Australia leads water reporting initiative 1

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1 1 Australia leads water reporting initiative 1 Professor Jayne M Godfrey Professor of Financial Accounting, Monash University Member, Water Accounting Standards Board Disclaimer: The views expressed in this article are those of the author and not necessarily those of Monash University, the Water Accounting Standards Board, or any other organisation with which she is associated. When the full impact of Australia's water crisis became known, accounting and water experts joined forces to create a new discipline to distinguish the truths, lies, errors and uncertainties in managing the world s most precious resource. In a world-leading, critical component of Australia's multi-billion dollar water reform package, they created the discipline of water accounting. A water accounting conceptual framework has been written and an exposure draft on the preparation and presentation of a general purpose water accounting report has been published. Australia's approach is being evaluated internationally as well as nationally. Water accounting reports and their assurance can play a vital role in facilitating economic, social and environmental decisions based upon assessments of water policies, water management, water allocations and water delivery. With policies such as water allocation and water pricing likely to be informed by water accounting, much is at stake for many stakeholders. General purpose water accounting is a method for accounting for water and water rights that has been developed by Australia s Water Accounting Standards Board. This is a method that accountants should recognise for its analogy with general purpose financial reporting. In the Exposure Draft of Australian Water Accounting Standard 1 The Preparation and Presentation of General Purpose Water Accounting Reports (ED AWAS 1), water accounting is defined to be a systematic process of identifying, recognising, quantifying, reporting, and assuring information about water, rights or other claims to water, obligations to deliver water or rights or other claims to water. As the output of general purpose water accounting, general purpose water accounting reports (GPWAR) are analogous to general purpose financial reports (GPFR) in concept and in structure. They are designed to provide information about water that is useful to report users who are unable to otherwise command the information for themselves. 1 This speech was presented in the Water accounting panel discussion held in Melbourne on Wednesday, 27 October This panel was hosted by The Institute, the Accounting and Finance Association of Australia and New Zealand (AFAANZ).

2 2 GPWAR include a Statement of Physical Flows, akin to the Cash Flow Statement, which shows how holdings of water moved during the reporting period. They also include accruals-based statements corresponding to the balance sheet and statement of comprehensive income: the Statement of Water Assets and Water Liabilities and the Statement of Changes in Water Assets and Water Liabilities. The Statement of Water Assets and Water Liabilities reports water and rights and other entitlements to water as water assets. It also reports water liabilities, which are obligations to provide either water or water rights or other entitlements to other parties. The Statement of Changes in Water Assets and Water Liabilities shows movements in water assets and water liabilities during the reporting period. In addition, a GPWAR includes an independent attestation that the statements have been prepared and presented according to relevant standards; a contextual statement describing the physical and administrative aspects of the water report entity; and an accountability statement by those charged with governance, confirming that the GPWAR has been prepared and presented in accordance with relevant standards. To understand the content and presentation of GPWAR, visit the Bureau of Meteorology website: The reports look very much like financial reports, but with volumetric rather than financial measurement, and a focus on water and not other assets and liabilities. Also, because GPWAR classification should be based upon user information needs, it can relate to factors such as water location (e.g., different storages systems within a community), water quality (e.g., potable or non-potable or degrees of salinity) or water risk (e.g., if a firm has multiple operations that are differentially water-intensive, the classification within GPWAR might separately classify according to the nature of the operations). Why water accounting is important in Australia In the last decade, there has been no issue more important to Australia than water - its protection and its distribution. Australia is particularly vulnerable to water scarcity because it is the driest inhabited continent in the world, with significant rainfall variability: seasonally; yearly and across the continent. Australia also has the highest per capita water use. Intense recent drought and the 2010 release of the Guide to the Proposed Murray-Darling Basin Plan have ensured that water management and governance remain highly charged emotional and political issues in Australia. How much water is available in the Murray Darling Basin? How much is available in Melbourne dams? Brisbane dams? Sydney storages? Other parts of Australia? Where has it been sourced? How has it been managed and

3 3 used? Answers to these questions will affect water policies, including policies relating to water allocations and pricing. These policies will have significant repercussions for the environment and for the lives of many. Addressing these questions sensibly requires information. In turn, crucial to the quality of that information is the role and quality of water accounting. Internationally, Australia is taking the lead in developing a system of water accounting directed towards providing high quality, consistent and comparable information to provide transparent accountability and to inform water accounting report users decisions. Developing ED AWAS 1, Exposure Draft of Australian Water Accounting Standard 1 The Preparation and Presentation of General Purpose Water Accounting Reports The catalyst for Australia s approach to general purpose water accounting was the National Water Initiative, the national plan for water management and governance throughout Australia. This plan was signed up to by the Commonwealth, State and Territory governments between 2004 and 2006, and in 2007 a Water Accounting Development Committee (WADC) was formed to start developing water accounting standards. One of the first items on the WADC agenda was to commission Associate Professor Brad Potter to undertake a study to determine the characteristics that information users would expect water accounting to deliver. The characteristics include the following: Decision Usefulness; a disciplined accounting approach to recording and reporting water information; standards to be based upon the approach of generally accepted financial accounting standards; consistent and comparable reporting formats; qualitative characteristics of relevance, reliability, understandability, comparability and credibility; and assurance. About the same time, the WADC also commissioned Professor Keryn Chalmers, Associate Professor Brad Potter and me to develop a draft Water Accounting Conceptual Framework. Let us now fast-forward to 2009 and In 2010, under the Water Act 2007 the Bureau of Meteorology is responsible for issuing standards in relation to water accounting. Its advisory board, the Water Accounting Standards Board (WASB), is an independent expert advisory board to the Bureau of Meteorology, charged with developing those water accounting standards. The WASB is the successor to the WADC which was formed in The WASB has five members who are drawn from accounting discipline and water related disciplines; two have prior accounting standard-setting experience. The WASB approved the Water Accounting Conceptual Framework, Water Accounting Conceptual Framework for the Preparation and Presentation of General Purpose Water Accounting Reports (WACF) in In 2010, it also

4 4 approved the exposure draft of Australia s first comprehensive Australian Water Accounting Standard (ED AWAS 1), which was released by the Bureau of Meteorology in October It is important to note that no work commenced on ED AWAS 1 preparation until the Water Accounting Conceptual Framework was completed. As such, ED AWAS 1 is underpinned by, and consistent with, a complete Water Accounting Conceptual Framework (WACF). The WASB goal was always to first establish the theoretical, or conceptual, framework to ensure that standards are cohesive and integrated. As such, a key advantage of water accounting standard setting relative to financial accounting standard setting is that, despite being developed centuries after financial reporting, general purpose water accounting has a huge advantage over financial reporting. This advantage means that water accounting can develop faster, more efficiently and more rigorously. That advantage is a complete conceptual framework. Between the Water Accounting Conceptual Framework and ED AWAS 1, was an intermediate document called the Preliminary Australian Water Accounting Standard this was used for consultative purposes and to provide guidance to participants in methods pilots, testing the approach that WASB advocated. During the process, the WASB engaged Ernst & Young to assist in the technical work of developing ED AWAS 1. The development of ED AWAS 1 has been a highly collaborative effort between people with backgrounds in government, the private sector, chartered accounting, water management, accounting standard-setting, and academe. It is also the product of extensive stakeholder consultation with both water and accounting organisations, practitioners and academics, including the Institute. As with the Preliminary Australian Water Accounting Standard, ED AWAS 1 includes model reports to guide users in preparing water accounting reports for different types of water report entities. Role of general purpose water accounting As mentioned, ED AWAS 1 describes general purpose water accounting as a systematic process of identifying, recognising, quantifying, reporting and assuring information about water, rights or other claims to water, and about obligations to deliver water or water rights or claims to other parties. The objective of general purpose water accounting is to assist in meeting users information needs, where the users are otherwise unable to command the information they need. Included in the envisaged group of users are water users; water market investors, traders and brokers; environmental organisations; auditors, analysts, investors, financiers, local governments, researchers, planners and policy formulators.

5 5 Users decisions are unlikely to be only about water. Instead, they may include economic decisions such as whether to invest in a company that is exposed to water supply fluctuations and other water risks such as pricing or contamination. Alternatively, they might be environmental decisions such as how much water can be traded from a river system without affecting environmental flows. Even social decisions are anticipated, such as a community s decision regarding the preservation of lakes or pools for social recreational purposes. At a higher level, water accounting will no doubt inform water allocation and pricing policies and practices. Water accounting in Australia and overseas Australia is leading the world in relation to a user-needs approach to water accounting. Feedback is currently being sought in relation to ED AWAS 1, with a view to it feeding into Australian Water Accounting Standard 1, which will be published once organisations have had time to develop appropriate information systems. Also, the WASB is commencing a project in conjunction with the Auditing and Assurance Standards Board to develop an exposure draft relating to the audit and assurance of GPWAR. This will ultimately become the second Australian Water Accounting Standard. At the same time, the Bureau of Meteorology is preparing the first National Water Account, based upon the principles of the Water Accounting Conceptual Framework, and ED AWAS 1. Furthermore, some organisations are adopting ED AWAS 1 principles and practices already in anticipation of benefits to them and their stakeholders. International developments Internationally, Australia s particular brand of water accounting has attracted interest and support. Together with the Australian Research Council, the Institute and CPA Australia are partners to an accounting research project investigating international best practice in water accounting and the roles that water accounting can play in resolving local, national and international issues. As part of that project, in September 2010, international leaders in financial accounting, water accounting and water management participated in a water accounting conference which will result in the publication of a book on water accounting. Participants debated the role that water accounting can play, as a rigorous, consistent and transparent principle-based reporting approach. Roles include conflict mitigation and dispute resolution within and across state and national boundaries. At the extreme, this refers to mitigation and resolution of what some argue are the greatest threats to national and international security: water wars.

6 6 If the same rigorous approach to identifying, measuring and reporting water balances and trans-border flows, rights to water and obligations to deliver water is adopted and understood by parties engaged in transactions that have potential to generate conflict, the shared understanding reduces information asymmetry. In turn, this produces clarity in relation to the exercise of property rights as well as in relation to social and equity impacts of water movements and transactions such as the impact of toxic mudslides from one country contaminating major waterways such as the Danube. Accountability is more transparent. The role of water accounting in protecting the environment for future generations (through the establishment of an intergenerational planetary trust ) was also investigated, as was its benefits to mining companies seeking to publicly demonstrate the responsibility of their water management. Internationally, a range of methods of recording or reporting water information can be labeled water accounting, and the conference considered water accounting approaches. One was the Water Footprint which aims to measure how much water is directly or indirectly consumed in producing particular products. Another was the UN System of Environmental-Economic Accounting for Water (SEEAW). This system records information about water in a manner similar to the way the National Accounts record information about financial transactions. GPWAR will not resolve the water crises of the world, just as GPFR did not solve the Global Financial Crisis. However, as with financial GPFR, GPWAR benefits as a general decision-making tool are clear in comparison with other forms of water accounting that serve important, but usually more specialised purposes. This is particularly because of the GPWAR focus on communication and serving user information needs. The future of GPWAR: engaging academics, government, business and industry As a new and emerging discipline that involves accounting and water-related disciplines, there is much scope for academics, government, business and industry to work together to ensure that water accounting developments, which are leading the world, continue to do so... and in the right direction The sorts of issues that will need to be addressed if the discipline is to be developed to its potential include the following: What political and other influences will affect processes and outcomes of water accounting standard setting? What will be the impact on GPWAR preparation costs of a single, consistent national approach? What are the economic and environmental and social costs and benefits of water accounting standards?

7 7 When are alternative water accounting approaches relevant to different issues? What will be the effect of GPWAR on the following: Government decisions regarding allocation and pricing policies? Water authority decisions about water trading? Federal funding for States and Territories water management? Investor assessments regarding investment risk because of water dependence of particular corporations (volume or quality)?: Public assessment of government power, ability and will in managing water? Operating practices in water-intensive industries? > Movement to more drought resistant crops? > Reduced water use by hospitals (sanitation)? > Reduced water use by manufacturing (eg beverages, food products, paper, etc.)? Will there be developments in the accuracy and integrity of quantification approaches? What are the benefits to voluntary adoption of GPWAR and voluntary audit of GPWAR? How can water accounting provide input to financial reporting? (e.g., valuation of water-related infrastructure; assessment of going concern for water-dependent firms; etc?) Should water be reported as an asset in GPFR, and if so, at what value? Conclusion Water is an essential resource for all individuals and all organisations. With competition for water growing, the need to account for how it is sourced and distributed will only increase. Water accounting has grown out of a thirst for information to provide accountability and to assist in decision-making. It is important to acknowledge that on its own, water accounting will not resolve any water crisis. It is a decision-making tool, not a solution. However, it can play an incredibly important part. After all, good decisions are usually underpinned by good information.