Environmentally related impacts on financial reporting: The case of pollution permits in Czech legislative conditions

Abstract

The Czech Republic was one of the biggest air polluters in Europe before the year 1989. Czech industry was restructured from heavy to light industry as a consequence of the transition from a centrally planned economy to a market economy after the political, social, economic and other changes that took place that year. The Czech Republic became a member of the European Union in 2004. Due to the membership it was crucial to implement environmental legislation that ensures the reduction of greenhouse gas emissions. The submitted paper deals with problems of pollution permits from the view of Czech accounting legislation. The purpose of financial accounting is to generate financial information about a company in order to provide a basis for transparency and accountability relationships with stakeholders. Financial reporting is used by managers to communicate the dated financial information to external parties. The main environmental topics in a company's financial accounting are the recognition, measurement and disclosure of environmentally related economic impacts on business and a company value. Local financial accounting standards differ between jurisdictions and can substantially influence the economic results of a company. When examining sustainable development and accountability it is crucial to investigate how environmental issues are dealt with by financial reporting rules, whether and when environmentally induced financial outlays should be classified as assets or as expenses. The aim of this paper is to discuss the influence of pollution permits on Czech financial reporting with the view of accounting entity that pollutes air by greenhouse gases. The paper describes problems of a present situation of recording accounting transactions connected with pollution permits such as a purchase or donation of permits, their evidence in Czech financial accounting. The paper analyzes implementation of the EU environmental legislation into Czech national law and it is focused on Czech companies that have an obligation to obtain pollution permits. This situation influences financial accounting and reporting of financial statements. © 2011 WIT Press.