Corporatesocial responsibility: A comparative analysis of financial statements
Anorganization is said to be socially responsible if it undertakesinitiatives that are geared towards benefiting the society. Corporatesocial responsibility (CSR) acts as a self-regulatory mechanism thatensures a firm adheres to ethical standards, the spirit of the lawand the social norms. A company’s CSR can comprehend variousstrategies which range from giving away some of the proceeds tocharity, volunteering and undertaking measures to safeguard theenvironment among others(Haynes, 2013). CSR reporting is increasinglybecoming a part of the business environment though it is still in itsinfancy stage. Compared to the past decades, we can conclude thatcorporate conscience continues to mature and brings in new and uniquevoices to the table. The figure below indicates the trend in CSRreporting since 1992.
Figure1: Number of CSR reports issued since 1992
Objective of the research project
Socialresponsibility is not an option for any business entity. It is a dutythat every firm must undertake to maintain a balance between theeconomy and the ecosystem. Both the US GAAP and the IFRS accountingstandards have outlined some guidelines regarding CSR within whichcompanies should operate. This project, therefore, focuses onanalyzing those rules, pointing out any similarities and differencesthat exist between them and establishing measures that have beenundertaken to harmonize the CSR reporting principles.
Organization of text
Mostorganizations have encapsulated CSR activities within their corebusiness operations as a way to “give back” to the community. Itis believed that social responsibility coupled with strategicentrepreneurial projects can build a sustainable and impressivebusiness. Starbucks Coffee is a prime example of how CSR can beproductive and result in organizational success. Since the companycame into existence, it has concentrated on acting responsibly andethically through production of quality products, accountability andenvironmental leadership. The firm has been able to support severalprojects such as Ethos Water initiative that feeds over 1 billionpeople.
US GAAP Accounting Standards for corporation social responsibility
TheFASB has included limited information related to CSR reporting orrevelation of environmental-related obligations and any losspossibilities arising from social or environmental issues. However, awide range of social and ecological problems that call fordocumentation have been accounted for under ASC 450 and ASC 410-30 ofthe FASB accounting principles. Most of CSR related activities arenever disclosed in the official financial statements, and there is alikelihood that FASB will not adjust its standards to captureCSR-related initiatives in the financial reporting (Epstein, 2011).
ASC450, formerly known as FAS 5 summarizes the accounting and revelationprerequisites for loss and gain possibilities. An example of a losscontingency would be injury or damage caused by sold products. Thestandards state that a loss contingency can only be recognized if itmeets two conditions. First, the liability should have been incurredbefore the reporting date, or it is probable and second, the amountof loss should be reasonable enough to be estimated reliably.Nonetheless, if the contingency does not meet the stated requisitesit could still be noted in the financial statements. Emergencies thatbring about social benefits do not appear in the financialstatements. This is because by recognizing them we would beaccounting for benefits that have not been realized (Bonham, 2013).
ASC410 -30 states for an environmental liability to be included in thefinancial statement two prerequisites must have occurred before thedate of financial analysis. First, the litigation must have beenasserted or probable of being asseverated. Second, it should belikely that the litigation will result in unfavorable outcomes.Supposing that the two conditions have been met and a particularcompany has been pointed out as the Potentially Responsible Party(PRP), the standards state that the organization should meet at leastthe minimum amount required to remedy the environmentalliability(Bonham, 2013). For instance, supposing an entity or anindividual has been had been reported to be the current or a pastowner of a mining site that discharges hazardous waste into theenvironment. It is estimated that to undertake a clean-up project itwould cost the society $4,500. This implies that the organization isexpected to pay a minimum amount of $4,500 and list it in thefinancial statements.
IFRS Accounting Standards for corporate social responsibility
Justlike the US GAAP standards, information related to CSR activities hasbeen limited under IFRS guidelines. Some principles that governenvironmental obligations and loss contingencies have been coveredunder IAS 37. Other than the above items, the FASB does not addressissues relating to environmental projects. The Director CorporateCommunications (DCC) Mark Byatt, reported that the IASB has no voiceover corporate conscience reporting regulations. He also added thatthey have no intentions of setting standards for such processes sinceit would require them to get involved in the promotion of CSRreporting initiatives.
Miningindustries have been known to enter into agreements with localcommunities in that they offer CSR packages in return for maintainingtheir license to operate. The IAS 37 standards govern suchcommitments and have outlined when and how an organization canrecognize a CSR obligation. The prerequisites for identifying aprovision are as follows. First, a business entity must have apresent obligation as a result of past activity. Second, compensationmust be probable that is more likely than not and third the outcomemust be a reliable estimate. IAS 37-86 demand that business shouldnot recognize contingent obligations but should divulge them, unlessthe contingency of an efflux of economic benefits is remote. At thesame time, IAS 37.31-35 states that an organization should notrecognize contingent assets but should unveil them in cases when aninflow of economic profits is probable (Robert, & Ian, 2011).
History of convergence of accounting for corporate social responsibility
Overthe years CSR reporting has undergone a complex development and everyday it is becoming an embodiment of organizations’ core business.Today, the three great CRS reporting standards are the G3 standardsdeveloped by the Global Reporting Initiative (GRI), theAccountAbility’s AA1000 Series and the UN Global Compact’sCommunication on Progress (COP). Before the invention of theinternationally accepted CSR reporting regulations, the CSR reportswere prepared without adherence to external recounting principles. In fact, CSR reporting was taken as a marketing strategy to enhancepublic image. Just like harmonization of the IASB and the FASBaccounting standards has been a long and arduous process, it isexpected that any possible convergence of the CSR reporting standardswill even be more onerous. Nonetheless, if the common CSR reportingstandards will be much of market-based strategies to bring abouttransition, then equivalence and coherence are the essentialattributes for CSR reporting. The AA100 series rules have been foundto be stringent in addressing particular needs facing individualfirms and their stakeholders. However, applied alone they fall shortof the comparability the GRI’s G3 standards offer. In 2006, the UNGlobal Compact endorsed the use of G3 regulatory rules which broughtan additional level of validity and worldwide recognition. At thesame time, with more than 2000, companies employing the use of G3standards in CSR reporting, GRI is becoming more globally recognizedand preferred.
Current similarities and differences in accounting for and reporting CSR
CSRreporting under both US GAAP and IAS 37 demand that recognition ofany loss should be by the likelihood of occurrence. Nonetheless, thedefinition of the “probability” differs. Under US GAAP, probableis defined as likely while with IFRS it is elucidated as more likelythan not(Porter, & Norton, 2014).
Bothaccounting standards disallow recognition of liabilities for expensesrelated to future operating events (Porter, & Norton, 2014).
Atthe same time, both standards ask for more information regarding anycontingent liability whose existence is more than remote but does notmeet the requisites for recognition to enable it to appear in thefinancial statements.
Liableassets are not cognized under IFRS standards. However, with US GAAPstandards, Probable assets are calculated at the lower of theprocurement date equitable value and the excellent guess of thefuture compensation amount(Shamrock, 2012).
Withthe IASB standards, contingent debts are cognized at their fairvalues as long as those values can be estimated reliably. With theFASB standards, the contractual obligations are acknowledged at theirequitable value without the “reliably measurable” consideration(Shamrock, 2012).
Althoughboth standards agree that any obligation should be acknowledged onthe basis of probability, the understanding of the term probabilitydiffers significantly. With the US GAAP, it implies likely while withthe IFRS it is interpreted as more likely than not.
Expectation of Greater Converge in CSR accounting and reporting
Unlikeaccounting for financial operations which are compulsory, CSRreporting is voluntary. In that case, any company that decides todisplay its CSR activities have a greater leeway to pick a strategyof its choice. Having a single set of internationally recognized CSRreporting standards have become strenuous due to such loopholes.Nevertheless, CSR reporting is still a new field in its infancy. ASshown in figure 1 this area is gaining power every day and with timethere may be possibilities that CSR reporting will be compulsory. Atthat point harmonizing these standards will be simpler and morelikely to bear fruits. Convergence process will advance as moreregulatory bodies, and financial markets raise their dependency onCSR reporting (Rezaee, 2014). Notwithstanding, G3 guidelines are veryexhaustive and with the current efforts to harmonize the CSRreporting standards, it is more likely that they will end up beingthe only globally recognized CSR reporting standards
Corporateconscience befits not only the society but also the company inquestion. It is a source of organizational success. A company’spublic image lies at the mercy of CSR activities. Such tacticsimprove the relationship with both loyal and potential consumers. Atthe same time, intensive CSR programs increase the opportunities oftapping new grounds that enhances the competitive advantage andproduct positioning within the relevant industry.
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