- Alfred North Whitehead. Since accounting is an art, J. R. Wambsganss and B Sanford discuss the diverse opinions on the accounting treatment of Pollution Allowances as assets in the balance sheet. Secondary resources are gathered to affirm or disprove the pollution allowance issue. After digesting the resources, should the pollution allowances be recorded as assets that should be reported on the balance sheets of companies entitled to such allowances?
Both J. R. Wambsganss and B Sanford are very effective in delivering their proposal to record the pollution allowances as an asset in the company's balance sheet. The inclusion of data gives credence to the presentation and the inclusion of their research on the functions of the FERC and EPA organizations. J. R. Wambsganss and B Sanford focus on several issues pertaining to pollution allowances. J. R. Wambsganss and B Sanford clearly emphasized that the EPA allows companies to emit sulfur dioxide (SO2) on a limited basis. Next, J. R. Wambsganss and B Sanford showed the reasons why the Current Federal Energy Regulatory Commissions recommends the recording of the pollution allowances on the cost basis. The commission recommends that the cost is needed as a basis for determining how much of the pollution allowances can be sold and the pollution emission limits.
Next, J. R. Wambsganss and B Sanford reiterated that the EPA recommends that the pollution allowances should not be recorded in the balance sheet of the receiving company. The basic reason here is that the companies did not pay a single pound for the pollution allowances received from the EPA. Next, J. R. Wambsganss and B Sanford also recommended that the pollution allowances should be classified as donated assets. The article vividly shows that the companies must not exceed their maximum limit. The article can easily convince readers to accept their ideas on pollution allowances.
Next, J. R. Wambsganss and B Sanford recommended that the pollution allowances must be recorded as assets in the balance sheet. The authors' recommendation is based on the basic definition of assets. According to the International Accounting Standards, assets are resources that can be controlled by the company as a result of past events; selling, buying, and donating. According to both authors, the pollution allowances snugly fit the description of a marketable security. Likewise, recording the allowances as an asset complies with the marketing mechanism process of the 1990 Clean Air Act (J Wmabsganss, B Snaford 1996;646). In addition, MacKenzie enhances the issue by stating that "it involves a government or other authority setting a 'cap' - a maximum allowable aggregate total quantity of emissions - and selling or giving the corresponding number of allowances to emitters."(Mackenzie, 2009; 442).
Both J. R. Wambsganss and B Sanford emphasized that the pollution allowances must be recorded in the books of accounts on cost basis. Cost is equal to the fair market value at the time of receipt of allowance from EPA. However, the EPA emphasized that the pollution allowances do not have a cost because they were given free to the companies. Likewise, the book value of the product is sold at profit. Their article emphasized that free pollution allowances cannot be reliably measured. Cook affirms the importance of the cost as a basis for comparing the soundness of the EPA policy stating "entities that during the initial phase failed to deliver sufficient allowances to cover their level of emissions are fined 40 pounds per ton of shortfall" (Cook, 2009;458).
Both J. R. Wambsganss and B Sanford insisted that the other side of the accounting entry is a credit to owner's equity when the pollution allowances are issued by the EPA to the companies for free. Specifically, Donated Capital or Contributed Capital is credited. The journal entry falls under the owner's equity portion of the balance sheet. In addition, Cash is credited when the company purchases pollution allowances from other companies if payment was made (J Wmabsganss, B Snaford 1996; 643). Lohman firmly backs the EPA's drive to minimize pollution emissions with its emphasize indicated to "we must pay more attention to the environment as we must calculate the value of the environment, it provides a guide to analysis and language of debate" (Lohmann, 2009; 500).
Further, the other side of the accounting entry is a credit to owner's equity when the pollution allowances are issued by the EPA to the companies for free. Specifically, Donated Capital or Contributed Capital is credited. The journal entry falls under the owner's equity portion of the balance sheet. In addition, Cash is credited when the company purchases pollution allowances from other companies if payment was made (J Wmabsganss, B Snaford 1996; 643).
Next, both J. R. Wambsganss and B Sanford that an expense account should be used to recorded the use of the pollution allowances. More specifically, the account title, Pollution Expense, must be debited. To balance the equation, Pollution allowance is credited to complete one journal entry that will be posted to the ledger accounts. For Example, Pollution Allowance Expense is debited for the pollution emissions. The account title Pollution Allowances is credited to balance the Pollution Allowance Expense account. Further, the recording of the issuance by the EPA of the pollution allowance and the debit to Pollution Allowance for the amount paid for purchasing the allowance from other companies indicates consistency in the recording of the issuance of the pollution allowance. The recommendation not to record the issuance of the pollution allowance indicates that the balance sheet does not show a complete financial picture of the company.
Both J. R. Wambsganss and B Sanford agree that the accounting treatment of pollution allowance affects management behavior. The recording of the pollution allowances instills in the minds of the managers that their companies must not exceed the total hours located in the assets portion of the balance sheet will give a favorable image of the management and the company itself. The management will have additional assets that it can sell to the public. Management can control the pollution control strategies while complying with national pollution emission targets (Wambsganss 1996; 1). In addition, management will be forced to buy additional pollution allowances when one's own pollution allowances run out. The EPA will penalize companies who exceed their pollution allowances. However, Milne shows that trading of the pollutions allowances is minimal. Milne indicated that 2000 data shows that "the EPA will annually distribute 9 million permits. Of these, only 200,000 would be sold annually at auction, the rest being gifted. Trading among utilities has been slight" (Milne 1996; 682).
Likewise, both J. R. Wambsganssand B Sanford emphasized that the recording of the pollution allowances will lead companies to reduce their pollution emissions because cannot exceed their allowance benchmarks. Companies are now forced to reduce their current pollution emissions to within the pollution allowance limits. The EPA will impose fines on those companies exceeding their allotted pollution allowances. Allan Cook emphasized that "the efficient producer, or manager, may judge that it can reduce more emissions - and earn more credits by undertaking a project to enable a less efficient entity to reduce the emissions" (Cook 2009; 459). Related to recording of allowances, Gibson affirms the discussion by stating that "the sale of allowances by a cleaner utility in a newer or more affluent suburb advantages its shareholders and the residents of that suburb at the expense of residents of older, more industrialized suburbs" (Gibson, 1996; 656)
Further, both J. R. Wambsganss and B Sanford did not mention that even if specific companies reduce pollution, this will simply lead to pollution being transferred to developing countries, with no overall impact on the environment. Thus, the pollution will not lead to pollution being transferred to developing countries because there is no overall impact on the environment.
In addition, the creation of a "market for credits" may make the measurement of the fair value of carbon credits and other pollution allowances easier, it is not likely that the attention of managers will be on trying to make profits from trading credits rather than on trying to reduce pollution. The managers will prioritize production of goods that will be sold to meet organizational revenue goals. Along the way, managers will lead in the reduction of pollution emissions by making the manufacturing process more efficient. Production output is not reduced. However, efficient production precipitates to a reduction of pollution emissions. In turn, the saved pollution emissions will translate to save pollution allowances. The saved pollution (J Bebbington, C Gonzalez 2008) allowances can be sold to generate a commodity gain. The management of all companies is responsible for its actions in terms of generating profits and reducing losses.
Further, the accounting treatment actually matters. As discussed above, the recording of the pollution allowances will increase the company's assets as well as the stockholder's equity section of the balance sheet. In turn, the company has more assets to sell as compared to not recording the allowances. The goal of reducing pollution emission by introducing taxes on polluters is less effective when compared to recording of the pollution allowances for it increases the company's assets (P Mete, C Dick, L Moerman 2009;1). J Andrew, M Kaidonis, B Andrew (2006; 1) emphasized that "carbon taxes are alternate policy instruments that are more likely to orient social and economic activity towards carbon pollution mitigation". The EPA's imposition of a fine is more effective in curtailing pollution emission limit violators.
Mete firmly agrees with the use of taxation to reduce pollution by stating "Taxation of Carbon permit creates a plethora of issues for companies, especially considering the breadth of both direct and indirect taxation rules. The possible tax consequences influence cash flows and investment decisions of entities. In the United States, guidance has been issued for the taxation requirements of acid rain allowances" (Mete 2009; 620).
Furthermore, this would perhaps be a "real" cost, since companies would have to pay out resources, rather than a "paper" cost created by the accounting treatment for allowances. The ecological cost of industrialization brings in both positive and negative results (J Bebbington, C Gonzalez 2008)4. The cost includes the companies' purchase of additional pollution allowances entails cash outflows. The companies' coffers will be drained under both situations. Under the EPA's penalty scheme, the companies will have to pay for exceeding pollution emission targets. The cost does not include the cost of purchasing additional pollution allowances to cover excessive pollution emissions. Cook reiterated that "carbon tax activity becomes costly and the cost is borne in proportion to the level of emissions involved" (Cook 2009; 457).
There are detractors to the Wambsganss and Sanford Articles. Kathy Gibson insisted that "the reporting of such allowances is not the real problem in addressing atmospheric pollution, but that the economic philosophy which attempts to address ecological problems of assigning value to these permits is the main culprit" (Gibson 1996; 1). Lehman reiterated that the Wambsganns and Sanford article is not entirely true. Likewise, Lehman argues that the environmental accounting on the cost basis fails to tackle the urgencies of the environmental issue" (Lehman 1996; 1). In addition, Milen emphasized that Wambsganss and Sanford's theory that the pollution allowances are freely given by EPA is not really true. The detractor stated that the "shareholders own the rights to pollute and the economic efficiency should be the sole arbiter in determining the regulation of environmental resources" (Milne 1996; 1)
BRIEFLY, the article focuses on the soundness of recording pollution allowances in the asset portion of the balance. The J. R. Wambsganss and B Sanford article emphasized the importance of including the allowances in the balance sheet. The recording of the allowances complies with the definition of asset, specifically marketable securities and donated assets. The allowances should be recorded at cost basis which is equal to the fair market value at the time of allowance receipt from the EPA. The allowances should be credited to owners' equity, specifically donated capital or contributed capital. The pollution allowance expense should be debited for the use of the allowances. The accounting treatment of the allowance affects management behavior for managers must comply with the EPA's pollution emission benchmarks. Consequently, compliance translates to reduction of overall pollution emissions. There is no transfer of pollution emission to developing countries because there no increase on the overall pollution emission. The recording of the allowances reduces the pollution emissions because companies cannot exceed their allowance benchmarks. The market for credits makes the fair value of carbon credits and other allowances measurable. Accounting treatment of the allowance matters for the recording will increase the assets and owner's equity section of the balance sheet. The allowances represent real cost in terms of amount to be paid for the purchase of the allowances. The detractors like Gibson, Lehman, Milne fail to overturn the persuasive presentation of J. R. Wambsganss and B Sanford. Mete emphasizes that taxation of polluters exceeding benchmarks reduces pollution emissions. Indeed, the pollution allowances must be recorded as assets that should be reported on the balance sheets of companies entitled to such allowances.