received as a subsidy or acquired from the market.

• IAS 36 Impairment of Assets can be applied whenever a company’s environmental assets are suffering an impairment, either as consequence of a contamination, physical accident, loss of contractual rights or depletion of mineral resources.

• IAS 2 Inventories is relevant whenever highly polluting industries, such as mining, recognize their waste as assets with a residual value. The standard requires such waste to be recognized as inventories only if additional costs were to be incurred to convert the waste products into marketable goods.

• IAS 20 Accounting for Government Grants contains an implicit reference to the initial distribution of emission rights and their recognition in the financial statements.

• IAS 32, IAS 39, IFRS 7 and IFRS 9 on financial instruments are linked to the present and future risks emerging in such cases as hedge accounting, the measurement of environmental derivatives, and the treatment of other financial elements occurring as a result of environmental impacts.

• IFRS 3 Business combinations provides that identifiable assets and liabilities acquired in a business combination should be evaluated at their fair value, which may be connected to the environmental impact of such elements.

• IAS 41 Agriculture is a specialized standard with no mention of environmental elements, but targeting a sector with highly sensitive environmental profile.

• IAS 10 Events after the Balance Sheet Date describes the steps to be taken by any entity when disclosing relevant events occurring after the balance sheet date. Such events, which may carry an environmental impact, should be described in concert with the causes that had generated them before year-end.

• IAS 1 Presentation of Financial Statements contains several remarks on additional information and reports issued by companies, in order to provide their stakeholders with a comprehensive view of their environmental and social impacts. Entities are encouraged to produce such reports, whenever managers consider that they are useful in shaping the external users’ opinions and actions.

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• IFRS 8 Operating segments establishes certain disclosure elements to be provided in the annual reports of large companies. Diversified firms sometimes own an operating segment having a clear connection with environmental services and environmental protection, such as clean energy, urban services, decontamination services, recycling, green technologies, etc.

• IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities presents several details on the recognition and measurement of liabilities generated by decommissioning and dismantling activities, such as the closure of a chemical plant, the restoration of sites after extractive activities or the removal of heavy equipment.

• IFRIC 5 discusses the integration into the accounting process of those rights to interests arising from decommissioning, restoration and environmental rehabilitation funds.

• IFRIC 6 presents the accounting treatment of those liabilities arising from participating in a specific market (waste electrical and electronic equipment).

• IFRIC 3 Emission Rights provides that a cap-and-trade scheme gives rise to three elements: an asset for the allowances held, a government grant for the value of the allowances at the date of receipt, and a liability for the obligation to deliver allowances equal to emissions that have been made. Due to the pressure exerted by the business community and the disapproval from the European Commission, IASB decided to withdraw IFRIC 3 in 2005. Considering that no new interpretation has been issued, the recognition of emission quotas has remained a controversial problem. Adopting the methods applicable under US GAAP is a viable solution, as IAS 8 allows the usage of accounting policies from other standard-setters if no specific international standard exists.

This review of IAS/IFRS and IFRIC has shown that the international standards contain a series of conceptual and technical elements which permit the identification, measurement and disclosure of environmental accounting elements (i.e. assets, liabilities and expenditure). This analysis helps us to propose a grid presented below:

*** Insert Table 2*** Each of the 14 categories above is checked in annual reports. If the attribute appears in the information, it is given a 1, and if not a 0. We obtain the scores that indicate the environmental divulgation for each firm, that is to say that the higher is the score, the better is the environmental information of the firm. The maximum score could be 28 points (14 for descriptive matters and 14 for monetary ones). 4. Empirical results Table 3 provides the environmental disclosure scores item and per country with respect to the type of the information, i.e. descriptive or monetary. It is worth noting that environmental matters are primarily reported through provisions and, a lesser extent, through contingent assets-liabilities and environmental income-expenses. Conversely, there is no information provided regarding environmental development asset or environmental donations and sponsorship. In the same vein, information related to intangibles other than exploration of mineral resources, wastes, and environmental fines and taxes are extremely rare.

***Insert Table 3*** Table 4 presents a breakdown of the sampled firms by number of environmental items covered. It is worth noting that half of firms do not report any mandatory environmental

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information. 66% of French firms, 49% of German firms and 55% of UK firms do not report descriptive or narrative information. 54% of French firms, 43% of German firms and 50% of UK firms do not report monetary information. German firms are those that report the higher number of descriptive information. 12.8% of them provide more than 3 types of narrative information with respect to 7.3% for French firms and 0 for UK firms. However, French and UK firms are those that provide the higher number of monetary information. 23.6% of UK firms and 19.5% of French firms give more than 3 types of narrative information, versus 2.9% of German firms.

***Insert table 4*** In Table 4, we observe, on the one hand, that the average by country shows that it is more environmental divulgation in France and UK that in Germany, and, on the other hand, that the average by sectors shows that French companies from Basic Materials, Technology and Healthcare give more information that the other companies from Germany and UK. The score function shows up that French companies are in top, UK companies just after and German companies in third position. We can say that the general environmental information using IAS/IFRS is very poor. The score function should converge to 1 if the environmental information using IAS/IFRS is given. In our case, a score of 0,06 shows that environmental information for companies using IAS/IFRS is very poor.

With respect to the industry classification, it is worth mentioning that firms in the technology industry report almost no environmental information, while firms in the basic materials industry are those that provide the higher quantity of environmental mandatory information.

***Insert table 5*** In order to neutralize the impact of the industry when comparing the disclosure scores by country, we ran the following regression:

DISC = α0 + α1 FR + α2 GER + β1 BM + β2 Health + β3 Indus + β4 CCGS + ε

Where is DISC is the disclosure score of the firm, FR and GER are 2 dummies that equal 1 when the firm is French or German respectively, 0 otherwise. The other dependant variables are dummies that equal 1 when the firm belongs to the industry characterized by the variable, 0 otherwise. We use BM for Basic Materials, Health for Healthcare, Indus for Industrials, CCGS for Cyclical Consumer Goods and Services.

As there is no dummy for UK firms and for firms from the Technology supersector, α0

denotes the average disclosure score for UK firms in the Technology industry. α1 denotes the

incremental mean disclosure score for French firms. α2 denotes the incremental mean disclosure score for German firms. A mean disclosure score for French (German) firms higher (lower) than the disclosure score of UK firms will result in statistically positive (negative) �1

(�2). Since the French and UK regulations impose firms significant environmental disclosures, which is the case of German firms, the mandatory environmental information provided in annual reports by French and UK firms should be higher than the one provided by German firms if, despite the mandatory dimension of international accounting rules, reporting practices are affected by national dimensions.

***Insert table 6***

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Results in table 5 show that is α1 is statistically equal to zero suggesting the mean disclosure

score of French firms is as high as the one of UK firm. α2 is statistically negative suggesting that, all things equal, German firms disclose less mandatory environmental information than UK and French ones. As Germany is the country with the less constraining environmental regulation, notably with respect to disclosures, this suggests that reporting under IAS-IFRS is affected by the various constraints firms must comply with at national level. 5. Interpretations These differences observed in annual reports could be explained from two points of view: the specificity of national regulatory environmental framework (5.1) and the differences between national environmental accounting regulations (5.2). 5.1. National regulatory environmental framework In the UK, the first rudiments of environmental legislation date back to the 14th century, when historical evidence documents the controls over the quality of air and water (Holland and Foo, 2003). In the 1960s, the first governmental controls relative to industrial activities were devised to deal with air pollution, while in the 1990s several elements of specific legislation were consolidated into the Environmental Protection Act of 1990 and the Environmental Act of 1995. In this respect, the standard-setter has introduced the concepts of “best practicable environmental option” (BPEO) and “best available techniques not exceeding excessive cost” (BATNEEC). To conform to the requirements of BPEO and BATNEEC, the companies under the jurisdiction of this legislation had to reform their operating practices, employ new waste treatments, and invest in modern technologies for reducing polluting emissions. On the communication side, the Companies Act of 1985 established a disclosure requirement for all listed companies to provide an annual operating and financial review (OFR). The OFR had to include information on any significant corporate environmental impact. The name of this section of the annual report was changed by the Companies Act of 2006, now being called a business review. In the new regulatory context, the disclosure requirements for environmental information are extended to include large non-listed companies, which should consider using key performance indicators and information relating to environmental matters. The Companies Act suggests the fact that managers have considerable discretion regarding the type and comprehensiveness of the information disclosed in the business reviews. The public’s reaction to the new developments in the matter of environmental regulation in the UK suggests that the stakeholders’ confidence in the transparency efforts of companies have diminished considerably. This is compounded by the absence of statutory standards and the dilution of the auditing review requirements, which potentially undermine the integrity of the reported information (Williamson and Lynch-Wood, 2008). Aside from the legal requirements, several organizations have issued disclosure guides on the matter of environmental information, e.g. in 2001, the Department of Environment, Forestry and Rural Affairs (DEFRA) proposed the “General guidelines for environmental reporting or greenhouse gas emissions, on waste and water”, while the Association of British Insures (ABI) completed the “Guidelines on what and how institutional investors expect companies to report”. In France, the regulation entitled Nouvelles Régulations Economiques (NRE) was published in the Official Journal of France on 15 March 2001 and became applicable with the beginning

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of 2002. This law states that all listed companies should provide details in their management report concerning the environmental impacts of their operations. The Second Grenelle Act of 2009, applicable from 2011, extends the critical mass of environmental reporting to any polluting activity initiated by companies with more than 500 employees. The required disclosures are of a financial and non-financial nature, and refer to the environmental impact of a company’s operations (air, water, emissions, energy, materials), as well as to the firm’s commitment to environmental protection, remediation and limitation of adverse consequences of economic activities on the natural environment. The Autorité des Marchés Financiers (AMF - the French Commission for Stock Exchanges), the Compagnie Nationale des Commissaires aux Comptes (CNCC - National Auditors Association) and the Conseil National de la Comptabilité (CNC - National Council for Accounting Regulation) have emitted opinions concerning NRE. For example, the AMF restricts their recommendations to the financial risks pertaining to the shareholders, the CNCC limits auditors responsibility to aspects impacting financial statements and the CNC has decided to issue its guidelines solely for those elements which are to be found in the balance sheet, income statement and notes (Antheaume, 2004). These legal requirements have been preceded by private initiatives, such as the publication in 1996 of a “Guide for the preparation of an integrated report on the economic and environmental aspects”, by an organisation called The Friends of the Earth (Les Amis de la Terre), which has issued recommendations based on the analysis of 122 firms. In Germany, the National Institute for Standard-Setting (Deutche Institut Fur Normierung) issued in 1997 the paper entitled DIN 33922 “Leitfaden für Umweltberichte” (Guidelines for environmental reports to the public). Through this guide, later repealed, the Institute established the minimum amount of information to be included in the corporate environmental report. Similarly, other organizations are striving to improve environmental communication. Since 1994, Institut für ökologische Wirtschaftsforschung (IÖW - Ecological Economics Research Institute) has begun to assess the quality of corporate environmental reporting using a proprietary scoring system, with criteria such as: report content, relevance, clarity and visual layout. In this respect, the IÖW has developed a partnership with Deutsche Bundesstiftung Umwelt (DBU - German Federal Foundation for the Environment), with Institut für Markt Umwelt Gesellschaft (IMUG - Institute for market, environment and society), with the Body of Financial Auditors (WPK - Wirtschaftsprüferkammer), with an industrial association (Future e.V. Lengerich) and with a series of companies conducting relevant pilot studies. Table 7 presents a synthesis of the main characteristics of environmental disclosure regulation in the selected national contexts (i.e. the UK, France and Germany). It is apparent that Germany, unlike France and the UK, has chosen a different path to insure that the environmental impact of economic activities is disclosed to the public. While France and the UK have opted for a regulated demand of environmental information, mostly from listed and large non-listed companies, Germany has provided disclosure guidelines applicable to any economic entity, irrespective of size. Moreover, in France and the UK, the legal requirements revolve around the inclusion of environmental information into the management report, while German guidelines recommend the drawing of a separate environmental report.

***Insert Table 7***

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Between France and the UK there are also significant differences. For example, the French standard-setter has provided a comprehensive list of environmental information to be disclosed by target companies. Conversely, British managers have a larger share of freedom when if comes to selecting the information to be included in the business review section of the annual report. However, the most significant point of divergence is related to the target audience for these reports: while French firms are addressing the general public, the British companies have adhered to an accounting framework which favors the investors as the primary users of information, considering their specialized informational demands and monetary stakes in the running of the firm. The explanation of the poorness of environmental accounting information could also be connected with the non requirement of external audit of environmental information in any of the three countries. The previous studies have suggested that different stakeholder groups have little confidence in corporate environmental information (De Moor and De Beelde, 2005; Brammer and Pavelin, 2006), so that it is generally acknowledged that the credibility of environmental information could be significantly enhanced by a pertinent audit opinion on the scope and comprehensiveness of corporate environmental reports. 5.2. National environmental accounting regulations Even if France, Germany and the UK are members of the European Union and are applying IAS/IFRS for listed companies, an influence of reporting presentation could come also from national accountancy bodies. In the UK, all accounting standards developed and issued by the Accounting Standards Board (ASB) are known as Financial Reporting Standards (FRSs), along with older standards called Statements of Standard Accounting Practice (SSAPs), issued by its predecessor the Accounting Standards Committee (ASC). The actions of ASB on the convergence topic took shape in March 2004, through the project entitled the “Strategy for Convergence of UK GAAP with IAS”. In this document, the ASB’s proposal was to adopt UK standards based upon the principles of IFRS. In France, the main body of accounting regulation lies within the Plan Comptable Générale (PCG - National Chart of Accounts). Starting with 2004, the national standard-setter (CNC) has implemented a policy of progressive convergence between the national framework and IFRS. In Germany, accounting regulation is part of the Handelsgesetzbuch (HGB - German Commercial Code). In 2009, an ample revision of national accounting standards aimed to reformulate several modern accounting principles in a less complex manner, while also enhancing the informational content of local financial reports through the implementation of elements similar to IFRS. In general terms, the definitions of assets and liabilities are differing from one conceptual framework to another and could be an explanation for the different level of information in annual reports. Environmental assets A big difference is observed between assets presented by German countries and the others. An average score of 3 is obtained by Germany, in comparison with 22 in France and 21 in UK. This difference could be explained by the differences of asset definition in these countries:

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• IFRS – a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow into the enterprise;

• UK – rights or other access to future economic benefits controlled by an entity as a result of past transactions or events;

• France – an identifiable element of a firm’s wealth, with a positive economic value and which is under the control of the enterprise;

• Germany – an economic value, which can be separated from the enterprise and can be valued independently.

It is apparent that the four definitions presented above have several elements in common, but also some points of divergence. Thus, the British framework is the closest to the spirit of the IFRS, because the term “rights or other access” clearly suggests that ownership of an asset is not a prerequisite for the recognition of such elements. In France, in spite of several common elements, the emphasis is placed on the juridical aspect of control over an asset, which is contrary to the indication of IFRS. The German definition does not explicitly stress the characteristic of “future economic benefits”; it speaks about an “economic value” which often but not necessarily incorporates the idea of a future economic benefit. Elements classified as environmental assets can be either intangible assets (e.g. development expenditure or emission certificates), tangible non-current assets or, more seldom, inventories or financial assets. We present these differences below: In the UK, the standard FRS 15 Tangible fixed assets does not explicitly address the acquisition of environmental assets. Similarly to IAS 16, FRS 15 stipulates that estimated decommissioning and site restoration expenditures for an existing asset are to be incorporated into the value of that asset, as long as a provision is also recognized in accordance with FRS 12 Provisions, Contingent Liabilities and Contingent Assets. Regarding intangible assets, the provisions of FRS 10 Goodwill and intangible assets and those of SSAP 13 Accounting for research and development are in many aspects similar to those of IAS 38 Intangible assets. However, some of the provisions from the British system, such as those regarding the maximum utility life and the capitalization of development expenditure, may have a significant impact on the measurement of intangible environmental assets. In these two British standards there is no provision regarding the recognition of emission certificates. In 2009, DEFRA published its Guidance on How to Measure and Report your Greenhouse Gas Emissions. The guidance describes the approach an organization should take to measure and report its greenhouse gas emissions. In France, the Regulation CNR n° 2004-06 of 23rd November 2004 includes the provisions of IAS 16 regarding the recognition of assets addressing issues of environmental protection. The French standard-setter made however several comments on this issue (Note n° 2005-D of 1st June 2005): these rules are applicable only to those expenditures for personnel safety and environmental protection, which are incurred as a consequence of some legal obligation, and whose absence would trigger a major disruption in the firm’s operations. This comment suggests the fact that environmental assets do not carry future economic benefits by themselves, but only indirectly, in connection with other assets. The principle of incorporating decommissioning and dismantling expenditure into the value of non-current assets is similar to the treatment of IAS 16. The only difference is that the discounting of this expenditure is optional in the French system, while being compulsory in IFRS. For development expenditure, the French accounting regulation recommends a recognition procedure similar to that of IAS 38. However, the recording of emission rights follows a

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special rule in the French system: these certificates are accounted for as regularization elements with a separate tax treatment, as opposed to being a public subsidy, as recommended by IFRS. In Germany, just like in the UK, the domestic accounting regulation does not make any reference to the acquisition of environmental assets. Conversely, the estimated expenditure with dismantling, decommissioning and site restoration is not included in the value of the long-term asset. In case of a legal or contractual obligation, a provision has to be assigned over the useful life of the asset on a straight-line basis. Internally-generated intangible assets are subject to a policy choice. As a general rule, these assets may be recognized only if they are independently realizable in “common agreement” (e.g. they can sold or licensed to a third party). At the time of capitalization, it must be likely that an asset will arise. More specifically, the national standards stipulate that costs arising during development may be capitalized. There is no indication related to the recognition of emission rights. Finally, none of the three national frameworks makes any reference to inventories or financial instruments recognizable as environmental assets, maybe the reason to have only one company for France and one from UK presenting this information. Environmental liabilities Environmental liabilities are similarly presented by companies from three countries: Germany (44), France (57) and UK (51). Environmental liabilities are usually interpreted as provisions for risks and charges, as well as contingent liabilities, which are only disclosed in the notes to the annual accounts. In general terms, a liability should be any of the following:

• IFRS – a present obligation arising from a past event, the settlement of which results in an outflow of resources embodying future economic benefits;

• UK – the obligation of an entity to transfer economic benefits as a result of past transactions or events;

• France – an element of a firm’s wealth, with a negative economic value, incorporating an outflow of economic resources and for which any third party will not offer anything in return;

• Germany – a present obligation to third parties. Companies also have to recognize provisions for probable future obligations which result from past transactions or other past events as well as for obligations which might arise in the future.

It is clear that, while the British definition is also similar to the one provided by IFRS, the French system favors a property-rights vision of accounting recognition. The German definition for liabilities is narrow in comparison with the others models, maybe the reason to obtain the poorest score. It is however clear that, through the additional information to be disclosed in the financial report, the proportion of such elements in the balance sheet may considerably increase. The best information level was obtained by environmental provision divulgation: 35 for Germany, 23 for France and 35 for UK. In the UK, FRS 12 was developed and adopted at the same time as IAS 37. Except for the fact that the British standard provides more detailed guidelines on the discount rate for provisions, there are no differences between the two standards. In France, through the Regulation n° 2000-06 of 7th December 2000, the provisions of IAS 37 were also incorporated into the National Chart of Accounts. The Recommendation n° 2003-r02 of 21 October 2003 offers numerous details regarding the accounting recognition and measurement of environmental liabilities. Except for the discount option in the French

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system, there are no differences between the two sets of standards. We can not explain the lower level of this information for French companies. In Germany, provisions must be recognized for uncertain liabilities, expected losses from executory contracts, necessary repairs, maintenance expenses incurred within the first three months from the end of the preceding financial year, expenses for removal of earth and demolished buildings incurred within the following year, and guarantee expenses incurred without any legal or contractual obligation. The guidance for contingent liabilities is similar to IFRS. However, due to the importance of the prudence principle, more items are recognized as provisions rather than only disclosed as contingencies. The comparative perspective on the three national accounting frameworks reveals a certain degree of divergence with IAS/IFRS. The lack of conformity is manifested through the total absence of guidelines regarding the recognition of certain elements, through the possibility of choosing alternative policies (e.g. regarding development expenses), or through the existence of more conservative accounting options (e.g. the impossibility to capitalize decommissioning expenses, in the German system). Since the IASB has always had a close relationship with the accountancy bodies from France, Germany and the UK, it is expected that the national standard-setters will continue to develop their partnership with the IASB, either by working together on certain projects or by providing the IASB with feedback on the impact of IFRSs in their respective countries. This implies that, gradually, some of the differences between national and international accounting rules regarding environmental elements will be minimized. Certainly, one should not overlook the cultural differences that lie at the source of any policy choice in the area of financial accounting. The national institutional background is particularly strong for firms incorporated in any of these three countries; that said, it is always possible that, even in the presence of perfect formal convergence, the managerial decisions and implications to be highly dependent on the institutional context of each particular country. 6. Conclusions In the context where environmental reporting is one of the major challenges for modern accounting practice and research, this study seeks to offer insight into the environmental disclosure of companies using IAS/IFRS. Results show that environmental mandatory information in IAS-IFRS annual reports increases with the intensity of the environmental disclosure constraints in the country where the firm is located. This suggests that application of IAS-IFRS is to some extent country-specific, notably because national legal aspects have an impact on the information reported. Results from the present study contribute to the knowledge of environmental disclosure in the following manner. Firstly, the international accounting standards were subject to a close scrutiny, from the perspective of the integration of environmental recognition and disclosure issues. The main conclusion of this section is that there is no international standard exclusively dedicated to environmental issues. However, several standards have explicit or implicit provisions related to the recognition, measurement and reporting of environmental assets and liabilities and we propose a grid with environmental information to present for companies interested to improve their environmental disclosure. In this respect, it is expected that corporate transparency would benefit from a more hands-on approach to environmental accounting. The IASB should impose a minimum of accounting information to be provided in relation to corporate environmental impacts, and this disclosure should be governed by a

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specialized standard. Moreover, it would be even more beneficial for IASB to draw the blueprint for a separate financial statement addressing a company’s relationship with the natural environment. Finally, accounting for greenhouse gas emissions – quotas, emission rights, penalties and derivatives – is one of the most important challenges for actors in this specialized market. Secondly, the measure of the level of environmental information of companies applying IAS/IFRS shows that it is more environmental divulgation in France and UK that in Germany. This could be explained by the fact that while France and the UK have opted for a regulated demand of environmental information, mostly from listed and large non-listed companies, Germany has provided disclosure guidelines applicable to any economic entity, irrespective of size. The first position occupied by France could be explained also by the fact that the French standard-setter has provided a comprehensive list of environmental information to be disclosed by target companies. Conversely, British managers have a larger share of freedom when if comes to selecting the information to be included in the business review section of the annual report. However, the most significant point of divergence is related to the target audience for these reports: while French firms are addressing the general public, the British companies have adhered to an accounting framework which favors the investors as the primary users of information, considering their specialized informational demands and monetary stakes in the running of the firm. The score function shows that French companies are in top, UK firms just after and German groups in third position, but we observe that the general environmental information using IAS/IFRS is very poor. This situation is maybe connected with the non requirement of external audit of environmental information in any of the three countries. Finally, one can notice a certain degree of nonconformity between the national provisions regarding environmental accounting and the international standards that conduct French and UK companies to present more information about assets that German firm. A better collaboration among the standard-setters in the UK, France and Germany, and the IASB could create the premises for shaping the convergence process regarding environmental accounting. An objective for further research would be to extend the number of countries under study, as to uncover the diversity of institutional contexts and their impact on environmental reporting. For a more insightful perspective, the researchers may enter in contact with the persons in charge of compiling data for the environmental reporting process, as well as with those deciding on the final form of any environmental report. References Adams R, Coulson A, Mueller K, Sturm A, Bartel C. 2000. Accounting and Financial Reporting for Environmental Costs and Liabilities: Workshop Manual. Association of Chartered Certified Accountants, London, United Kingdom. Adams CA, Kuasirikm N. 2000. A comparative analysis of corporate reporting on ethical issues by UK and German chemical and pharmaceutical companies. European Accounting Review 9(1): 53-79. Aerts W, Cormier D, Magnan M. 2006. Intra-industry imitation in corporate environmental reporting: An international perspective. Journal of Accounting and Public Policy 25(3): 299-331. Aerts W, Cormier D, Magnan M. 2008. Corporate Environmental Disclosure, Financial Markets and the Media: An International Perspective. Ecological Economics 64(3): 643-659.

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Table 1: Sample description

France Germany United Kingdom

Total per industry

Basic Materials (BM) 6 10 8 24

Technology (Tech) 3 4 4 11

Healthcare (Health) 3 6 3 12

Industrials (Indus) 18 8 13 39

Cyclical Consumer Goods and Services (CCGS)

11 7 10 28

Total per country 41 35 38 114

Table 2: Scoring sheet of environmental information in compliance with IAS/IFRS

Items Descriptive Monetary 1. Environmental development assets 2. Intangible Assets with exploration of mineral resources 3. Emission rights_assets 4. Concessions, licenses, trademarks and similar items 5. Other intangible assets 6. Tangible assets 7. Tangible Assets with exploration of mineral resources 8. Inventories (waste) 9. Environmental provisions (Provision dismantling, removal of assets and the restoration of sites, Provision for CO2 emissions charges, Provision for insurance, environmental litigates etc.)

10. Emission rights liabilities and governmental grant 11. Fines and taxes 12. Environmental donations and sponsorship 13. Other environmental income and expenses 14. Contingent liabilities and assets

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Table 3: Number of firms providing environmental information in compliance with IAS/IFRS

Items Germany France UK Descriptive Monetary Total

1. Environmental development assets 0 0 0 0 0 0

2. Intangible Assets with exploration of mineral resources

0 3 4 6 1 7

3. Emission rights assets 2 9 2 9 4 13

4. Concessions, licenses, trademarks and similar items

2 1 0 1 2 3

5. Other intangible assets 1 0 0 1 0 1

6. Tangible assets 0 4 6 7 3 10

7. Tangible Assets with exploration of mineral resources

1 4 8 8 5 13

8. Inventories (waste) 0 1 1 2 0 2

9. Environmental provisions 35 23 35 49 44 93

10. Emission rights liabilities and governmental grant

0 8 0 6 2 8

11. Fines and taxes 0 1 2 3 0 3

12. Environmental donations and sponsorship

0 0 0 0 0 0

13. Other environmental income and expenses

4 14 6 16 8 24

14. Contingent liabilities and assets 5 11 8 20 4 24

Total 50 79 72 128 73 201

Table 4: Score function and average by country and by sector

Countries Average by country Average by supersector

BM Technology Healthcare Industrials Cyclical CGS

Score function

Germany 1,42857 2,6 0,25 1 1,25 1 0,05102 France 1,92682 7,66667 0,33333 2,33333 1,27778 0,18182 0,06881

UK 1,89473 5,125 0 2 1,61538 0,4 0,06766

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Table 5: Breakdown of sampled firms by number of environmental items covered

Panel A: Descriptive information

Breakdown of firms by number of items

# of items France Germany UK BM Tech Health Indus CCGS

6 1 0 0 1 0 0 0 0

5 0 0 0 0 0 0 0 0

4 2 1 0 3 0 0 0 0

3 0 4 0 0 0 0 0 0

2 3 2 7 9 0 2 1 0

1 8 13 10 7 0 2 16 6

0 27 19 21 4 11 8 22 22

Total 41 39 38 24 11 12 39 28

Proportion of firms by number of items

# of items France Germany UK BM Tech Health Indus CCGS

3 to 6 0.073 0.128 0.000 0.167 0.000 0.000 0.000 0.000

1 to 2 0.268 0.385 0.447 0.667 0.000 0.333 0.436 0.214

0 0.659 0.487 0.553 0.167 1.000 0.667 0.564 0.786

Panel B: Monetary information

Breakdown of firms by number of items

# of items France Germany UK BM Tech Health Indus CCGS

7 1 0 0 1 0 0 0 0

6 0 1 1 2 0 0 0 0

5 4 0 1 4 0 1 0 0

4 0 0 2 1 0 0 1 0

3 3 0 5 5 0 1 2 0

2 4 4 4 2 0 2 7 1

1 7 15 6 8 2 1 12 5

0 22 15 19 1 9 7 17 22

Total 41 35 38 24 11 12 39 28

Proportion of firms by number of items

# of items France Germany UK BM Tech Health Indus CCGS

6 to 7 0.024 0.029 0.026 0.125 0.000 0.000 0.000 0.000

3 to 5 0.171 0.000 0.211 0.417 0.000 0.167 0.077 0.000

1 to 2 0.268 0.543 0.263 0.417 0.182 0.250 0.487 0.214

0 0.537 0.429 0.500 0.042 0.818 0.583 0.436 0.786

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Table 6: Tests for the difference in disclosure scores between countries

DISC = α0 + α1 FR + α2 GER + β1 BM + β2 Health + β3 Indus + β4 CCGS + ε

Overall sample Monetary information

Descriptive information

α0 0,723 1,011 0,434 (4,53) (3,95) (2,53) 0,00 0,00 0,01 α1 0,117 0,105 0,129 (0,67) (0,37) (0,69) 0,49 0,71 0,48 α2 -0,412 -0,666 -0,157 (-2,27) (-2,29) (-0,81) 0,02 0,02 0,42 β1 1,774 2,157 1,391 (8,80) (6,67) (6,42) 0,00 0,00 0,00 β2 0,246 0,379 0,112 (0,95) (0,92) (0,41) 0,33 0,36 0,68 β3 -0,434 -0,636 -0,231 (-2,29) (-2,09) (-1,14) 0,02 0,04 -0,26 β4 0,514 0,616 0,412 (1,96) (1,46) (1,46) 0,05 0,15 0,15 adjusted R2

0,36 0,04 0,35

F 22,27 13,56 11,00 0,00 0,00 0,00

DISC is the disclosure score. FR and GER stand for France and Germany respectively. The other variables stand for the industry: Basic Materials (BM), Healthcare (Health), Industrials (Indus), Cyclical Consumer Goods and Services (CCGS) T statistics are in parentheses. P-values are in italic.

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Table 7: Environmental regulation in the UK, France and Germany

UK France Germany Legal framework Environmental Protection

Act (1990) Environment Act (1995) Companies Act (1985) Companies Act (2006)

Nouvelles Régulations Economiques (2001) Grenelle 1 Act (2008) Grenelle 2 Act (2009)

Guidelines for environmental reports for the public (1997) – now repealed

Target firms Listed and large non-listed companies

Listed companies and firms with more than 500 employees

All companies

Minimum information requirements

- Environmental matters (including the impact on the environment); - To the extent necessary for an understanding of the development, performance or position of the company, the review must include, where appropriate, analysis using key performance indicators including information relating to environmental matters

- Environmental aspects (consumption and emissions): water, raw materials, energy, greenhouse gas emission, toxic waste; - Preventive measures for environmental protection; - Certification and implementation of dedicated management systems; - Legal compliance and anticipation of legal changes; - Expenses incurred for environmental remediation measures; - The existence of specialized internal services for environmental assessment; - The recognition of provisions for risks and charges; - The rules imposed to subsidiaries overseas, regarding all the above elements; - The centralized coordination of these requirements at board level.

- Basic information block: a description of the organization’s activities, a presentation of the organization’s environmental policy and program, a description of the organization’s environmental management system; - Presentation of significant environmental figures; - Assessment of all significant environmental issues; -Declaration of formal requirements.

Target audience Shareholders, investors, lenders

The public The public

Verification / audit requirements

The auditor must state in their report on the company’s annual accounts whether the information given in the directors’ report is consistent with those accounts.

The present requirements do not include a specific certification of supplied environmental information, other than that usually provided by the financial auditors of the firm.

Providing specialized assurance for environmental reports is not required, but it is recommended.