Question

Some theorists contend that companies that create pollution should report the social cost of that pollution in income statements. They argue that such companies are indirectly subsidized as the cost of pollution is borne by society while only production costs (and perhaps minimal pollution fines) are shown in the income statement. Thus, the product sells for less than would be necessary if all costs were included. Assume that the FASB is considering a standard to include the social costs of pollution in the income statement.

Required: In your opinion, which characteristic (relevance or faithful representation) will make it difficult to come up with a reasonable standard in this area? Why?

Answer 1

In my opinion, it is the Relevance of the financial statements that may suffer owing to the addition of Social Costs of business. Here's why:

Relevance as an obstacle: The users of financial statements require for the financial statements to be tendered to their needs in such a way that, in as great an extend as possible, these statements can influence the decisions of these users. The disclosure should have a predictive outcome, meaning that such disclosure should be of such value that it helps users anticipate or describe what they think might happen with the enterprise in the future. And what happens to the enterprise in the future conforms to their confirmatory aspect of relevance as a qualitative characteristic. Adding pollution as social costs in the financial statements can distort figures in it because some figures will, due to social costs, be inflated. The relevance of financial statements will suffer if anything extra to the standard figures of cost are displayed as a cumulative cost.