1 Forest assets and environmental benefits in management accounting Seite Jahrgang (2009), Heft 1/2, S Forest assets and environmental benefits in management accounting Waldvermögen und Umweltleistungen im führungsorientierten Rechnungswesen Keywords: Schlagwörter: forest accountancy, sustainability control, performance measurement, forest assets, management accounting Forstliches Rechnungswesen, Nachhaltigkeitskontrolle, Erfolgsrechnung, Waldvermögen, internes Rechnungswesen Abstract Management of forests takes place in the institutional framework of forest enterprises and requires a variety of information. The core instrument of information supply is the accounting system. It provides the basis for decisions and internal controlling, and it is needed for reporting to external stakeholders on economic and social aspects of the forestry operation. Forestry accounting also has major deficiencies; periodic changes in forest assets are insufficiently recorded, and other achievements, especially with respect to the environment, are not shown adequately. Many approaches have been proposed over time to consider changes in forest assets, but none of them has been accepted in practice. Whereas there are hardly any legal regulations concerning forest asset records in external accounting, it is indispensable for internal accounting to have correct records and examine if targets have been reached. With regard to the environmental benefits that cannot actually be assessed with a monetary system, so-called performance reports and sustainability reports that show primarily physical factors are being examined. On a higher level these performance reports are partially com-
2 Seite 6 plemented by monetary factors. An overview of new developments and related topics with a focus on performance measurement and management control shall be presented and discussed in this paper. Kurzfassung Waldbewirtschaftung erfolgt im organisatorischen Rahmen von Forstbetrieben und bedarf einer Vielzahl von Informationen. Wichtigstes Instrument der Informationsbereitstellung ist das Rechnungswesen. Es liefert die Grundlagen für Entscheidungen und internes Controlling und ist Voraussetzung für die Berichterstattung über ökonomische und soziale Aspekte des Forstbetriebes an externe Interessenten. Das forstliche Rechnungswesen weist jedoch bedeutende Defizite auf: periodische Waldvermögensänderungen werden entweder gar nicht oder, falls doch, nur sehr unzureichend erfasst und gewisse Leistungen der Forstbetriebe, insbesondere solche in Bezug zur Umwelt, überhaupt nicht oder nur äußerst unzulänglich ausgewiesen. Zahlreiche Ansätze zur Berücksichtigung der Waldvermögensänderungen in der Erfolgsrechnung wurden im Laufe der Zeit vorgeschlagen, aber keiner davon hat nachhaltig Eingang in die Praxis gefunden. Auch wenn es kaum gesetzliche Vorschriften für die Erfassung des Waldvermögens im externen Rechnungswesen gibt, ist es für das interne Rechnungswesen unerlässlich, richtige Daten bereitzustellen und mit deren Hilfe zu kontrollieren, ob bzw. inwieweit die Ziele erreicht wurden. Für die Darstellung der Umweltleistungen, die mangels Marktpreisbildung kaum mit einem monetären System beschreibbar sind, bedient man sich zunehmend so genannter Leistungsberichte und Nachhaltigkeitsberichte, die primär physische Größen ausweisen. In den weiter entwickelten Formen dieser Berichte finden sich zumindest für Teilbereiche auch monetäre Wertangaben. Dieser Beitrag gibt einen Überblick über neue Entwicklungen im Themenkreis Bewertung/Abschätzung von Waldvermögensänderungen und forstlichen Umweltleistungen für Zwecke der Erfolgsrechnung und des Controlling mit kalkulatorischen Ansätzen und diskutiert einige damit verbundene Erfordernisse, Möglichkeiten und Probleme. 1 Introduction Rational forest management requires a variety of information from internal as well as external sources. The core instrument of information supply is the accounting system, which fulfills internal as well as external functions. Its primary task is to represent the relevant economic reality (states and flows
3 Forest assets and environmental benefits in management accounting Seite 7 of goods, services and money) correctly and completely. On the one hand, it provides the basis for decisions and internal controlling; on the other hand, it is needed for reporting to external stakeholders and informing about both the economic situation and the social (non-market) services of forestry (public relations); it provides the basis for taxation, etc. Criteria of sustainability related to the environment are increasingly gaining importance in the reporting process. Branches of management accounting Accounting is a comprehensive system comprising financial, cost and management accounting the latter has been recently expanded to include social and environmental accounting (Figure 1). Figure 1: Components of extended management accounting (Jöbstl and Hogg, 1998) Abbildung 1: Komponenten des erweiterten betrieblichen Rechnungswesens (Jöbstl and Hogg, 1998) Financial accounting records flows of money, goods and services from and to the enterprise in monetary terms, and the resulting state and changes in assets and liabilities. Monetary profit is the basic measure of results. Financial accounting is compulsory and regulated by law in the case of larger
4 Seite 8 firms according to their legal status. Usually smaller business units do not have any sophisticated or methodical accounting, while medium-sized ones often keep formal records of receipts and payments that are not well suited for management purposes. Financial accounting of the larger estates is on the whole well developed in many European countries. Cost accounting analyzes internal processes, factor consumptions and performances in detail, and is characterized by efficiency criteria. It is well developed in many larger enterprises and delivers many individual data on profitability in certain fields. Both systems of accounting cover the production of goods and the provision of services as far as they contribute to monetary profit. Social accounting aims at extending traditional accounting by considering qualitative aspects such as quality of living and welfare. Environmental accounting reports the enterprises use of the natural environment, which is both a provider of environmental goods (material and energy flows of all kinds) and a receiver of the enterprises pollution or undesired outputs such as material and energy residues of all kinds. In the case of sustainable forest enterprises the provision of environmental goods and services (e.g. nonmarket outputs of forestry) is in the focus of environmental accounting. Management accounting comprises all accounting activities aimed at providing data relevant for management purposes. Its core element is cost accounting. Recent developments in accounting There have been several activities in the development of forestry accounting in the past fifty years. At the national level, especially for specific types of enterprises (private, state-owned, small-sized, etc.): Proposals for financial and cost accounting, establishing of forest accountancy data networks, benchmarking and interfirm comparisons. At the international level e.g. the IASB (International Accounting Standards Board): IFRS (International Financial Reporting Standards) (IAS Plus, 2005), mainly in the field of financial accounting for listed companies, see paper K. Herbohn (2009). IUFRO (International Union of Forest Research Organizations): Proposals and recommendations of account frameworks (IUFRO, 1966), cost center accounting, forests assets valuation (at the end of the 1950s). Cost accounting, forest assets valuation, forest performance accounting; environmental accounting; studies on the situation of forest accounting worldwide (in the 1990s).
5 Forest assets and environmental benefits in management accounting Seite 9 In Austria, the proposed approaches for cost center accounting, expense distribution sheets etc. are widely used. The Austrian forestry accounting data network, for instance, has provided an abundance of data from financial and cost accounting of forest enterprises for 40 years, but their shortcoming is the lack of non consideration of the changes in forest assets. As a first step, the so-called adjustment to the allowable cut has been practically introduced. Shortcomings of forestry accounting Consequently, main shortcomings of forestry accounting are: neglecting or incorrectly registering any changes in growing stock. not or inadequately representing other achievements, especially with respect to the environment in a wider sense. As a consequence, the results shown by accounting are to a certain extent incomplete or wrong. The main concern of forestry accounting is in any case the specific element of forestry: the forest, the forest stands, the forest assets and the forest performances. All other aspects belong to general accounting. There is an ethic commitment of the forest owner to sustainability (longterm planning and acting) which also means to monitor the management and its long-term results, and there is an obligation of the forest manager to report to the stakeholders. Therefore the accounting system has to be improved by integrating changes in forest assets and enlarged by including social and environmental aspects. The main problem in forestry performance accounting is (e)valuation Many approaches have been proposed over time to evaluate forest assets and to consider changes in forest assets, but none of them has been accepted in practice so far. Currently, there are several new and promising approaches to solve these problems. Whereas there are hardly any legal regulations concerning forest asset records in external accounting, it is indispensable for internal accounting to have correct records of forest assets and to examine if targets have been reached. With regard to the non-market or environmental benefits that cannot actually be assessed with a monetary system, so-called performance reports that show primarily physical factors are being examined.
6 Seite 10 2 The valuation of forest assets The valuation of forest assets faces a number of practical problems, e.g. method of evaluation, forest survey (costs, accuracy), prices of products and input factors, forecasting of future development and results. Principally, the value of any asset is the discounted present value of the economic benefits it will generate in future years. The approaches can e.g. be roughly classified into balance sheet (inventory, ) and calculatory approaches. From the viewpoint of periodic performance assessment one can differentiate between (Figure 2) approaches with and without monetary valuation approaches with and without valuation of forest assets. Figure 2: Classification of methods for integrating forest assets (Jöbstl and Karisch, 2001) Abbildung 2: Gliederung der Methoden zur Einbeziehung des Waldvermögens (Jöbstl and Karisch, 2001)
7 Forest assets and environmental benefits in management accounting Seite 11 Several new approaches and proposals promise to improve the controlling process of an enterprise with regard to forest assets and social benefits, and set a focus on performance measurement and management control. Another central issue is the integration of non-market products and the socalled green accounting. The emphasis is placed on physical factors, satellite accounts and performance reports that are partially complemented by monetary factors. Consequently, we put the focus on performance measurement (i.e. considering changes in forest assets and including non-market benefits (NMB)). 3 Approaches for periodical performance assessment considering changes in forest assets As already mentioned, balance sheet and calculatory approaches are applicable. Balance approaches try to quantify changes in forest assets in the balance sheet or profit and loss account. They are known from public forest enterprises in Great Britain, New Zealand etc. Recently, scientists from Central Europe have also attempted to fully integrate forest assets into financial accounting. The approach of a German research group (Borchers, 2000) has been developed on the basis of IAS (International Accounting Standards) and the local commercial law. Forest assets appear as growing stock in the balance sheet, but not their periodical changes as revenue/expenses in the income statement. A similar study was recently presented for Scandinavian forest enterprises (Penttinnen et al., 2004). Joint-stock companies that are publicly quoted are to show forest assets in their balance sheets. Enterprises run by state and provincial governments also strive towards this goal. In principle, we recommend not to load financial accounts with this information but to use the notes for more or less detailed descriptions. Here it turns out that calculatory approaches can be handled more easily; they set a framework and out of this framework individual or all parts can be implemented and performance accounting can, thus, be improved step by step. For smaller forest enterprises, however, it is in any case more reasonable to opt for calculatory approaches that avoid the evaluation of assets. A calculatory approach to improved periodical performance assessment In the following, the outline of a calculatory approach for the periodical performance assessment shall be presented that considers changes in forest
8 Seite 12 assets, avoids the problem of forest assets valuation, and integrates environmental services. Generally adopted by Central European larger forest enterprises is the so called allowable cut based calculation. The allowable cut is used instead of annual increment as a measure and benchmark of the sustainable production potential. Deviations between allowable and actual cut are considered to be an expression of changes in the value of growing stock. Figure 3: Calculatory approach to improved periodical performance assessment Abbildung 3: Kalkulatorischer Ansatz für eine verbesserte Periodenerfolgsermittlung However, this calculation is solely a step in the right direction, and has to be improved by other means, for the following reasons: problematic derivation of allowable cut (e.g. average of different formula subjective) re-calculation on the total felling quantity - disregarding tree species,
9 Forest assets and environmental benefits in management accounting Seite 13 quality, logging site etc. lacking consideration of the execution of silvicultural measures proof of changes only in relation to the management plan (allowable cut) In order to improve this calculation, a calculatory approach for a better periodic performance assessment was developed by Jöbstl (e.g. 2000b, 2000c) starting from balance sheet and income statement. A model for improving the economic performance account by avoiding an assessment of forest assets could look as follows (Figure 3). Starting from the profit and loss and the cost center accounts with adjustment to allowable cut, further steps are taken to analyze the silvicultural measures (planned and actual), assess in detail the deviations of actual harvest from the allowable cut, record and assess other aspects such as damage, and describe non-market services. Finally, a medium-term analysis of success is carried out together with the next forest inventory. Short-term performance accounting Short-term performance accounting comprises advancing from the allowable cut method the assessment of the following components: Deviation of allowable from actual cut sub-divided into tree species, assortments, logging sites, etc. Deviation of planned and actual silvicultural measures Changes in the state of young stands and tending areas Damages by calamities and game Maintenance of forest roads and buildings Effects of allowable cut on forest assets Loss of timber production due to hunting, recreation, etc. To eliminate or separate the influence of fluctuations in market prices standard prices and standard costs are used. Expenditures and receipts from infrastructural (non-timber) services are separated by proper cost center accounting and adequately loaded with overhead costs. Losses and damages caused by calamities, game, and the provision of infrastructural services are calculated on the basis of opportunity costs. Techniques to estimate the value of non-market goods and forest services are difficult to apply and in their current form usually not useful at the enterprise level.
10 Seite 14 Medium-term performance analysis In combination with the forest inventory a comparison of the states of the forest (actual state t o - actual state t 1 ) and further analyses can be carried out (Figure 4). Figure 4: Medium-term performance analysis concept outline Abbildung 4: Grundschema der mittelfristigen Erfolgsanalyse The process concept for medium-term performance analysis is essentially based on the fundamental ideas of an actual-actual- and a target-actualcomparison as well as an analysis of deviations and causes. It comprises the following components (Jöbstl, 1996): 1. Comparison of two consecutive inventories (Actual Actual; Target Actual) 2. Analysis of the past medium-term planning period period analysis (control of plan execution and analysis of financial results) 3. Medium-term plan assessment and long-term development preview (forecasting) Preconditions for this approach are a purpose-oriented design of the forest inventory, derived from a carefully created evaluation model, and the determination of the requirements to be covered by book-keeping (recording of physical and financial quantities).
11 Forest assets and environmental benefits in management accounting Seite 15 The results of the analyses are a catalogue of physical and monetary characteristics of the forest state and the periodic results (absolute, relative and differential figures). Their combination allows an assessment of the valuecreating effects of the expired period. As far as possible and reasonable, the physical data will be complemented by monetary values. This approach is supported by a set of calculation and development simulation models. Future perspective (Jöbstl and Karisch, 2001) A possible future solution for the continuous internal control of forest assets changes has been developed by Karisch (2003) a forest stand data base with annual updating of forest inventory data. Combined with planactual comparisons for harvesting and tending, simulation of forest stand development as well as monetary valuations the annual observation of forest assets development should be enabled. Environmental accounting Whereas on the international level, several guidelines/proposals to adjust the national accounts in order to provide data on the real social costs and benefits of forestry for society were provided (SNA, SEEA, EEAF) (see paper Lange and Peyron, 2005) there are only few proposals for the enterprise level in forestry, namely: Merlo s step-wise approach to enterprise environmental accounting (Merlo, 1996; Merlo and Jöbstl, 1999) Merlo s approach to environmental accounting on the enterprise level in forestry and agriculture (Table 1) starts with conventional financial statements: balance sheet, profit and loss account of the forest enterprise following conventional accounting principles. In a second step it separates environmental/recreational activities from conventional ones, i.e. agricultural products and timber from recreational environmental services. In the third step it outlines near market values as perceived by the entrepreneurs (changes in growing stock, risks due to natural hazards, ) and in the last step it aims at incorporating non-market benefits and costs (externalities), or, at least, providing a framework for their incorporation, as far as they can be shown in monetary terms, or by other means. Satellite accounts and addenda including physical/biological aspects can therefore be used.
12 Seite 16 Table 1: Merlo s step-wise approach to enterprise environmental accounting Tabelle 1: Merlo s schrittweiser Ansatz für ein betriebliches Umweltrechnungswesen Steps or levels Items included in the financial statement Accounting objectives Type of profit and loss 1 Financial receipts and expenditures Private Financial profit and loss 2 Financial receipts and expenditures separated according to ordinary and environmental activities 3 Incorporation of non-monetary costs and benefits concerning the enterprise alone (hidden values) 4 Incorporation of non-monetary costs and benefits concerning the society as a whole Private with separation of ordinary and environmental activities Private with consideration of hidden (environmental) costs and benefits Public Financial profit and loss separate between ordinary and environmental activities Financial profit and loss plus non-monetary private profit and loss Social profit welfare Jöbstl s improved short-term performance accounting (Merlo and Jöbstl, 1999; Jöbstl, 2000c) This approach is similar to step 1-3 of Merlo s approach, but works without monetary evaluation of NMB and infrastructural services. However, a quantitative and qualitative description of environmentally relevant facilities and services of the forest holding is proposed to be presented in a separate sheet (headers in Table 2). Table 2: Headers of a catalogue of environmentally and socially relevant characteristics Tabelle 2: Gliederung des Kataloges umwelt- und sozialrelevanter Charakteristika General characteristics of the forest estate Forest roads and buildings Management activities in current period Marketable non-timber production and services Protection, recreation and welfare activities and facilities Employment Negative external effects
13 Forest assets and environmental benefits in management accounting Seite 17 Sustainability reporting Several publicly owned enterprises, e.g. the Austrian federal forest estate, are concerned with the elaboration and publication of so called Environmental Performance Reports, which have recently been expanded to Sustainability Reports, including different aspects of sustainable forest management (SFM). 4 Results and conclusions Finally, it has to be admitted that the traditional accounting system is not even able to provide sufficient information for the Sustainable Timber Yield Management and that adequate further developments with regard to forest resources are needed. The profit & loss and management performance figures shown by financial accounting are incorrect or misleading, therefore useless for assessing sustainability. While financial accounting hardly contributes to forest management, a well developed cost accounting system, however, is an important aid to continually supervise and control the costs; examine efficiency in individual areas, projects and processes; supervise the processes and results by comparing actual and target values and interfirm comparisons; guiding management and, consequently, guaranteeing sustainability. Thus, it serves to support the achievement of the sustainability goals but not to measure sustainability, because cost accounting does not consider the changes in forest assets either and does, therefore, not permit a correct performance and profit and loss accounting. The traditional accounting system cannot contribute to the new major challenges of SFM such as recording other forest services apart from providing information about expenses, costs and direct revenues. Therefore, it needs to be complemented by new approaches: For forest assets valuation, balance approaches und calculatory approaches are under discussion. Whereas balance approaches are primarily discussed for enterprises quoted on the stock exchange, for joint stock companies and for state-owned enterprises, smaller enterprises should consider calculatory approaches. Forest assets and non-market services are ideally described in annexes without burdening the accounts. In this context, forest inventory plays a central role. Currently, there is a lack of data, especially of those that allow a monetary assessment. Forest
14 Seite 18 inventories are planned inadequately. More intellectual input is needed. However, it is a fact that data collection and processing are expensive and not feasible for small enterprises. Models and calculation aids are missing. Financing the further development of existing models has a very low priority in practice, since they do not seem to be indispensable for the current management. Only very few enterprises try to determine the changes in forest assets, most enterprises do not consider this important or interesting, partly because it is expensive and complicated, and partly because they do not want to know about the facts. Nevertheless, further efforts are necessary, since the provision of information about the state of the forest, forest services and economic outcomes relevant for sustainability is the manager s duty, whereas the stakeholder needs to go and get the information. Calculatory methods and sustainability reports are most likely the solutions in the future. References Borchers, J. (2000) Überlegungen zur Einbindung des aufstockenden Holzes in den Jahresabschluss von Forstbetrieben vor dem Hintergrund des Paradigmenwechsels internationaler Bilanzierungskonventionen. In: Jöbstl, H.A. (ed.), pp Herbohn, K. (2009) A preliminary investigation of the reporting of forest assets under International Financial Reporting Standards. Austrian Journal of Forest Science 126(1/2): Innes, J.L., Edwards, I.K. and Wilford, D.J. (eds.) (2005) Forests in the Balance: Linking Tradition and Technology, XXII. IUFRO World Congress, August 2005, Brisbane, Australia. International Forestry Review 7(5), 414 p. IAS Plus (2005) IFRS. IUFRO (1966) Kontenrahmen für Forstbetriebe. Accounting Systems for Forestry Enterprises. Plans comptables pour entreprises forestières. Munich, 116 p. Jöbstl, H.A. (1996) Medium-Term Performance Analysis in Forest Enterprises - A Calculatory Approach. The Finnish Journal of Business Economics 45(1): Jöbstl, H.A. (ed.) (2000a) Waldvermögensbewertung - Forstliche Erfolgsrechnung. FOWI-Berichte, 15, Eigenverlag, Universität für Bodenkultur Wien, 178 p. Jöbstl, H.A. (2000b) Grundprobleme der Waldvermögensbewertung und forstlichen Erfolgsrechnung. In: Jöbstl, H.A. (ed.), pp
15 Forest assets and environmental benefits in management accounting Seite 19 Jöbstl, H.A. (2000c) Verbesserte Erfolgsrechnung unter Einbeziehung der Waldvermögensänderungen und der Umweltleistungen der Forstbetriebe. In: Jöbstl, H.A. (ed.), pp Jöbstl, H.A. and Hogg, J.N. (1998) On the State of Forestry Accounting in Some European Countries. Actes et Communications, No. 17, INRA, Paris, pp Jöbstl, H.A. and Karisch, G. (2001) Waldvermögensbewertung für Zwecke der forstlichen Erfolgsrechnung Forst und Holz 56(23/24): Karisch, G. (2003) Berücksichtigung des Waldvermögens im forstlichen Rechnungswesen. FOWI-Berichte 16. Eigenverlag Universität für Bodenkultur, Wien, 200 p. Lange, G.-M. and Peyron, J.-L. (2005) Environmental, social and economic accounting for forestry at national and international levels. In: Innes et al. (eds.), 299. Merlo, M. (1996) Non-Market environmental values in forest management accounting. The Finnish Journal of Business Economics 45(1): Merlo, M. and Jöbstl, H.A. (1999) Incorporating non-market outputs into the accounting systems of publicly and privately-owned forest enterprises: an operative stepwise approach. In: Roper, C.S. and Park, A. (eds.), The Living Forest - Non-Market Benefits of Forestry. Proceedings of an International Symposium on the Non-market Benefits of Forests, Edinburgh, June 1996, The Stationery Office, London, pp Müller, D.M. (2000) Bilanzierung des Waldvermögens im betrieblichen Rechnungswesen. Schriften zur Forstökonomie, Band 21, Sauerländer, Frankfurt am Main, 267 p. Penttinen, M., Latukka, A., Meriläinen, H. and Salminen, O. (2004) IAS fair value and forest evaluation on farm forestry. In: Pajuoja, H. and Karppinen, H. (eds.), Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Vantaa, Finland, 12th - 15th May, Scandinavian Forest Economics 40: Author:, Professor for Business Management of the forest sector, BOKU-University Vienna, Feistmantel straße 4, 1180 Vienna, Austria,