Corporate Strategies and Climatic Changes
Question:
Discuss about the Accounting Theory for Multinational Enterprises Result.
The integration of the considerations in relation to the climatic changes in the corporate strategies has reshaped the particular way in which the business enterprises carry out their businesses. In their particular effort for addressing the climatic change, the companies derive the advantages of current opportunities like the development of new technologies and products for the purpose of accessing new markets. In many cases, the addressing of the climatic changes leads to the creation of good business sense. It must be noted here that the corporate entities also face higher risks in regards to climatic changes including the increasing regulatory and legal pressure, a high degree of costs for the internalization of the price of carbon, disruptions of the business activities induced by the climate of the region where the business is placed and risk of reputation (Hahn et al. 2015).
This particular study aims to focus upon the factors that analyze the motivations for the purpose of improving the particular disclosure in regards to carbon emission.
The recent studies show that the particular perspective in regards to climatic change has changed over the time. This means that 60% of the executives of the corporate entities view the aspect of climatic change as a much important consideration in respect to the overall strategy of the business firms. Moreover, 70% of the executives view this particular aspect as an important dimension in regards to brand and reputation. It must be mentioned here that the OECD guidelines for Multinational Enterprises result in the providence of a set of principles and standards that is applicable to the domestic and the multinational corporate entities in regards to the business conduct. The guidelines essentially refer to the regulations and the practices that are recommended by the governmental body in regards to the multinational practices that reflect the fact that the operations carried out by the corporate entities lead to sustainable development (Depoers et al. 2016).
It must be noted here that the concept of carbon disclosure has evolved as a significant establishment in regards to governance, climatic change awareness legitimacy and energy efficiency. The companies lead to the measurement of the carbon emissions at the request of the interested parties. The carbon measurement is carried out in order to get ahead in the competition. Moreover, the identification of the spending cuts have also been facilitated by the establishment of the carbon measurement standards of the corporate entities. Furthermore, it must be mentioned here that the particular disclosure in regards to emission information results in the building of trust among the investors and stakeholders of business and further facilitates the understanding of the performance in the industry. There has been an exponential growth in regards to the carbon disclosure in the recent years. This means that the exponential growth of carbon disclosure is connected with the awareness of the climatic change. The countries all over the world have been developing the policies particularly for the protection of the environment (Chiu and Wang 2015).
Importance of Carbon Emission Disclosure and Motivations
Moreover, there have been regulator concern and increasing public attention on issues of climatic change and the increasing demand for climatic change information from the stakeholders should be reflected and disclosed by the firms. In other words, the disclosure in the annual report of company should place the emphasis on providing information on climatic change of interest and other related users. For instance, the interest of regulatory bodies is in the reporting standards and accounting methods that are adopted by businesses for accounting and disclosing information on climatic change. The main interest of public lies in the efforts of organization for promoting climate friendly activities (Ioannou et al. 2015). Functioning of internal management is reflected in the disclosure of information related to carbon emission that is how the disclosure of carbon related information helps in reviewing business and managing the risks of climatic change. Some of the authors have placed emphasis on how business endeavors to disclose climatic information in association with business strategies for dealing with issues of climatic change that are of interest to stakeholders and satisfying them (Gallego et al. 2016). In reality, the demand from external shareholders and perspective of internal management reflects the growing tendency and willingness for firms to release climatic change information. Therefore, the information on climatic change disclosure should incorporate information relating to management of carbon emission and responses of organization to users of external information.
It must also be mentioned here that the particular aspect of carbon disclosures is important for the purpose of ensuring regulatory compliance. It must be mentioned here that the voluntary carbon emission disclosure provides that the companies have voluntarily contributed to climatic change disclosure and promoting carbon emissions. The accounting standards and professional accounting bodies have made considerable contributions toward climatic change disclosures and promoting carbon emissions. It has been argued that the framework of financial institutions fails to make the presentation of non-financial characteristics of business such as information on climatic change. Despite of such setbacks, the financial accounting standards board and International accounting standard board have been working jointly on project development of accounting guidelines on trading and carbon reporting (Peters and Romi 2014).
The inclusion of social and environmental reporting in the annual report of company has been recommended from a significant number of relevant agencies. The strategic element that is considered different stakeholders is the information of company regarding environment. Accounting treatment of carbon emission rights is incorporated in the term carbon accounting that involve using accounting methods for carbon emission relating to financial report. Comparing of financial statements would be difficult in the absence of interpretations and accounting standards specifying accounting for emission rights. For accounting the effects of emission trading schemes, preparers of IFRS have developed various approaches. Since accounting increases the quality of information and makes comparable reporting, it is essential to have accounting standards of carbon emission. The comparability of financial statements are worsen of there is any divergence in practices that results in hard decision making process (Yunus et al. 2016). In general, this would respond to increase societal concerns about climatic change and in particular, emission of carbon dioxide. Regardless of such benefits, there are no international standards for specifying emission rights accounting. In general, in accordance to different interpretations of IFRS, the accounting for carbon emission can be done in multiple ways. For instance, emission rights can be classified by firms as inventory assets, intangible assets and other research and development activities. This is regarded as an accounting choice and is justified with the implementation of positive accounting theory.
OECD Guidelines for Multi-National Enterprises
In financial accounting, for a particular transaction or choice, there is a choice between methods of alternative accounting mainly when there is no applicable compulsory accounting standard. For explaining the accounting practice, positive accounting theory is built on agency theory by emphasizing on accounting role to aid relationship with different stakeholders. The theory is developed with the all individual actions that are based on interest of individual for acting opportunistically for increasing their wealth. The choice of managers to oppose or support certain accounting treatment is impacted by particular attributes of organization. This particular situation occurs in the case of accounting for emission rights where there is no standard accounting treatment for the same. On the other hand, financial users as well as employees of organization will receive assistance from global accounting standards for analyzing the carbon credit as gross or net position. For this particular case, institutional theory is applicable to the standard as it takes into accounting carbon emission factor in the way applicable to industries. In such situation, the applicable new standards would benefit financial reports by adding value to organizations and reducing cost and financial risks of accounting would be same for all organization. As per the Australia environment business, the cost of maintaining, monitoring, allocating and controlling resources is increased die to implementation of new system (Ioannou et al. 2015).
The financial reporting of organization is impacted by lack of standardized framework of accounting. Comparability of financial statements is undermined by divergence in the way of emission rights and thereby making it difficult for taking appropriate decisions by stakeholders. The guidelines of global reporting initiative incorporates carbon disclosures and it is posits that there is relationship between the standardization of corporate sustainability report and accounting for emission rights that helps in preparing of high quality financial information (Watson 2015).
Based on positive accounting theory, firms or organization makes voluntary social disclosures and the firms will be influenced to have their carbon emission assured by third parties from external pressures such as regulations and regulatory enforcement. In some countries, there has been implementation of carbon tax because of carbon footprints, pollution and global warming. Therefore, in accordance to this theory, disclosure of carbon emissions by the firms would be ensured by external third parties in relation to their negative and positive impact on their business. Assurance of carbon emission by techniques to reduce any political costs and hence the theory of political cost helps in explaining why most of the firms adopt to environmental and voluntary social disclosures (Qian and Schaltegge 2017). Such disclosures can be explained as an effort of organization to reduce political cost by avoiding regulations. Managers in different parts of world have been influenced to use method of accounting due to the introduction of carbon tax and mandatory reporting requirements that will ultimately results in reduction of political costs. Hence, organization would choose to have their carbon emission disclosures that are assured by third parties for obtaining benefits such as government grants and subsidies.
Establishment of Carbon Disclosure as a Governance Institution
When choosing methods of accounting such as social responsibility reporting, it is argued that large firms are more sensitive to political pressures and are visible in the public eye that will help in minimizing of reported earnings and hence reducing political costs. The interaction between economic and socio political system of nation helps in shaping the organization perception by a wider society (Lewandowski 2017). Hence, to avoid the government regulations for preserving their own self interest and meet the social expectation, it is required by organizations to release social accounting and voluntary environmental disclosures. Therefore, based on positive accounting theory, carbon emission assurance intended to maintaining, promoting and legitimizing the relationship of firms by presentation of image that is supported by organization.
The management of carbon emission has direct impact from the perspective of both investment and regulations. If the company is not capable of fulfilling their responsibilities towards reducing carbon emission to the target level under the mandated carbon management schemes, they are required to buy emission allowance from carbon trading market causing financial burden on company. In order to achieve the targets, company can make investment in carbon management schemes by measures such as development of carbon technology, equipment and low energy emission. According to stakeholder theory prediction, better performance of carbon emission will create intangible impacts on company such as better relationship with suppliers, customers and government and this building good reputation of company. In relation to corporate environmental affairs, voluntary nature of disclosures helps in examining the relationship between environmental performance and environmental disclosures (Hassan and Romily 2018).
Conclusion:
The report prepared for analyzing the motivations for improving the disclosure of carbon emissions is discussed using the accounting theory such as positive accounting theory. The research has contributed to some previous research concerning the accounting treatment of emission rights. It has become increasingly essential for organization to be efficient in managing the resources and behave in a manner that is environmentally sustainable. Consequently, the demand of information in relation to environmental issues has risen enormously. It has been ascertained that accounting treatment of emission rights has witnessed large divergence as a certain factors. However, for the comparability of corporate performance, the pre requisite factor is accounting entries standardization. The new accounting standards incorporating consistencies would help stakeholders in analyzing the emission rights as gross or net positions. It is required by organization to address some of the aspects such as classification, costing methods, gain recognition and disclosures in relation to carbon emission.
References list:
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