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Part 1 of Introduction to 3D Accounting by Stewart McKie
Part 1 of Introduction to 3D Accounting by Stewart McKie

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Published by: cfoinfo on Dec 15, 2009
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© Stewart McKie - 1 - 8/12/093D Accounting: An Introduction to Green Accounting© Stewart McKie, 2009There was a time, many decades ago, when all a CFO had to care about was the ‘F’word: Finance. But today’s chief financial officer has to care about more than justfinance. The new ‘triple bottom line’, a term originally coined by John Elkington in1994, implies that the financial management of the business has to go hand in handwith environmental and social impact accounting.Here, I refer to this kind of organizational management as three-dimensionalaccounting or ‘3DA’. What can I tell you: I’m a technology guy, I love acronyms.Yes, I know ‘three dimensional’ has baggage: cardboard spectacles, the spooky thirddimension and 3D graphics. But I prefer it to ‘triple bottom line’ because it seemsmore holistic, ‘bottom line’ has too much of profit and loss feel about it and 3BL is pronounced ‘thribble’.Because 3DA is not just about money. 3DA is concerned about different businessoutcomes: Impact and footprint rather than just profit and loss. 3DA has a differentaudience: Organizational stakeholders generally rather than equity shareholdersspecifically. 3DA reflects a different kind of operational transparency that isconcerned with people and the planet and not just profit.We should all care about the social and environmental impact of a business,especially global businesses, as in the end their impact can have far reachingconsequences that are not easy to predict – even the recent financial crisis might have been mitigated by better social accounting. Today, more and more people will havequalms about working for your company or buying your products if your social andenvironmental practices are not accurate and transparent, so 3DA contributes to brandimage. And steadily increasing environmental regulation means that most businesseswill be forced to pay at least some attention to 3DA simply to comply withlegislation. If you think Sarbanes-Oxley or reporting to the SEC in XBRL was a burden on your business shoulders, then take my advice: Start bulking up now.
The 3Ds
The 3Ds are the financial, social and environmental dimensions of your business.Here, I’ll introduce the social and environmental dimensions and focus on anenvironmental accounting example. I won’t spend any time on the finance dimension.The last dramatic change to finance was when Luca Pacioli documented double entry bookkeeping in the 15
century. Since then business management has been stuck in aone–dimensional groove.The social dimension is people focused, whereas the environmental dimension isresource focused. By people I mean both people who work for and with a business,the people who buy and use products or consume services and the people whosurround businesses in the communities where the business is located or operates in.By resources I mean the operational resources of the business (typically comprisingits fixed assets) and the resources the business consumes or generates as a result of itsoperations (i.e. its business processes). Note that both people and resources are anintegral part of business processes, so the social and environmental impact of a business process is also a legitimate area of attention.
© Stewart McKie - 2 - 8/12/09Social accounting should not be mixed up with human resource (HR) management(HR) in software terms – although there is some overlap. Social accounting is primarily concerned with how the business is helping or harming people but with anexternal community rather than internal personnel focus. Similarly, resourceaccounting should not be mixed up with fixed asset (FA) management in softwareterms – although again, there is some overlap. Resource accounting is primarilyconcerned with what the business is generating and what it is consuming and how thisactivity helps or harms the planet. Naturally, the level of attention the business paysto social and environmental accounting depends largely on what it does, its corevalues, and the regulatory environment it operates in.The social and environmental accounting dimensions are generally not found in atraditional accounting system. Most general ledgers are focused on monetarytransactions posted to entities such as company and account and analyzed to thestructural and delivery entities of the business organization such as divisions anddepartments or jobs and projects – not people and resources. So let’s get to what this piece is really concerned with: Thinking about 3DA from a software application perspective.
3D Accounting
As stated above, 3D accounting’s primary target audience is the organizationalstakeholders of the business – not just investors and shareholders - but the communityor business network that includes partners and suppliers, customers and prospects,influencers and regulators. 3D accounting’s primary concern is the balance of itsinputs and outputs or put another way consumption and generation. The primaryoutcomes that 3D accounting cares about - alongside the business making a profit tosurvive and provide jobs and tax revenue – are whether the business is helping or harming people and the planet.Clearly these outcomes are fundamentally different from what is expected fromtraditional financial general ledger accounting.Yet, as we’ll see below, 3DA does not and should not need to operate separately fromexisting financial accounting systems. It doesn’t take much to see how it could easily be bolted on. 3DA clearly represents additional functionality that the leadingenterprise resource planning (ERP) vendors will want to integrate into their existingapplication suites, in order to extend their organizational footprint even further. Butequally, the additional 2Ds of 3D accounting are quite capable of functioning as ‘bestof breed’, stand-alone modules, that are integrated at some level with the ERP system- for example to receive a feed of cost data.
3DA in Practice
If you were going to design-your-own 3D accounting system you might start byadding two parallel ‘ledgers’ that run alongside the financial general ledger: Thesocial and environmental ledgers. The principles of the core financial reports –  balance sheets, income statements, source and use of funds – can apply equally wellacross all three ledgers. However, social and environmental reporting may benefitfrom adhering to new reporting formats, such as the Global Reporting Initiative (GRI)
© Stewart McKie - 3 - 8/12/09G3 Reporting Framework for sustainability reporting, and a specific set of  performance management key performance indicators (KPIs) such as the 22 KPIsrecommended by the UK’s Department for Environment, Food and Rural Affairs(DEFRA).So let’s consider what an environmental ledger might look like and how it couldoperate by using the example of an airline engaging in carbon management. Airlinesoperate aircraft (business resources) that are used to deliver flights (business events)carrying passengers (business agents). The airline knows how much carbon a specificaircraft emits for a given flight duration based on its fuel type and consumption, sothe carbon impact of the flight can easily be allocated across all the passengers on theflight.For the sake of our example let’s say that our flight emits 1000 carbon units and theaircraft can carry up to 100 passengers. Each carbon unit has a notional quantity of 1and a notional cost of 1 currency unit. Ideally we would like the carbon footprint of this flight to be carbon-neutral or even better carbon positive. At the moment weknow it is carbon negative. For the flight to become carbon neutral, somehow each passenger (or the airline) needs to generate 10 carbon ‘credits’.By better carbon management through environmental accounting this business istrying to:1.
Track its carbon footprint more effectively2.
Understand how much carbon reduction is costing3.
Reduce one of its internal environmental KPIs, namely the average carbonfootprint of its flights.Table 1 shows an income statement and balance sheet-like view of the carbon ‘status’(position) of the flight just before it takes off. The income statement records moneywhereas the balance sheet records the unitary equivalent of that money. On thisincome statement, carbon ‘income’ comes from two sources: buying carbon offsetsand generating carbon credits by other means. Carbon expenses come from the costsof acquiring that ‘income’. On the balance sheet, positive carbon gains are added fromthe spend on carbon (i.e. the income subtotal) and negative carbon losses are addedfrom the emissions generated by the flight. The flight’s carbon footprint is the net of the two.At the moment before the flight takes off the carbon position is as shown in table 1.Some twenty passengers have purchased carbon offsets as part of their ticket cost andas part of the business’ support for reducing carbon it has pledged to plant a tree for each passenger carbon offset purchased (a less desirable method might be to pay anenvironmental tax instead – but let’s be positive here). Each offset purchased is worth5 carbon units as is each tree planted but for the sake of this example, planting a treeonly costs the currency equivalent of half an offset.

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