What benefits should entities expect

from preparing sustainability

reports?
Preparing sustainability
reports formalises and
enhances communication with
key stakeholders providing
them an efficient way to learn
about the positive
social and environmental
impacts that the business is
having. It helps
stakeholders to compare
results with other companies
and it provides businesses
with the opportunity to create
a competitive advantage by
gaining the trust and
admiration of stakeholders.
ACC 704: SEMESTER 2 2022

Revision Questions

A. What benefits should entities expect from preparing sustainability reports?

The following benefits can be gained from preparing sustainability reports:

- Embedding sound corporate governance and ethics systems throughout the organisation
- Improved management of risk through enhanced management systems and performance
monitoring
- Formalising and enhancing communication with key stakeholders
- Attracting and retaining competent staff
- Ability to benchmark performance with other entities.
B. Identify four corporate stakeholders and explain how they affect a business’s operations.

Shareholders provide the funds to establish a company and have a strong influence on the operation of a
company through voting rights (Formal pressure)

Suppliers provide companies with products to sell or consume

Customers purchase products/services and provide revenue

Employees provide the labour that a company requires to function.

All of these stakeholders can have a strong influence on business operations. If they do not agree with how a
business is operating they can withdraw from the company which would cause massive issues as they are all
a necessary part of operation. According to the institutional theory, a corporation will need to change if there
is serious informal pressure from the above stakeholders. Legitimacy theory also supports this, as it says if a
company is not conforming to society’s expectations a legitimacy gap will form and they will lose their right
to operate in that society.

C. Explain the difference between sustainability reporting and traditional financial reporting.

Traditional financial reporting focuses on recognising the financial effects of an entity’s transactions. It
follows generally accepted accounting principles and accounting standards and is audited by an external
auditor. The financial report is limited to transactions that have a financial impact.

Sustainability reporting however goes beyond this. It includes reporting on the environmental activities
and of the entity as well as its social impacts. These are combined with financial information.
D. What is the Global Reporting Initiative, and what is its purpose?

The Global Reporting Initiative was launched in 1997 as an initiative to develop a globally accepted
reporting framework to enhance the quality of sustainability reporting. It provides a framework of principles
and performance indicators that organisations can use to measure and report their social and environmental
performance. Its purpose is to enhance the transparency, comparability and clarity of sustainability reports.

E. Explain the meaning of sustainability and outline why corporations might consider it in their
business operations.

Sustainability, or sustainable development, is concerned with development that meets the needs of the
present without compromising the ability of future generations to meet their own needs. It refers to three
main areas – economic development, environmental development and social development. Corporations
might consider their effect on sustainability as they are in control of the majority of the earth’s resources so
any moves towards sustainability cannot occur without the support of business. Figure 11.1 presents reasons
that BHP Billiton embraces sustainable development. These include: to reduce business risk and enhance
business opportunities; to gain an maintain their ‘licence to operate’ – which is also referred to as a social
contract; to improve operational performance and efficiency; improved attraction and retention of its
workforce; maintain security of operations; enhanced brand recognition and reputation and to enhance their
ability to strategically plan for the longer-term.

F. Sustainability reporting

Obtain the 2013 sustainability report for Toyota Motor Corporation. Prepare a report that addresses
the following issues:

1. Toyota’s vision and mission statement, and how these might relate to sustainability (if at all)

2. Toyota’s stakeholders and how the company has engaged with each of stakeholder group

3. Governance mechanisms in place on the board of directors to address sustainability

4. How Toyota links sustainability to its risk management systems

5. Any guidance Toyota used in implementing environmental and social performance and reporting
systems.

1.

Our vision: Most respected and admired company.

Our mission: We deliver outstanding automotive products and services to our customers, and enrich our
community, partners and environment.

Our four core values:

• Customer first
• Respect for people

• International focus

• Continuous improvement and innovation.

While the vision does not specifically relate to sustainability, the mission and core values do. In Toyota
Ltd’s mission they discuss enriching the community and environment. This will lead to organizational
strategies to address these sustainability issues. In addition one of the company’s four core values is respect
for people, implying a social focus beyond a profit motive. The company also has a separate environment
vision and action plan.

2. In its sustainability report under ‘Stakeholder Engagement’ the following table highlights stakeholders
groups the company engages with and how:

Stakeholder Group Key Issues Response and Engagement

Employee satisfaction and job Working at Toyota,
security communication broadcasts and
Employees employment programs

Career and professional Learning and development

development programs via Toyota Institute
Australia. Read about our
Employees
Customers Customer service Customer satisfaction surveys

Product quality Interaction via dealerships

Customer Experience Program

Business partners - dealers Effects of Great East Japan Dealer support during natural
Earthquake and natural disasters disasters
in Australia

Environmental impacts Dealer Environmental Risk Audit

Program and Toyota
Environmental Dealership
Program

Ongoing development Dealer training

Business partners - suppliers Effects of Great East Japan Annual Supplier conference
Earthquake and natural disasters
in Australia

Self-reliance Supplier Development Programs

Community Contribution to local community Local and national community
partnerships

Community sponsorships
Government Ongoing viability of Australian Regular interaction on key issues
automotive market such as production of next
generation engine at Altona plant

Written submissions including

NPI, EEO and NGERS
Toyota Motor Corporation Efficient operations Regular liaison on operating
issues including product quality,
sales and marketing

G. What is a conceptual framework?

A conceptual framework is an analytical tool with several variations and contexts. It can be applied in
different categories of work where an overall picture is needed. It is used to make conceptual distinctions
and organize ideas.

H. Which ethical and social responsibilities do companies have when it comes to quality? Can you
think of an example where poor quality had some serious social consequences? Does the quest
for quality respond to a sense of responsibility, or to the need to maximize profits for
shareholders?

Ethics is a framework that navigates an organization on what all activities are right or wrong and good or
bad. It plays a vital role that deciding the success of an organization and also while offering quality. The
prime ethical responsibility of a firm is to provide quality products and services to its target customers at an
affordable price. Organizations should deliver what it has promised to their target customers through the
products/ services offered to them. By offering quality, a company can enhance the purchase and brand
loyalty of a business.

The ethical responsibility of an organization includes following fair conduct and obligation towards its
employees through pain fair pay and providing reasonable work expectations, such as a safe and healthy
work environment. Organizations also need to have grievances cells to report any kind of discrimination or
harassment at the workplace. This enhances the quality of work which makes the employees contribute their
best to achieve the organizational goals. The shareholders and board of directors also need to comprehend
the ethical necessity of the government bodies and act accordingly by taking up ethical responsibilities that
are crystal clear and help in guiding the business in the right direction.

The social responsibility of an organization is to have a clear obligation to work for the society and the
community within which it operates the organization. The companies should be socially responsible and
fight against pollution like water pollution, air pollution, and other pollution that may impact society, and the
environment equally. Organizations nowadays take up organizing and sponsoring various events for the
betterment of society and saving the environment from severe hazards.

The key social responsibility of organizations emphasizes serving quality to the society and environment
without hampering anyone or anything. Poor social responsibility hampers the overall functioning and
reputation of the businesses.
An example of poor social responsibility undertaken by a company is Volkswagen. Volkswagen is a well-
known motor vehicle manufacturing company that is headquartered in Germany.

Years back the company produced and sold its cars to different countries that had software designed and
developed purposefully to misguide the customers in return for maximizing the profit base from the sale of
such cars. The company's only motive was to earn a profit base by taking the advantage of the potential
customers. As a result of this, they export around 5 lakh cars with purposefully designed software to
overcome the emission test. Emission test is vital for running vehicles on the road because they help in
measuring whether toxic gases emitted by a vehicle are under a certain established limit or not. Through this,
the company was able to generate a huge amount of profits, but in the long run, it was discovered by the
government how the company was able to rise up and flourish business within a short time frame. This
impacted the goodwill and reputation of the firm as people lost their faith and trust in the company as it
proved to be detrimental to the customers as well as to the environment.

I. Who are the perceived recipients of general purpose financial statements and what information
do they look for in the financial statements? (10 marks)
According to IASB Conceptual Framework 2018, the primary users of general purpose financial
reporting are present and potential investors, lenders and other creditors, who use that information to
make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or
other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that
affect the use of the entity’s economic resources. Users and their information need are as follow;

a) Shareholders- are the owners of the company which mean ownership of capital due to dispersal of
shareholding have made the shareholders take more interest in the financial statements with a view to
ascertaining the profitability and financial strength of the company.

b) Debenture Holding- The debenture holders are interest in the short-term as well as the long-term
solvency position of the company. They have to get their interest payments periodically and at the end,
return of principal amount.

c) Creditors – Existing and potential suppliers of goods and materials or services and others doing business
with the company are interested in the liquidity position of the company.

d) Lenders (Financial institutions and commercial banks) – they are interested in the solvency - short
term and long term and profitability position of the company.

e) Prospective Investors – They are interested in the future prospects and financial strength of the company.

f) Employees and Trade unions – Their information need is in the financial position and profitability of the
company.

h) Important customers – Customers who want to make long standing contract with the company are
interested in its financial strength.

i) Tax authority – Tax authorities are interested in the profits earned by the company to determine their tax
liability.
J. What is an enhancing qualitative characteristic and what role do the enhancing qualitative
characteristics have in relation to the role of fundamental qualitative characteristics?(6 marks)
The enhancing qualitative characteristics of a financial statements are relevance, reliability,
comparability and understandability. The roles of enhancing qualitative characteristics in relation to
fundamentals qualitative characteristics are;
Relevance:
Relevance is one of the essential subjective qualities relating to content. Data has the nature of
significance when it impacts the monetary choices of clients by assisting them with assessing past,
present or future occasions or by affirming, or rectifying, their previous assessments.
Reliability:
Reliability quality is one more subjective trademark connecting with content. Data has the nature of
dependability when it is liberated from material mistake and inclination and be relied on by clients to
address reliably that which it either implies to address or could sensibly be anticipated to address.

Comparability:
This is another qualitative characteristic show of fiscal summary. Clients should have the option to
look at the monetary explanations of a venture after some time to recognize patterns in its monetary
position and execution. Clients should have the option to look at the budget reports of various
ventures to assess their overall monetary position, execution, also changes ready. Consistency is in
this manner required. Their role for comparability refers to the ability of the users to distinguish
similarities and differences between two economic phenomena. The comparability between entities
and consistency in the application of methods or procedures over time period will enhance the
informational value in relative economic performance. In order to maximize the fundamental
qualitative characteristics, some degree of comparability should be included in relevant and faithful
representation.
Understandability:
This means that the quality of financial information that the users could be able to identity or
discover the meaning of the message that trying to be shown. Users of financial statements are
assumed to have sufficient knowledge to study the information properly. If the information is
classified, clearly represent and concise, it will help to enhance understandability. Sometimes, the
information is complicated and hard to understand, the users may seek an adviser to explain to them.

K. Explain why an entity might adopt sustainable development and corporate social responsibility
practices (6 marks)
Entities adopt sustainable development and corporate social responsibility practices for the following
reasons:
 Social responsibility empowers employees to leverage the corporate resources at their disposal to do
well.
 Being a socially responsible company can bolster a company's image and build its brand.
 Social responsibility programs can boost employee morale in the workplace and lead to greater
productivity, which has an impact on how profitable the company can be.
 Businesses that implement social responsibility initiatives can increase customer retention and
loyalty.
 Socially responsible companies have the opportunity to stand out from the competition because they
cultivate superior and positive brand recognition.
 L. Discuss stakeholder influence on sustainable business practices.

According to Henderson et al (2013) stakeholder influence on sustainable business practices is to increase

business value. A stakeholder relations to management can enable the early identification of risks and
opportunities and therefore the implementation of sustainability measures that contribute to initiative such
as;
 The sustainable development goals
 Environmental, social and governance reporting/corporate social responsibility reporting
 The task force on climate-related financial disclosure.
Additionally, the goal of stakeholder relations to management is to harness positive influences and minimize
negative influences on the project, organization or partnership. The interaction among stakeholder groups
(i.e. lines of communication, networks, and systems) may enhance this level of influence on business
practices.

M. Explain by giving examples under what circumstances conflicts of interest may arise. (6
marks)

Possible conflicts of interest including hiring or promoting relatives and close friends, basing financial
decision-making around personal interest rather than what’s best for the business, or sharing confidential
information with competitors. Any of these circumstances can harm other stakeholders in an organization;
 Engaging in nepotism: Mixing personal relationship with professional ones can easily add up to
conflicts of interest. For example, a public official might regulate a close friend or family member’s
company with a more relaxed hand than their competitions; or a law firm partner might promote their
child to a high-ranking position straight out of law school despite more qualified candidates vying for
the job. People should strive to avoid the mixing of their personal and professional relationship.
 Making self-interested decision: whenever someone acts in their own financial interest at the expense
of their company, they may be guilty of self-dealing. Consider a business partner who pursues their
own personal benefit while breaching their fiduciary duties to clients and associates. These financial
conflicts of interest can manifest in a host of different ways.
 Revealing confidential information: Keeping your organization’s secrets under wraps is an official
duty regardless of where you work. Revealing private and confidential information portrays a sheer
lack of professional judgement and becomes a conflict of interest if that revelation leads to your own
personal, financial, or professional gain.

N. Explain the following terms in relation to the accounting profession and illustrate your
understanding by giving examples: integrity; objectivity; professional competence and due
care; confidentiality and professional behaviour (10 marks)

According to the International Federation of Accountants (IFAC) (2006) establishes ethical requirements for
professional accountants to comply with the following fundamental principles:

Integrity

Integrity requires honesty and objectivity in all professional matters. Integrity implies not merely honesty but
fair dealing and truthfulness. Our work must be uncorrupted by self-interest and not be influenced by the
interest of other party. Integrity comes before profit. We’re not afraid to say ‘no’, for all the right reasons.
For instance, integrity is what public trust is built upon. Without adherence to the strict moral and ethical
guidelines of the profession, there is no value to the accountant’s work. We can have all the skill, knowledge
and experience in the world, but without integrity, and therefore trust, our work becomes questionable. For
this reason, it is important for clients and the public in general that rely on the financial data for decision
making, to assess accountants ‘integrity. To have integrity, an accountant most not only being willing to
ethically do the right thing, but also maintain all the skills to ensure to do the best job possible.

Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to override
professional or business judgments. The objectivity principle in accounting states that the financial
statements a company produces must be based on solid evidence. The aim of this principle is to ensure that
management and accounting do not allow any personal opinions or biases from making their way into the
financial statements.

All accounting transactions are supported or proven by business documents such as invoices, which is a
source document, which records all sales transactions made by a business. Cash memos are also regarded as
source documents, which signify cash received for a sale of a particular good or service. There are also many
other documents which serve as evidence and increases the accuracy of accounting transactions.

For instance:

Enron Corporation was an energy company which existed in the US. In 2001, it was discovered that the
enterprise was hiding billions of dollars of debt. The violation of the accounting principles resulted in
shareholders losing more than $74 billion as the price of Enron’s share price collapsed massively and Jeff
Skillings, the CEO of the company, was sentenced to 24 years in prison.

Professional Competence and Due Care

A professional accountant has a continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when providing professional services.
For example, if you’re driving your car, you’re expected to engage in safe behaviour that prevents a car
accident. You’re expected to follow the speed limit and not text while driving. A reasonable person would
consider those activities proof of “due care.”

Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the
personal advantage of the professional accountant or third parties.
For instance, accounting consultants have a responsibility to act in their clients' best interests. As an
accountant, you're required to comply with codes of practice when handling confidential information, which
means clients often speak openly and reveal information to you that could damage their business if it got into
the wrong hands.

Professional Behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any action
that discredits the profession.
For instance, being punctual, dressing professionally, communicating respectfully, and being honest and
ethical.
O. Explain four (4) bases of measuring assets and liabilities subsequent to their initial recognition
(4 marks)

Answers:
(a) Historical cost (historical proceeds);
Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or in some circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of
business.

(b) Fair Value/Current cost;

Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle
the obligation currently.

(c) Net realizable (settlement) value;

Realisable value. The amount of cash or cash equivalents that could currently be obtained by selling an
asset in an orderly disposal.
Settlement value. The undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.

(d) Present (or discounted) value of future cash flows.

A current estimate of the present discounted value of the future net cash flows in the normal course of
business.

P. Firms are starting to take notice of the environmental and social aspects of their operations in
addition to economic issues. To date many of these reports have been little more than
public relations exercises, with very selective content and inadequate continuity of
performance indicators over time. While the existence of reporting does signal an increased
awareness of triple bottom line issues, it is important that these reports continue to improve
and become more meaningful and useful.

Required:

i. Explain what is environmental and social reporting.

Environmental Reporting is basically defined as the publication of environmental information

relating to the business such as environmental risks; environmental impact, policies, strategies,
targets, costs, liabilities, or environmental performance. Examples of performance indicators: impacts of
processes, products and services on air, water, land, biodiversity and human health.

Social Reporting is the presentation of data which enable the evaluation of living conditions of the
population and their change over time. Type of information disclosed: workplace health and safety;
employee retention policies/activities; labour rights policy; wages and working conditions. Examples of
performance indicators: workplace health and safety condition, employee retention, labour rights,
human rights, wages and working conditions at outsourced operations.

ii. Discuss with the issues of conventional accounting that supports the development towards the
environmental and social reporting.

Fundamental characteristics of traditional accounting conventions which seem ill-suited for environmental
applications in general:

The entity concept which serves to exclude externalities from accounting reports

The accruals concept which is driven by identification of financially rather than any environmentally
‘critically events’

The consistency concept which fails to recognise the non-linearity’s in environmental impacts

The prudence concept which privileges the ‘objective’ as compared with the ‘subjective’ in the
information capture process.

Q. Discuss the factors that motivate the changes from the conventional accounting to the need of
environment and social reporting.

ANSWER:

The factors that motivate the change:

Demand for greater disclosure and accountability

Growing importance of intangibles

Attracting talents

Supply chain pressures

Support and encouragement from regulators

Increasing influence from non-governmental organisations (NGOs)

Advances in communications technology

Financial market interest

R. Why is environmental and social reporting relevant to various users of financial statements?

In your answer, highlight the information that each group of users would be interested.

ANSWER:

Investor

Environmental impact and any resulting liabilities

NGOs

Actions by NGOs such as Greenpeace may influence the corporation behaviour

To raise issue to make the public aware

Consumer

• To know about the product quality or safety

Government

• Ensure law compliance

S. Different stakeholders can benefit from a company’s environmental reporting, however, and

it is capable of serving the information needs of a range of both internal and external
stakeholders. Discuss how environmental reporting benefits both the company and the shareholders.

ANSWER:

Benefits of environmental reporting:

A useful way in which reporting companies can help to discharge their accountabilities to society and to
future generations (because the use of resources and the pollution of the environment can affect future
generations).

Serve to strengthen a company’s accountability to its shareholders.

- By providing more information to shareholders, the company’s is less able to conceal

important information and this helps to reduce the agency gap between a company’s directors and
its shareholders.

Demonstrate their responsiveness to certain issues that may threaten the perception of their ethics,
competence or both. Several companies have used their environmental reporting to respond to specific
challenges or concerns, and to inform stakeholders of how these concerns are being dealt with and
addressed.

To gain, maintain or restore the perception of legitimacy.

- When a company commits an environmental error or is involved in a high profile incident, many
stakeholders seek reassurance that the company has learned lessons from the incident and
so can then resume engagement with the company. For the company, some environmental
incidents can threaten its licence to operate or social contract.

Capable of containing comment on a range of environmental risks.

- Many shareholders are concerned with the risks that face the companies they invest in and
where environmental risks are potentially significant (such as travel companies, petrochemicals,
 etc) a detailed environmental report is a convenient place to disclose about the sources of
these risks and the ways that they are being managed or mitigated.

 A key measure for encouraging

the internal efficiency of operations.
 This is because it is necessary
to establish a range of technical
measurement
systems to collect and process some
of the information that comprises
the
environmental report. These systems
and the knowledge they generate
could
then have the potential to save costs
and increase operational efficiency,
including reducing waste in a
production process.
A key measure for encouraging the internal efficiency of operations.

- This is because it is necessary to establish a range of technical measurement systems to

collect and process some of the information that comprises the environmental report.
These systems and the knowledge they generate could then have the potential to save costs
and increase operational efficiency, including reducing waste in a production process.
 -Define the elements and
recognition criteria of
financial
-statements as per the
Conceptual Framework.
Define the elements and
recognition criteria of financial
statements as per the
Conceptual Framework.

T. Define the elements and recognition criteria of financial statements as per the Conceptual
Framework.