Question

Assume that Exxon accounts for contingencies using IAS 37. Prepare 3 paragraphs (4 sentences or less for each paragraph/question) addressing the following: How does the concept of “sustainability” relate to the concept of “environmental liabilities”?

Answer 1

Provisions

A iprovision iis ia iliability iof iuncertain itiming ior iamount. iThe iliability imay ibe ia ilegal iobligation ior ia iconstructive iobligation. Examples iof iprovisions imay iinclude: iwarranty iobligations; ilegal ior iconstructive iobligations ito iclean iup icontaminated iland ior irestore ifacilities; iand iobligations icaused iby ia iretailer’s ipolicy ito imake irefunds ito icustomers.

An ientity irecognises ia iprovision iif iit iis iprobable ithat ian ioutflow iof icash ior iother ieconomic iresources iwill ibe irequired ito isettle ithe iprovision. iIf ian ioutflow iis inot iprobable, ithe iitem iis itreated ias ia icontingent iliability.

A iprovision iis imeasured iat ithe iamount ithat ithe ientity iwould irationally ipay ito isettle ithe iobligation iat ithe iend iof ithe ireporting iperiod ior ito itransfer iit ito ia ithird iparty iat ithat itime. iRisks iand iuncertainties iare itaken iinto iaccount iin imeasuring ia iprovision. iA iprovision iis idiscounted ito iits ipresent ivalue.

IAS i37 ielaborates ion ithe iapplication iof ithe irecognition iand imeasurement irequirements ifor ithree ispecific icases:

· future ioperating ilosses—a iprovision icannot ibe irecognised ibecause ithere iis ino iobligation iat ithe iend iof ithe ireporting iperiod;

· an ionerous icontract igives irise ito ia iprovision; iand

· a iprovision ifor irestructuring icosts iis irecognised ionly iwhen ithe ientity ihas ia iconstructive iobligation ibecause ithe imain ifeatures iof ithe idetailed irestructuring iplan ihave ibeen iannounced ito ithose iaffected iby iit.

Contingent iliabilities

Contingent iliabilities iare ipossible iobligations iwhose iexistence iwill ibe iconfirmed iby iuncertain ifuture ievents ithat iare inot iwholly iwithin ithe icontrol iof ithe ientity. iAn iexample iis ilitigation iagainst ithe ientity iwhen iit iis iuncertain iwhether ithe ientity ihas icommitted ian iact iof iwrongdoing iand iwhen iit iis inot iprobable ithat isettlement iwill ibe ineeded.

Contingent iliabilities ialso iinclude iobligations ithat iare inot irecognised ibecause itheir iamount icannot ibe imeasured ireliably ior ibecause isettlement iis inot iprobable. iContingent iliabilities ido inot iinclude iprovisions ifor iwhich iit iis icertain ithat ithe ientity ihas ia ipresent iobligation ithat iis imore ilikely ithan inot ito ilead ito ian ioutflow iof icash ior iother ieconomic iresources, ieven ithough ithe iamount ior itiming iis iuncertain.

A icontingent iliability iis inot irecognised iin ithe istatement iof ifinancial iposition. iHowever, iunless ithe ipossibility iof ian ioutflow iof ieconomic iresources iis iremote, ia icontingent iliability iis idisclosed iin ithe inotes.

Contingent iassets

Contingent iassets iare ipossible iassets iwhose iexistence iwill ibe iconfirmed iby ithe ioccurrence ior inon-occurrence iof iuncertain ifuture ievents ithat iare inot iwholly iwithin ithe icontrol iof ithe ientity. iContingent iassets iare inot irecognised, ibut ithey iare idisclosed iwhen iit iis imore ilikely ithan inot ithat ian iinflow iof ibenefits iwill ioccur. iHowever, iwhen ithe iinflow iof ibenefits iis ivirtually icertain ian iasset iis irecognised iin ithe istatement iof ifinancial iposition, ibecause ithat iasset iis ino ilonger iconsidered ito ibe icontingent.

Sustainability ifocuses ion imeeting ithe ineeds iof ithe ipresent iwithout icompromising ithe iability iof ifuture igenerations ito imeet itheir ineeds. iThe iconcept iof isustainability iis icomposed iof ithree ipillars: ieconomic, ienvironmental, iand isocial—also iknown iinformally ias iprofits, iplanet, iand ipeople.

· Sustainability ifocuses ion imeeting ithe ineeds iof ithe ipresent iwithout icompromising ithe iability iof ifuture igenerations ito imeet itheir ineeds.

· Investors ican ibe iwary iof icompanies ithat icommit ito isustainability. iAlthough ithe ioptics ican ibe ibeneficial ito ishare iprice, iinvestors iworry iabout icompanies ibeing itransparent iwith itheir iearnings iresults.

· Big ibrands ioften imake ipledges ito isustainability, ibut iit ioften itakes ia ilong itime ito iachieve isustainability igoals.

Sustainability iencourages ibusinesses ito iframe idecisions iin iterms iof ienvironmental, isocial, iand ihuman iimpact ifor ithe ilong-term, irather ithan ion ishort-term igains isuch ias inext iquarter's iearnings ireport. iIt iinfluences ithem ito iconsider imore ifactors ithan isimply ithe iimmediate iprofit ior iloss iinvolved. iIncreasingly, icompanies ihave iissued isustainability igoals isuch ias icommitment ito izero-waste ipackaging iby ia icertain iyear, ior ito ireduce ioverall iemissions iby ia icertain ipercentage.

These icompanies ican iachieve itheir isustainable ineeds iby icutting iemissions, ilowering itheir ienergy iusage, isourcing iproducts ifrom ifair-trade iorganizations, iand iensuring itheir iphysical iwaste iis idisposed iof iproperly iand iwith ias ismall iof ia icarbon ifootprint ias ipossible.

The ipush ifor isustainability iis ievident iin iareas isuch ias ienergy igeneration iwhere ithe ifocus ihas ibeen ion ifinding inew ideposits ito ioutpace ithe idrawdown ion iexisting ireserves. iSome ielectricity icompanies, ifor iexample, inow ipublicly istate igoals ifor ienergy igeneration ifrom isustainable isources isuch ias iwind, ihydropower, iand isolar.

However, imoving itoward isustainable iproduction iis ioften ia icomplex iprocess ifor icompanies. iBy ibasing idecisions ion ilonger itimelines, isome iof ithe ihigher iupfront iinvestments iin iefficiency iand irenewable isources iare ieasier ito ijustify. iInvestors ihave ihad ito iadjust itheir iexpectations ifor ireturns ibecause ia icompany ithat icommits ito ithe isustainable idevelopment iof iresources imay ihave imore imodest iearnings iresults iin ithe inear iterm.

Environmental iliability irefers ito ithe ipotential ienvironmental icosts ithat ia ibuyer iincurs iwhen ipurchasing ior ileasing ian iasset. iThe iliabilities iarise iwhen ia ibuyer iis iconducting idue idiligence ion ithe iproperty iand iwill ibe irequired ito itake iownership iof ithe iasset iand iall iliabilities iassociated iwith ithe iasset ipost-acquisition.

Environmental iliability iis iespecially iimportant iwhen ithe ibuyer iis ibuying ia ibusiness ior iasset ithat iexerts ian iimpact ion ithe ienvironment. iFor iexample, iwhen ipurchasing ian iindustrial imachine ithat iis ilikely ito icause iair ior iwater ipollution, ithe ibuyer iwill iconduct ian ienvironmental iassessment ito idetermine ithe itypes iof ienvironmental iliability iassociated iwith ithe iasset ibeing ipurchased.

Types iof iEnvironmental iLiabilities

1. Compliance iobligations

iWhen ipurchasing ian iasset ito ibe iused iin ithe imanufacturing iprocess iof igoods, ia ibusiness imust iconsider iexisting icompliance iregulations iand ithe ipossibility ithat inew ilaws iwill ibe ienacted. iTo iensure icompliance iwith icurrent ilaws, ia ibusiness iwill ibe irequired ito iincur icertain icosts ithat iprotect iit ifrom ifuture iliabilities.

One iof ithe icosts iis ithe iadministrative icost iincurred ito irecord iprocesses, ilabel ichemicals, iand itrain istaff itasked iwith ihandling ithe ichemical isubstances. iA ibusiness imay ialso iincur icosts ito icontain ichemical ispills, imanage ithe iharmful ieffects iof iair iemissions, iwaste itreatment, iand iexit icosts ifor iclosing idisposal isites. iFailure ito imanage ithe ieffects iof ithe iwastes ion ithe ienvironment ican iattract ilawsuits iand ilegal iactions iby igovernment iagencies iagainst ia ibusiness.

2. Remediation iobligations

Remediation iobligations irequire ibusinesses ito imanage ithe ieffects iof ipollution ior iindustrial iactivities ithat ipose ia irisk ito ihuman ihealth iand ithe ienvironment. iEnvironmental iliability iis iassociated iwith icompliance iobligations isince imanaging ithe icurrent iobligations ican ihelp ireduce ithe iremediation iobligations ithat ithe ibusiness iwill ibe irequired ito imeet iin ithe ifuture

Remediation iobligations imay icomprise iwater itreatment, iexcavations, imonitoring, ievaluating ithe ienvironment ifor iadverse ieffects, irelocating icommunities ito isafer iareas, ire-constructing idamaged iproperties, iand iresponse icosts iincurred iby igovernment iagencies. iAn ientity imay iface iremediation iobligations ifor inegative iimpacts ion ithe ienvironment ifor iformerly iowned ior iused isites, isites iit inever iowned ibut icontaminated, iand isites iit iowns iand ihas inot icontaminated.

3. Fines iand ipenalties

An ientity imay ialso ibe irequired ito ipay ifines iand ipenalties ifor inon-compliance iwith iapplicable ilaws iand iregulations ithat iprotect ithe ienvironment ifrom ipollution iand idegradation. iThe icosts iare iadded ito ithe icost iof icompliance ithat ia ifirm iis irequired ito ipay iand iare iused ito ifulfill ipunitive ifunctions.

The icost iof ithe ifine ior ipenalty ican ibe ipredetermined ior iassessed iby ia ipublic iagency iwhen iassessing ithe iextent iof ithe inon-compliance iand ithe ieffect iof inon-compliance ion ihumans iand ithe ienvironment. iTypically, ithe iamount iof ifines iis iset iin ia iway ithat iequals ithe icosts ithat ithe ifirm isaved ithrough inon-compliance. iIt ican ivary ifrom ia ifew idollars ito iseveral imillion idollars ifor ievery iviolation iagainst ithe ienvironment icommitted iby ithe ifirm.

4. Compensation iobligations

iThis iis icaused iby ithe irelease iof iharmful isubstances ito ithe ienvironment. iA ifirm ican iface icompensation iobligations ieven iafter ibeing iin icompliance iwith iall ithe iother ienvironmental iobligations. iCompensation iobligations imay ibe iclassified ias ia ipersonal iinjury, iproperty idamage, ior ieconomic iloss.

Compensation ifor ipersonal iinjury imay iinclude ibodily iinjury, ipain, iand iwrongful ideath, iwhile icompensation ifor iproperty idamage imay icomprise iloss iof ifarm icrops iand ilivestock, iand idamage ito ireal iestate iand ivehicles. iClaims ifor ieconomic iloss imay icomprise iloss iof iequipment, ilost iprofits, iand iloss iof ithe isources iof ilivelihood

5. Punitive idamages

iThe igoal iof ipunitive idamages iis ito idiscourage ithe iconduct iof ia ifirm ithat idisregards iother istakeholders iin ithe ienvironment iand ideter iother ifirms ithat ioperate iin ithe isame iindustry ifrom iengaging iin isimilar iconduct.