ACCOUNTING FOR SUSTAINABILITY
Why do organizations make environmental and social disclosures?
Because of changing expectations from stakeholders.
New definition of accounting
Organizations recording, reporting, analyzing information, communicating and being accountable to
stakeholders, who are making decisions, investing resources and holding the organization accountable.
“The objective of accounting is to produce financial and non-financial information that is useful to stakeholders for
decision-making and accountability purposes” – George, S. (2023). Accounting for accountability and decision
making [Lecture notes].Victoria university of Wellington
Limitations of old definition: stakeholders are limited, non-financial information is limited.
Corporate Social Responsibility (CSR)
Does not have a fixed definition, but it can be roughly outlined as the idea that corporations have an
obligation to deliver positive outcomes for all stakeholders, including those with environmental and social
concerns rather than just maximising profits. Going over and above the bare legal requirements.
EG: Westpac
 Climate action – Westpac is NZ’s first Toitū carbon-zero certified bank, operates in line with the
Paris Agreement, and offsets the remainder by purchasing NZ native permanent forestry carbon
credits
 Community partnerships – Westpac Rescue Helicopters, Sir Peter Blake Youth Foundation,
Dementia Friendly Banking, Duffy Books in Homes, iSPORT Foundation
 Financial education – provides in-person and online financial literacy classes
 Sustainability – has funds for sustainability
Mid 1800s – early 1900s: focus on increasing productivity, address ‘labour unrest’, alleviate social problems
including poverty & child labour.
1950s: increasing consumer power, CSR coined by Howard Bowen.
1960s: environmental concerns added to CSR concept.
1970s – 1980s: boycotts of multinational corporations, CSR growing, 90% of Fortune 500 companies have
social disclosures.
1990s – present: CSR institutionalised in guidelines, codes of conduct and standards.
Motivations for CSR (internal):
 To improve their image
 To restore or enhance the social legitimacy or corporations
 To manage stakeholder relations
 Sometimes it is a legal requirement
 Competitive advantage (ethical investors)
 To improve accountability to stakeholders and wider public
 Institutional pressures
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Voluntary to forestall regulation
Accessing finance (funding from ethical investors etc)
Motivations for CSR (external):
 Gives back to the community
 Climate change (50% of global industrial emissions since 1988 can be traced to just 25 companies)
 Reversing negative impacts (eg cleaning up oil spills)
Limitations of CSR:
It is only as effective as the business implementing it. (eg claiming they donate a portion of profits back to
local charities but it’s only $10 a year), and it can be hard to measure
Perspectives on CSR
Business case (Milton
Friedman)
Believes that CSR is only a tool for enhancing wealth, and considers it
voluntary. Considers engaging with stakeholders to be “consulting with”
stakeholders.
Stakeholderaccountability approach
Transparency and accountability – stakeholders have rights to this
information. CSR should be regulated. Important for democracy. Pluralist
view.
Unitarist view: all stakeholders share the same interests
Pluralist view: stakeholders have common and separate interests.
Critical theory approach
Anti-capitalism. CSR should be enforced, but government can’t be trusted.
Power imbalance between people and corporations. External reports are
more reliable because internal reports can be manipulated (eg greenwashing).
Sustainability Reporting (SR)
The practice of measuring, disclosing, and being accountable to internal and external stakeholders for
organizational performance towards the goal of sustainable development.
Sustainable development: “development that meets the needs of the present world without compromising the
ability of future generations to meet their own needs” – World Commission on Environment and Development.
(1987). Our common future.
The Triple Bottom Line (TBL) – economic, social, environmental
Frameworks for reporting
Framework
Global Reporting
Initiative (GRI)
Sustainability
Reporting Standards
Description
The GRI Standards are a
modular system of
interconnected standards.
They allow organizations
to publicly report the
impacts of their activities
in a structured way that is
transparent to
Strengths
Widely recognised and
accepted
Weaknesses
Can be complex and
time consuming to
implement
Flexible
Transparent
Requires significant
resources to collect and
analyse data which can
stakeholders and other
interested parties.
be a challenge for small
companies
The most common
framework – used by
more than 5,800
companies worldwide.
Designed to be flexible,
allowing companies to
customise reporting to
their specific needs.
Includes principles for
defining report content,
reporting quality, and
ensuring stakeholder
inclusiveness
The Sustainability
Sustainability
Accounting Standards
Accounting
Board (SASB) is an
Standards Board
environmental, social and
(SASB) Sustainability governance (ESG)
Accounting
guidance framework that
Standards
sets standards for the
disclosure of financially
material sustainability
information by companies
to their investors.
Focuses on financially
material issues, which is
particularly useful for
investors
Industry-specific
standards making it
easier for companies to
report on issues that
are the most relevant to
them
Relatively new (2011)
and less widely
recognised than GRI
May not be as
comprehensive as other
frameworks
Includes specific
standards relating to
specific industries,
allowing companies to
report on the most
relevant information
Based on the materiality
of sustainability issues
and includes guidelines
for defining what is
material for each
industry
International
Integrated Reporting
Council International
Framework (IR)
Designed to provide a
holistic view of a
company’s performance
including financial,
environmental, social and
governance issues.
Based on the idea that a
company’s value goes
Provides a
comprehensive view of
a company’s
performance, allowing
stakeholders to
understand the broader
impact of the company
Can be complex and
difficult to implement
Helps companies
identify areas where
May be difficult for
stakeholders to
Requires significant data
collection and analysis,
which can be a challenge
for smaller companies
beyond is financial
performance

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

they can create value in
the long-term
understand as it
requires a deep
understanding of the
company’s business
model and strategy
NZ XRB Climate Related Disclosure Standards – being developed currently, NZ specific
Social Accounting International – SA8000 Standard
AccounAbility – AA1000 Standards
Taskforce on Climate-Related Financial Disclosures
The International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards
United Nations Sustainability Goals
o 17 Sustainable Development Goals that aim to address some of the world’s most pressing
social, economic and environmental challenges by 2030. Lack of clarity around measurement,
but it is globally recognised and aligns well with stakeholder expectations.
MANAGEMENT ACCOUNTING
What is management accounting?
Information to assist financial, social or environmental decision making of internal managers in terms of
planning, monitoring and controlling. Links knowledge to action and responsibility.
Covers various time periods (usually forward looking).
What is reported? Whatever the managers desire. Information reported requires justification that the pros
of reporting it outweighs the cons, and that it adds value to the organisation. Not everything can be
included, so decisions require a cost-versus-benefit analysis.
Should information from management reporting be disclosed publicly to stakeholders? The target audience
of management accounts are managers, not external stakeholders. Releasing information depends on what
managers believe they are accountable for it, what relevance it has to external stakeholders, and whether
or not it is in the best interests of the organisation to disclose that information.
Audit: an unbiased (and often external) examination and evaluation of the financial statements of an
organisation or their financial reports. Why:
 Credibility – ensures it is free from bias, increases the ‘value’ of the report as it ensures it is relevant
and faithfully representative
 Reduces stakeholder risk – shows what risks there are and how to mitigate against them
 Stakeholder/investor value – attracting new stakeholders and reassures current stakeholders
WHY > TO WHOM > WHAT > HOW
Differences between financial and management accounting:
Management accounting
Financial accounting
Main audience
Regulation
Special purpose to satisfy specific information
needs of mangers
Managers
Unregulated, a lot of variation
Reporting frequency
As needed
General purpose for
everyone
Stakeholders
Regulated and
standardized
Annual or semi annual
Orientation
Past performance
Financial or non-financial
Projected and past performance (forward
thinking)
Whatever managers priorities
Organization level of
reporting
Management decides (focuses on a particular
division)
Aggregated level (whole
organization)
Type of report
Financial
The role of a manager
Planning: the process of setting goals and determining the actions needed to achieve those goals. EG: a
restaurant manager might develop a budget for different parts of the restaurant such as the kitchen, bar, and
front of house to ensure they keep on top of the funds allocated for things like ingredients and staffing.
Cost management: the process of analysing, controlling, and reducing costs within an organisation in order
to increase profitability or efficiency. EG: a restaurant manager may cost control measures by negotiating
favourable contracts with suppliers of vegetables to ensure that the kitchen get the highest quality
ingredient for the lowest price.
Decision making: EG: a restaurant manager may make decisions relating to whether outsourcing certain
aspects, such as time consuming pastry production or cleaning services, based on cost comparisons and
quality considerations.
Performance evaluation: EG: a restaurant manager may provide feedback to staff members, recognising
exemplary performance or addressing areas requiring improvement, based on performance evaluations –
which then could influence who gets a raise or if someone needs to be fired.
Financial reporting and communication: interpreting and communicating financial information to investors,
executives and other stakeholder. EG: a restaurant manager might prepare financial reports, highlighting
revenue, expenses, and profitability, and present them to the restaurant owner providing insights into the
financial performance of the restaurant.
Critical thinking
What is critical thinking? Making reasoned judgements that are well considered, logical, and based on asking
the right questions and collecting the appropriate supporting information
Why are accountants expected to be critical thinkers? Accountants have a key role in planning, monitoring
and controlling organisational behaviour. Such activities need to include considerations of the long run and
the short run, and sustainability-related issues, as well as considerations of the various ways in which an
organisation can add value. Critical thinking is necessary to all of this, therefore is a highly valued skill that is
expected of accountants.
Counter accounting
Benefits of counter
accounting
Drawbacks of
counter accounting
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Transparency
Holds the company accountable
Improved decision-making (better understanding stakeholder’s concerns
and priorities)
Improved stakeholder relationships
Risk mitigation
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Time consuming
Complex
Risk of bias
Should companies respond to counter-accounts in their CSR reports?
Company/internal
perspective
Showcases the viewpoints of stakeholders who may not be happy with their
activities which may damage reputation.
It could bring to light things that they don’t want the public to know
Could showcase the company as being highly democratic and transparent,
allowing them to work with stakeholders to improve operations
Customer perspective Makes them more sceptical
They appreciate it as it provides more information and context
May not care about CSR and only financial performance
Investor perspective
They are interested in how the corporation responds to counter-accounts as it
reflects their management performance
Employee perspective
NGO/activists’
perspective
They may feel sceptical/conflicted about the corporation’s CSR commitments if
they perceive that their own working conditions/rights aren’t properly
addressed.
Feeling more engaged and proud of working for that company knowing that it
takes CSR seriously
Not being able to understand or interpret it
Use it as a leverage to pressure corporations to adopt more sustainable/ethical
practices, and expose their alleged abuses/shortcomings
What issues might counter-accountants face?
 Perceived bias or propaganda – not taken seriously
 Limited resources – cannot afford to go to court for laying false claims, but have limited access to
information and data
 Inaccessible reports
 Limited impact – the corporation does not have an obligation to take their report seriously
Planning and control
Single-loop learning: self-regulating,
where risk is low. EG issuing passports.
Double-loop learning: questions the
basis on which strategies have been
developed. EG child welfare by MSD.
Strategy
Specifies how an organisation will match its own capabilities and resources with the opportunities in the
external environment in order to accomplish objectives.
Mission statement: reflects the organisation’s core purpose and focus – a guiding principle. It acts to identify
what aspects of performance are considered important, and provides overall direction for managers.
Possible purpose of business: to retain customers, provide return to investors, contribute to society,
survive.
Possible purpose of public sector: to uphold the law, protect the environment, promote social and
economic wellbeing, maintain efficient and effective government operations.
What problems might be associated with being shorter term in focus? There can be a short term focus
when focusing on annual profits rather than looking at long term objectives. This is not good for the longrun. EG investing in cheaper equipment because it generates higher profits in the next period, but in the
long run it becomes problematic and needs to replaced.
COST ACCOUNTING
Cost behaviour: how costs change in response to changes in activity or volume – the relationship between
a cost and the level of activity that causes this cost. It is an important concept in accounting because it
helps managers to make informed decisions about pricing, production levels and profitability.
Managers want to know about cost behaviour because they want to know how changes in sales or
production levels will affect costs and profitability.
Investors and creditors care about cost behaviour because it helps them assess a company’s financial health an
long-term viability.
Relevant costs: costs that will occur in the future and will differ between alternative courses of action.
Fixed costs: those that do not change in a particular period as the volume of production changes. EG rent,
insurance, supervisor salary.
Variable costs: those that change as a result of production or service volume. EG raw materials costs,
delivery costs.
Mixed costs/semi-variable costs: those with both a fixed and variable component. EG utilities, licencing fees.
Step costs: those that increase in a step-like pattern as activity levels increase.
Life cycle analysis: analysing a product or service from cradle to grave
Life cycle costing: placing a cost on inputs and outputs created by operations
Material flow cost accounting: recording what materials are inputs and outputs of operation
Contribution margin = sales revenue - variable costs
Contribution margin per unit = sales revenue per unit - variable costs per unit
Contribution margin ratio = contribution margin per unit / sales price
Mangers need to know the contribution margin to determine what the incremental contribution to profits is for each item of a good or service sold. It is also needed to determine the
break-even point and the total number of products needed to be sold to produce a particular profit.
Break-even point (in units) = total fixed costs / contribution margin per unit
Managers need to know the break-even point because it indicates the level of production an organisation must reach before it covers its costs and can start to generate a profit
Margin of safety = actual sales units - break even sales units
A higher margin of safety is good as it leaves room for cost increases, downturns in the economy or changes in the competitive landscape
Calculating total cost for a given activity level: y = a + bx
y = total costs, a = fixed costs, b = variable costs per unit, x = activity level
For mixed costs, can use either highest total and highest production cost, or lowest
Degree of operating leverage = contribution margin / profit
Used as a measure of the sensitivity of profits to changes in sales. Helps you to measure the degree of risks involved (eg more fixed costs = more risk)
Units needed for target profit = (target profit + fixed costs) / contribution margin per unit
Considers factors including the expectations of owners, the risks inherent in the operations, and the opportunity cost of alternative options
Payback period = find net savings per unit produced. Find how many units you need to produce. Determine
how long it will take to produce these, given budgeted sales.
How long it will take to pay back the initial investment
Accounting rate of return = (average net profit / average investment) x 100%
Average net profit = total profit / number of years
Average investment = (start + end value) / 2
Net Present Value (NPV)
Find the net future cash flows (y) in today’s numbers:
= y/(1.in)
i = discount rate
n = how many years from now it takes place
Add all of these to the initial investment, + remaining worth of good
If NPV is positive, this means it is worthwhile
NOTE: make sure you add the sale price of machine to the last cash flow
High-low method of calculating mixed costs = difference between highest and lowest total production cost
/ difference between highest and lowest production output
7000/5000 = $1.4 per unit
Maximising the return on a constraining/scarce factor: where there is a constraining factor (eg such as the
limited availability of raw materials, production capacity or skills), an organization will try to maximise the
contribution per unit of the scarce, or constraining, factor (resource).
BUDGETS
What is a budget
A budget is a quantitative, detailed plan of an organization's activities for a given period of time. Budgets are
for managers, and it is not typically public information. When preparing a budget, you need to consider the
organisation’s mission and strategic plans, past performance, and external factors such as changing
technology, market demands, government policies, available finance and competitors’ actions.
Benefits of budgeting:
 Aids the coordination of different sections/divisions
 Assist in identifying problems early
 Provides a basis for motivation
 Encourages forward thinking/strategic planning
 Provides a basis for evaluating future performance
 Establishes a system of control
 Framework to understand how the organisation is performing, and how activities are related
Static budgets: a budget that does not change as certain variables such as volume change (eg master
budget)
Flexible budgets: a budget that does change (flex) as certain variables such as volume change (eg the sales
level in the sales budget)
Line of credit: an agreement negotiated with a fund provider to supply an amount of cash up to a maximum
level if needed, and where interest is only paid on the amount of money actually borrowed (would be
needed if for example reality doesn't live up to cash budget). Only granted if the company is creditworthy.
Budgeted variances
Variances: differences between actual performance and budgeted performance (master budget shows
budgeted). Can be favourable or unfavourable
 Favourable variances need investigation to understand what went right. Did a particular strategy
work extremely well? Was there a one-off event that won't be repeated? Understanding this can
help replicate the success in the future.
 Unfavourable variances also require investigation to understand what went wrong. Did costs
increase unexpectedly? Did a strategy fail? Understanding this can help avoid similar problems in the
future.
Materiality thresholds: a variance that exceeds an agreed-upon threshold on a budgeted amount, and that
an organization would elect to investigate.
Relevant range: the range of production output or volume in which our expectations regarding cost
behavior are expected to hold.
Lots of Cash on Hand- Good or Bad?
Good Scenario:
 Businesses often need a cash buffer for unexpected costs. Unforeseen opportunities or crises can
occur, and having cash on hand can help manage these situations effectively.
 Example: Suppose a global pandemic causes widespread disruption in the supply chain. Having cash
on hand allows your business to pivot, perhaps sourcing materials from different suppliers at
potentially higher costs, without jeopardizing overall operations.
Bad Scenario:
 If the company has too much idle cash, this might indicate inefficient capital management. Cash on
hand doesn't generate significant returns on its own. Therefore, it's often better to invest surplus
cash back into the business or distribute it to shareholders as dividends.
 Example: If your business has a lot of cash sitting idle in its accounts, this cash is not being used to
generate further profits. It could be better used to fund growth initiatives like R&D, marketing,
hiring, acquisitions, etc., or it could be distributed to shareholders who could potentially generate a
better return on this cash.
Overall, it is preferable to have more cash than less cash, it is not efficient to have large amounts of
cash. The act of preparing a cash budget will highlight periods of excess cash, as well as periods in which
there could be cash shortages if other actions are not taken.
The master budget
A comprehensive set of budgets that provide
coverage of an organisation’s activities. The master
budget consists of several interdependent budgets
that together create a reasonably cohesive
organisational plan for a specified period of time.
Operating budgets: cover the actual
manufacturing/merchandising process directly
related to the core operations of the organisations.
EG sales budget, manufacturing overhead budget,
labour budget, direct materials budget
Financial budgets: EG income statement, balance sheet, cash budget
The sales budget
A detailed summary/plan of the estimate sales units and revenues from the organization's sales for the
budgeted year (in the future). A mission for the sales department.
NOTE there is usually a difference between 'sales revenue' and 'cash receipts from customers' (ie because of bad debts).You record the sales in the period that they were
made, not when the cash is received.
The following information relates to Bells Surfing Company, which
sells one type of surfboard. The forecasted sales for year 2024 are:
Quarter 1 (Q1) 20,000 units
Quarter 2 (Q2) 22,000 units
Quarter 3 (Q3) 24,000 units
Quarter 4 (Q4) 26,000 units.
The selling price for each unit is $500.
Prepare the sales budget based on the sales forecast
The production budget
Establishes the required number of units that must be produced.
NOTE beware of any starting and closing inventories.
Required production in units = target sales + required closing inventory – opening inventory
The direct materials budget
Tracks direct materials used during production.
The beginning materials inventory is $30,000. Due to an increase in
sales, the manager wants the ending materials inventory to be
$40,000 per quarter. For each surfboard, the material cost is
expected to be $100, as it was last year.
The direct labour budget
Tracks labour used during production.
The manufacturing overhead
expenses budget
Resources beyond direct materials and direct
labour used in the production process (eg
electricity, string).
The selling and administrative
overhead expenses budget
Costs not involved in the production process that
are still needed for the organization to operate (eg
salaries of administrative staff). (note uses target
sales, not units to be produced)
The budgeted income statement
Is prepared after all the operating budgets have
been prepared. It provides a basis for evaluating the
projected overall financial performance of an
The cash budget
Records the planned cash receipts and planned
cash payments for a particular period of time. Split
into:
 Cash flows from operating activities
 Cash flows from investing activities
 Cash flows from financing activities
o Opening cash
o Closing cash
organization. It deducts projected expenses from
projected revenues in order to arrive at the
budgeted profit.
The budgeted balance sheet
Shows the projected assets, liabilities and owner's equity of an organization at the end of the accounting
period if the organization operates as planned.
ETHICS
Virtue ethics
Emphasises the importance of personal character (eg honesty, kindness, courage, loyalty) and values,
independent of strict adherence to rules or consequences.
Virtue ethics “addresses the question of what a person should be or become, rather than the question of
what a person should do” (Duska et al., 2011, p. 66). Duska, R., Duska, B. S., & Ragatz, J. (2011). Accounting
Ethics. Wiley-Blackwell.
EG accountants should prioritise being a good person and truthful in their work.
Deontological ethics
Kant. The morality of an action based on adherence to rules and moral duties.
EG accountants should follow the code of conduct and other rules, regardless of the outcome.
Consequentialist ethics
Considers the ethics of actions in relation to their consequences. EG utilitarianism (Bentham)
The Code of Ethics – standards of ethical conduct/fundamental
principles of ethics
1. Integrity
2. Objectivity (ie not bias)
3. Professional Competence and Due Care (maintain professional knowledge and skill to ensure client
receives competent service
4. Confidentiality (exception: when there is a legal or professional right/duty to disclose info)
5. Professional Behaviour
(part 1, section 100 and 101)
In text: (New Zealand Institute of Chartered Accountants, 2022)
Reference list: (New Zealand Institute of Chartered Accountants. (2022). New Zealand Institute of Chartered
Accountants (NZICA) Code of Ethics. International Federation of Accountants)
Ethical dilemma framework
Define the facts and the dilemma
Ethical review (identify the principles or guidelines that effect the situation, and stakeholders involved)
Consider options
Investigate outcomes
 Basic consequence
 In-depth explanation/evaluation
 Example
 Short-term & long term affects
Decide what to do
Evaluate decision
Why do accountants need ethics?
o Being a good person with sound values is not always enough to handle ethical dilemmas
o Helps business people to understand possible approaches to a dilemma
o Promotes ethical behaviour and rational decision-making processes (that considers the best
outcome for all stakeholders)
o Deeper understanding of personal and organisation’s values
o To comply with legal and professional standards
o To prevent fraud and misconduct (ie because easy to manipulate data)
o To ensure accountant’s legitimacy (following Hine’s 1988 theory, accountants can only operate if
there is trust from society)
When would personal sources of ethics not be relevant for accounting?
o
o
o
o
Lack of specific business context
Conflicts of interest between individual and organisation
Importance of sensitivity to cultural and religious diversity
Business decisions have tangible implications
EXAM TIPS
Writing a memo:
REMEMBER A CONCLUSION
The purpose of this course is about decision making.
If calculating units, round up!
When defining budgets, use ‘for a specific period of time’!
Give an examples for EVERYTHING
Legal requirement
Remember to use sales units, not production units for selling and administration overhead budget
When calculating NPV, make sure you add the sale price of machine to the last cash flow