Energy efficiency – accounting and reporting considerationsModule 2

Disclaimer

This material has been developed as part of the UTS Business School and Ernst & Young ‘Leadership & Change for Energy Efficiency in Accounting & Management’ project. The project is supported by the NSW Office of Environment & Heritage as part of the Energy Efficiency Training Program. For more information on the project, please go to: http://www.business.uts.edu.au/energyefficiency/.

This presentation is for educational purposes only, and does not contain specific or general advice. Please seek appropriate advice before making any financial decisions.

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► Introduction► Sustainability – accounting and reporting► Managing the carbon price impact

► Impact on treasury function► Impact on finance function► Tax implications► Where to next?

► Sustainability and financial reporting► Over to you...reflect and plan

Agenda

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Outline

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2

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Energy Efficiency

1.0 Define energy baseline

2.0 Measure energy data

3.0 Analyse efficiency

opportunities

4.0 Implement Opportunities

5.0 Control and monitor

energy

► Describe the drivers behind sustainability strategies and energy efficiency measures

► Describe the key features of the carbon scheme and identify whether their organisation is a liable entity or significantly impacted

► Identify methods to reduce costs associated with the carbon scheme► Apply the available different accounting approaches to accounting for

carbon► Describe the key challenges for the various business functions of

both accounting for carbon and energy efficiency projects implemented

► Identify best practices within sustainability reporting, current and future trends and developments within financial reporting

► Have a general awareness of the various voluntary and compulsory reporting schemes in operation impacting data collection and financial reporting

Learning objectives for this module

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► What are some of the current issues you experience in accounting for sustainability/ energy efficiency measures within your organisation?

► What are some of the current issues you experience with reporting on sustainability/ energy efficiency measures within your organisation?

Over to you

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The sustainability pathway – two aspects of evaluating sustainability

Understand what’s important to the business

Social

Set corporate goals

Economic EnvironmentalS

take

hold

ers

Issues Risks Opportunities Responsibilities

Determine Material aspects

Set targets/milestones

Set key performance indicators

Respond Inform

MonitorProgress

ReportDisclose

Business value in recognising the material sustainability issues, and

setting a strategy to respond

Stakeholder value in the company reporting on their

performance

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Is there a link to Shareholder Value?

Reduced regulatory

intervention

Enhanced reputation and

brand

Alliance with business partners

Access to and lower cost of

capital

Attractive employer

Cost savings Improved risk management

Customer satisfaction and

loyalty

Better Access to Resources

New business opportunities

Shareholder Value

Community Marketplace

Workplace Environment

Improved safety performance Improved

productivity

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Shareholders – a critical stakeholder

Van Stadenet al . 2010 . ‘Shareholders’ requirements for corporate environmental disclosures: A cross country comparison’. In The British Accounting Review. Vol 42. Iss. 4. Pp.227-240.

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Climate Change – A Global Driver

The Asia Pacific region contributes largely to global greenhouse gas (GHG) emissions, particularly China.

Country targets to reduce emissions:► China: 40% to 45% by 2020 (intensity basis on

GDP)► Indonesia: 26% to 41% by 2020► Papua New Guinea: 50% by 2030► Singapore: 16% by 2020► Thailand: 30% by 2020 (energy sector only)► Australia: 5% to 25% by 2020

Companies across the Asia Pacific are seeking to capitalise on GHG reduction opportunities to demonstrate to stakeholders – including investors – that they are managing sustainability risks.

Carbon Disclosure Project (CDP): Increasingly, companies are monitoring greenhouse gas emissions and disclosing their approach to managing climate risk through the CDP, which is accessed by investors and analysts globally. Over 3000 companies now report annually.

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Managing carbon price impact

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What we are going to cover....

► Background of carbon scheme

► Are you liable?

► Impact on treasury function

► Impact on finance function

► Management accounts

► Financial accounts

► Tax implications

► Where to next?

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► Carbon price from 1 July 2012 fixed at $23► Growing at 2.5% real terms in 2013 and 2014 ($24.15 and $25.40)

► From 2015 a flexible price determined by market (cap and trade)► Price floor established - $15 (growing)► Price ceiling established - $20 above the international carbon

price

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Clean Energy carbon pricing systemCore design elements

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Clean Energy carbon pricing systemCore design elements (cont’)

► Liability determined per facility ► Over 25,000 tCO2e direct (scope 1) GHG emissions

► Permits (carbon units) auctioned by Government:► 5% of liability can be met with units from the Carbon Farming

Initiative► No international permits during fixed price phase, but up to 50%

after this► Companies estimate and retire 75% of their liability by 15 June,

with a ‘true-up’ on the following 1 February

► EITE (emissions intensive trade exposed) companies will receive free carbon units

Sector and industries impacted - examples

Liable entities Significantly impacted

► Steel making► Aluminium smelting► Electricity generation► Water production► Mining► Waste ► Other industrial

processes

► Manufacturing► Retail► Agriculture► Financial services► Insurance► Transportation

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Determining liability

Managing your obligations

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► In your table groups, discuss how the carbon scheme will impact your organisation.

► As a group:► Prepare a list of all the departments within your

organisation you can see being impacted.► Note which areas do you see most impact for

a) cost rises

b) cost savings?

► As part of the finance team, what opportunities do you see for driving down costs?

► Be prepared to share your ideas with the group

Exercise 1: How will the carbon scheme impact aspects of your organisation?

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Business implications

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Su

pp

ly c

hai

n Sustainability of

business Pricing impact structures

Strategy Design product process

Source materials

Manufacture/ produce

Sell Customer service

Asset profitability

M&A

Carbon strategy /impact

on business framework

Fuel type mix

Costs of raw materials

Production efficiency

Customer contract

structures

Brand strategy

OTN dealings with customer

Product innovation

Funding Liquidity

Fu

nct

ion

s

Trading of permits

Accounting policies

Finance HR IT Procurement Legal Regulatory

Management of cash

Abatement project modelling

Tax implication

DOA/ governance

Reporting

Capability and

capacity

Monitoring and

reporting systems

Contract management and strategy

Credit assessment/

supplier viability

Ownership of liability

(JVs)

Compliance reporting

Reporting of liabilities

Treasury Tax

Opportunities for driving down costs

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Impact on operational functions

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Impact on operational functions

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Carbon pricing

Treasury

Tax

Procurement

HRLegal

Regulatory

IT

Finance

Impact on treasury function

► Risk management policy

► Evaluate changed business and finance risk

► Considerations include:

► Risk appetite

► Overall risk management strategy

► Determining a mitigation strategy

► Building carbon risks into existing risk measurement methods

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Impact on treasury function

Cash and liquidity management

► Ability to forecast cash flow, working capital & liquidity requirements is key

► Liable entities:► Potentially higher revenue

► Cost of purchase of Carbon units

► Liable and non-liable entities:

► Higher operating costs from cost pass through

► Impact on capital budgets24

Impact on Finance function

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Impact on finance function

Financial accounting

► Current international practice

► AASB / IASB discussions

► Other implications

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Accounting approaches - impact on net assets and net profit before income tax each accounting period1

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  IFRIC 3 approach2 Net liability approach Government grant approach

   

Reimbursement rights method

Carrying value method

Reimbursement rights method

Carrying value method

Balance SheetAsset

- Purchased units Cost MV Cost MV Cost

- Free units Deemed cost Nominal amount Nominal amount MV Deemed costLiability

- Emission obligation MV of units (all)MV of units (purchased)3

Cost of units (purchased)3 MV of units (all) Cost of units (all)

- Deferred income (government grant)

Deemed cost – amortised4 Nominal amount Nominal amount

Deemed cost – amortised4

Deemed cost – amortised4

Impact on net assets Yes No No No No

Income Statement

Revenue

- Deferred income (government grant) Deemed cost Nominal amount Nominal amount Deemed cost Deemed cost

- Revaluation No Yes No Yes No

Expense MV of units (all)MV of units (purchased)3

Cost of units (purchased)3 MV of units (all) Cost of units (all)

Impact on net profit before income tax

Cost of purchased units + effect of fluctuation in market price on liability Cost of purchased units Cost of purchased units Cost of purchased units Cost of purchased units

1. Assuming financial year = compliance year (ie 30 June year end) and no settlement of obligation until following compliance year

2. Assuming entity does not apply revaluation model under AASB 138. 3. Only recognise liability when obligation exceeds units allocated for free, ie when required to purchase

units to settle obligation. 4. Deferred income is recognised in income over the period of emissions consistent with the basis on which

the expense is recognised, regardless of whether units are held or sold.

Cost = market price of units at date of purchase

Deemed cost = market price of units at date of receipt

MV = market value of units at reporting date

Nominal amount = (in Australia) zero

http://www.ifrs.org/The+organisation/Members+of+the+IFRIC/About+the+IFRIC.htm

Entity A: ► Total emissions for the year: 30,000 tonnes of CO2-e

► Carbon units for the year (1 unit = 1 tonne of CO2-e)

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ExampleFact set

Free units Purchased units

Number of units 20,000 10,000

Date Received beginning of year

Purchased end of year

FV at that date $15/unit $20/unit

IFRIC3

ExampleT-accounts end of year before settlement

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Carbon unit

CashLoss

Liability500

(200)

(600)

300

Net liabilityReimbursement rights

method

Carbon unit

CashLoss

Liability200

(200)

(200)

200

Government grantCarrying value method

Government grantReimbursement right

methodCarbon unit

CashLoss

Liability500

(200)

(500)

200Carbon unit

CashLoss

Liability600

(200)

(600)

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AASB September and October meetings:► Discussion on application of international practice

in Australia ► Specific focus - accounting treatment during fixed

price period► Consideration – is unit financial instrument?► Still under review by Board and no decisions

made

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AASB discussions

► Emissions Trading Schemes currently inactive► Options being discussed:

► Recognition of► Purchased units - asset at fair values► Free units - asset at fair values

► Liability: ► Obligation recognised for free units at fair value upon allocation► Excess emissions with price input initially and subsequently

measured at fair value; and recognition:► Liability capped at quantity allocated until entity actually

emits above allocated quantity; or► Liability recognised for expected emissions throughout the

compliance period

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Future developments IASB project

Pre-effective date considerations: ► Impairment trigger at 31

Dec 2011 or 30 June 2012? ► Onerous contracts?

Practical implications

1 July 2012 1 July 2015 Present

Fixed price period Flexible price period

Other implications

► Impact on budgeting and forecasting

► Impact on inventory costing► Carbon units acquired in business

combination► Accounting by brokers / traders► Forward contracts for carbon units► (income) tax consequences

Practical implications

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Impact on Regulatory Reporting

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Impact on Regulatory Reporting

►Reporting Schemes► NGERS► EEO ► RET► GGAS, ESS, VEET,

etc.

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Carbon pricing

Treasury

Tax

Procurement

HRLegal

Regulatory

IT

Finance

Reporting Greenhouse Gas emissions

NGERS Reporting Thresholds (www.climatechange.gov.au)

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National Greenhouse and Energy System (NGERS)

► Now in fourth year of reporting ► Mandatory for companies that report on:

► energy consumed and energy produced► scope 1 and 2 greenhouse gas emissions

► Based on invoices for electricity, gas, fossil fuels► Calculate emissions for each ‘facility’ and each type of greenhouse

gas for each facility expressed as tCO2-e.► Department of Climate Change and Energy Efficiency audits and

fines.

► NGER methodology underpins:► Carbon Pricing Mechanism► Government National Greenhouse Inventory► National Carbon Offset Standard

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Financial and NGERS reporting timelines

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Energy Efficiency Opportunities (EEO) Act

► Requires businesses to identify, evaluate and report publicly on cost effective energy savings opportunities

► Mandatory for corporations that use more than 0.5 petajoules (PJ) of energy per year (45% of energy use in Australia)

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National Carbon Offset Standard (NCOS)

► Voluntary offset market► Sets minimum requirements for

calculating, auditing and offsetting the carbon footprint of an organisation or product to achieve ‘carbon neutrality’.

► Provides guidance on what is a genuine voluntary offset

► Administered by Low Carbon Australia

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Exercise 2: Data capture issues and solutions

► What information are you asked to provide for management in relation to NGERs or other sustainability reporting measures. What additional information do you foresee having to provide under the carbon scheme?

► What issues are associated with this?► What can you suggest to overcome these issues?

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Tax implications

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Impact on tax function

Tax implications and strategy

► Deductibility

► Timing of deduction

► Tax cost of EITE carbon units

► Import of international units

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Impact on tax function

Fuel and pass-through costs

► Effective carbon price on business use of fuels

► Reductions in fuel tax credits

► Reductions in the automatic remission or exemption of excise

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Impact on tax function

Restructures, grants, R&D and others

► Business restructures

► R&D incentive

► Grants and financial assistance

► Passing on carbon costs – experiences from GST

► Developing carbon compliance systems

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Where to next?Quick 10 step implementation check-list for liable and impacted entities

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Action to be taken

1.Establish a governance committee

2.Identify your obligations and develop systems for compliance

3.Review joint venture agreements

4.Determine asset valuations and perform impairment tests

5.Assess the impact from upstream suppliers

6.Develop strategy to pass carbon costs to customers

7.Develop your accounting treatment policy

8.Validate the quality of emissions data gathering and timing of carbon reporting

9.Develop MACC to assess short and long term investment strategies

10.Considering grant schemes if eligible

Resources

► Ernst & Young publications► Accounting for a clean energy future► Navigating the complexities of carbon pricing policy Key issues from the

Australian Government’s Clean Energy Legislation Package► Accounting for emissions reductions and other incentive schemes ► Mastering the Challenge – Practical IFRS guidance for power and utilities► Ernst & Young’s International GAAP 2011

http://www.ey.com/AU/en/Services/Specialty-Services/Climate-Change-and-Sustainability-Services/The-business-of-climate-change---Carbon-pricing

►Institute of Chartered Accountants Australia publications► Australia needs a consistent basis for the financial reporting of emission

rights► Australia’s Proposed Emissions Trading Scheme – The Tax Policy

Dimension

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Further resources available

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Visit: www.ey.com/au

Sustainability and Financial Reporting

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Sustainability – Who values it, and how is it communicated?

Sustainability: is creating long-term shareholder value by embracing opportunities and managing risks derived from social, environmental and economic factors. To know how to respond to sustainability and maximise value, businesses need to understand the external drivers related to sustainability and how this translates to their own business in terms of risks and opportunities.

Number of Sustainability Reports published. Source: Corporate Register

► Non-Financial or Sustainability Reporting: the practice of measuring, disclosing and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development

► Corporate Social Responsibility (CSR): the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large

► Triple bottom line: reporting on financial, environmental and social performance

► Environmental and Social Governance (ESG): focussing on those areas of sustainability not associated with financial performance, ESG is the oversight and corporate function for managing environmental and social impacts and opportunities.

Key Sustainability Terms

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A typical Sustainability Reporting Journey

Include some disclosures on

current performance in

the Annual Report

Produce a stand-alone

SustainabilityReport

Increasereporting of sustainability performance

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What are the global reporting trends?

Trends in Asia

Sustainability reports published from the Asian region have historically been from Japan. However, companies across the Asia pacific are increasingly reporting. The most significant growth in recent years has come from Chinese companies.

► Europe was the first to report

► Continual trend of increased reporting, particularly in Europe

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The sustainability frameworks companies use

The GRI framework is the most widely used frameworks globally. It provides guidance on indicators to be. Sector supplements for selected industries are provided in addition to the core guidelines

► Global Reporting Initiative (GRI-G3)► AccountAbility’s Principles Standard

(AA1000APS)► Accounting for Sustainability’s

Connected Reporting Framework► Various industry-specific guidelines

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GRI – Indicators that provide a framework for sustainability report content

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More information on Sustainability Reporting

► The first and most widely adopted global framework for sustainability reporting.

► Benchmarking tool to build business strategy to incorporate corporate responsibility issues.

► Adoption is mostly by large companies.

► Measures the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies.

► Tracks the environmental, economic and social performance of Australian companies that lead their industry in terms of corporate sustainability.

► Global Reporting Initiative (GRI)

www.globalreporting.org

► Corporate Responsibility Index (CRI)

www.corporate-responsibility.com.au

► FTSE4GOOD

www.ftse.com/Indices/FTSE4Good_Index_Series

► Dow Jones Sustainability Index (DJSI/AuSSI)

www.aussi.net.au

Sustainability reporting occurs in many different formats. Four of the world’s leading practice frameworks are:

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Towards Integrated Reporting

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Why is Integrated Reporting on the agenda?

► Financial crisis► Focus on short-term profits and rewards irrespective of their long-term

sustainability► Demonstrated the need for capital market decision-making to reflect long-

term considerations► Called into question extent to which standard corporate reporting

disclosures highlight systematic risks to business sufficiently

► Limitations of current reporting► Do not fully consider the social, environmental and long-term economic

context within which the business operates

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Integrated reporting brings together data that is relevant to the performance and impact of a company in a way that creates a more profound and comprehensive picture of the risks and opportunities a company faces, specifically in the context of the drive towards a more sustainable global economy

Integrated Reporting – bringing together financial and non-financial disclosures

► Integrated Reporting is the combination of financial and non-financial reporting in a single document, either in place of, or additional to separate financial and sustainability reports.

Integrated Report

Governance Statement

Annual Financial

Statement

Sustainability Report

Financial Analysts

Sustainability Analysts

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How the IIRC proposes to address these issues

► The Discussion Paper Towards Integrated Reporting – Communicating Value in the 21st Century presents the rationale for Integrated Reporting► Offers initial proposals for the development of an International

Integrated Reporting Framework and outlines the next steps towards its creation and adoption

► Purpose is to prompt input from all those with a stake in better reporting, including producers and users of reports

► Integrated Reporting proposals were put forward to the G20 Finance Ministers meeting held in October 2011

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Integrated Reporting

► The bringing together of financial and non-financial information for reporting is the future of company disclosures.

► South Africa are leading the way by mandating integrated reporting for all listed companies. The chart on the right shows what is required.

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The Benefits of Integrated Reporting

► Emphasises an organisation's use of and dependence on different resources and relationships or “capitals” (financial, manufactured, human, intellectual, natural and social), and the organisation’s access to and impact on them

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The Benefits (cont.)

► Results in a broader explanation of performance than traditional reporting

► Reporting this information is critical to: ► a meaningful assessment of the long-term viability of the

organisation’s business model and strategy; ► meeting the information needs of investors and other

stakeholders; and ► ultimately, the effective allocation of scarce resources.

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The building blocks

► Five Guiding Principles underpin the preparation of an Integrated Report► Strategic focus ► Connectivity of information ► Future orientation ► Responsiveness and

stakeholder inclusiveness ► Conciseness, reliability and

materiality

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Key Content Elements

► Presentation of the Elements should make the interconnections between them apparent. ► Organisational overview and business model ► Operating context, including risks and opportunities ► Strategic objectives and strategies to achieve those objectives ► Governance and remuneration ► Performance ► Future outlook

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Mandatory disclosures under the ASX

► Principles 7 of the Australian Stock Exchange (ASX) Corporate Governance Council’s Principles of good corporate governance and best practice recommendations for the disclosure of material business risks.

► “material business risks may include, (but are not limited to): operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks.”

► These requirements have recently been extended (3.2), to introduce a requirement for disclosure on gender diversity.

► Companies must make disclosure relating to a diversity policy which includes measurable objectives for achieving gender diversity. They must also disclose in their annual report their achievement against those objectives, as well as the proportion of women on the board, in senior management and employed throughout the whole organisation.

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Report Assurance

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Improved confidence through assurance

Three ‘tiers’:

► Reasonable Assurance – like financial statement audit► Limited Assurance – selected scope and more limited procedures► Verification (not assurance) – sometimes referred to as agreed-

upon-procedures

Most commonly used standards:► International Standard for Assurance Engagements (ISAE) 3000:► Accountability’s AA1000 Assurance Standards (and its AA1000

Assurance Principles Standard)► Mix of both

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Trends in Assurance

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► Most companies that have assurance utilise the ISAE3000 standard

► The majority engage an assurance provider for limited assurance

► New ‘standards’ require recommendations to be included in the statements – but this has led to some confusion

Over to you...reflect and plan

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Identify the desired business outcomes?

Starting point for your Change Management activities:

►Identify the business outcomes desired from the project or the change.

Current StateDesired Future

State

Describe in terms of:► Business KPIs► Operational KPIs► Behaviours

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Thank youModule 2