1. Energy efficiency – accounting and reporting considerations Module 2 INSTRUCTIONS This template is designed for projected presentations and printed handouts only. The template provides the option of either a grey or white background. How to change colour palette: Format > Slide Design > Color Schemes Apply to All Masters

2. Disclaimer This material has been developed as part of the UTS Business School and Ernst & Young ‘Leadership & Change for Energy Efficiency in Accounting & Management’ project. The project is supported by the NSW Office of Environment & Heritage as part of the Energy Efficiency Training Program. For more information on the project, please go to: http://www.business.uts.edu.au/energyefficiency/. This presentation is for educational purposes only, and does not contain specific or general advice. Please seek appropriate advice before making any financial decisions. 2

3. ► Introduction ► Sustainability – accounting and reporting ► Managing the carbon price impact ► Impact on treasury function ► Impact on finance function ► Tax implications ► Where to next? ► Sustainability and financial reporting ► Over to you...reflect and plan Agenda 3

4. Outline 4

5. ► Describe the drivers behind sustainability strategies and energy efficiency measures ► Describe the key features of the carbon scheme and identify whether their organisation is a liable entity or significantly impacted ► Identify methods to reduce costs associated with the carbon scheme ► Apply the available different accounting approaches to accounting for carbon ► Describe the key challenges for the various business functions of both accounting for carbon and energy efficiency projects implemented ► Identify best practices within sustainability reporting, current and future trends and developments within financial reporting ► Have a general awareness of the various voluntary and compulsory reporting schemes in operation impacting data collection and financial reporting Learning objectives for this module 5

6. ► What are some of the current issues you experience in accounting for sustainability/ energy efficiency measures within your organisation? ► What are some of the current issues you experience with reporting on sustainability/ energy efficiency measures within your organisation? Over to you 6

7. The sustainability pathway – two aspects of evaluating sustainability Understand what’s important to the business Social Set corporate goals Economic Environme ntal Stakeholders IssuesRisksOpportunitiesResponsibilities Determine Material aspects Set targets/milestones Set key performance indicators RespondInform Monitor Progress ReportDisclose Business value in recognising the material sustainability issues, and setting a strategy to respond Stakeholder value in the company reporting on their performance 7

8. Is there a link to Shareholder Value? Reduced regulatory intervention Enhanced reputation and brand Alliance with business partners Access to and lower cost of capital Attractive employer Cost savings Improved risk management Customer satisfaction and loyalty Better Access to Resources New business opportunities Shareholder Value CommunityMarketplace WorkplaceEnvironment Improved safety performance Improved productivity 8

9. Shareholders – a critical stakeholder Van Stadenet al. 2010. ‘Shareholders’ requirements for corporate environmental disclosures: A cross country comparison’. In The British Accounting Review. Vol 42. Iss. 4. Pp.227-240. 9 9

10. Climate Change – A Global Driver The Asia Pacific region contributes largely to global greenhouse gas (GHG) emissions, particularly China. Country targets to reduce emissions: ► China: 40% to 45% by 2020 (intensity basis on GDP) ► Indonesia: 26% to 41% by 2020 ► Papua New Guinea: 50% by 2030 ► Singapore: 16% by 2020 ► Thailand: 30% by 2020 (energy sector only) ► Australia: 5% to 25% by 2020 Companies across the Asia Pacific are seeking to capitalise on GHG reduction opportunities to demonstrate to stakeholders – including investors – that they are managing sustainability risks. Carbon Disclosure Project (CDP): Increasingly, companies are monitoring greenhouse gas emissions and disclosing their approach to managing climate risk through the CDP, which is accessed by investors and analysts globally. Over 3000 companies now report annually. 10

11. Managing carbon price impact 11

12. What we are going to cover.... ► Background of carbon scheme ► Are you liable? ► Impact on treasury function ► Impact on finance function ► Management accounts ► Financial accounts ► Tax implications ► Where to next? 12

13. ► Carbon price from 1 July 2012 fixed at $23 ► Growing at 2.5% real terms in 2013 and 2014 ($24.15 and $25.40) ► From 2015 a flexible price determined by market (cap and trade) ► Price floor established - $15 (growing) ► Price ceiling established - $20 above the international carbon price 13 Clean Energy carbon pricing system Core design elements

14. 14 Clean Energy carbon pricing system Core design elements (cont’) ► Liability determined per facility ► Over 25,000 tCO 2 e direct (scope 1) GHG emissions ► Permits (carbon units) auctioned by Government: ► 5% of liability can be met with units from the Carbon Farming Initiative ► No international permits during fixed price phase, but up to 50% after this ► Companies estimate and retire 75% of their liability by 15 June, with a ‘true-up’ on the following 1 February ► EITE (emissions intensive trade exposed) companies will receive free carbon units

15. Sector and industries impacted - examples Liable entitiesSignificantly impacted ► Steel making ► Aluminium smelting ► Electricity generation ► Water production ► Mining ► Waste ► Other industrial processes ► Manufacturing ► Retail ► Agriculture ► Financial services ► Insurance ► Transportation 15

16. 16 Determining liability

17. Managing your obligations 17

18. ► In your table groups, discuss how the carbon scheme will impact your organisation. ► As a group: ► Prepare a list of all the departments within your organisation you can see being impacted. ► Note which areas do you see most impact for a)cost rises b) cost savings? ► As part of the finance team, what opportunities do you see for driving down costs? ► Be prepared to share your ideas with the group Exercise 1: How will the carbon scheme impact aspects of your organisation? 18

19. Business implications 19 Supply chain Sustainability of business Pricing impact structures StrategyDesign product process Source materials Manufacture/ produce Sell Customer service Asset profitability M&A Carbon strategy /impact on business framework Fuel type mix Costs of raw materials Production efficiency Customer contract structures Brand strategy OTN dealings with customer Product innovation Funding Liquidity Functions Trading of permits Accounting policies Finance HRITProcurementLegalRegulatory Management of cash Abatement project modelling Tax implication DOA/ governance Reporting Capability and capacity Monitoring and reporting systems Contract management and strategy Credit assessment/ supplier viability Ownership of liability (JVs) Compliance reporting Reporting of liabilities Treasury Tax

20. Opportunities for driving down costs 20

21. Impact on operational functions 21

22. Impact on operational functions 22

23. Impact on treasury function ► Risk management policy ► Evaluate changed business and finance risk ► Considerations include: ► Risk appetite ► Overall risk management strategy ► Determining a mitigation strategy ► Building carbon risks into existing risk measurement methods 23

24. Impact on treasury function Cash and liquidity management ► Ability to forecast cash flow, working capital & liquidity requirements is key ► Liable entities: ► Potentially higher revenue ► Cost of purchase of Carbon units ► Liable and non-liable entities: ► Higher operating costs from cost pass through ► Impact on capital budgets 24

25. Impact on Finance function 25

26. Impact on finance function Financial accounting ► Current international practice ► AASB / IASB discussions ► Other implications 26

27. Accounting approaches - impact on net assets and net profit before income tax each accounting period 1 27 IFRIC 3 approach 2 Net liability approachGovernment grant approach Reimbursement rights method Carrying value method Reimbursement rights method Carrying value method Balance Sheet Asset -Purchased unitsCostMVCostMVCost -Free unitsDeemed costNominal amount MVDeemed cost Liability -Emission obligationMV of units (all) MV of units (purchased) 3 Cost of units (purchased) 3 MV of units (all)Cost of units (all) -Deferred income (government grant) Deemed cost – amortised 4 Nominal amount Deemed cost – amortised 4 Impact on net assetsYesNo Income Statement Revenue -Deferred income (government grant)Deemed costNominal amount Deemed cost -RevaluationNoYesNoYesNo ExpenseMV of units (all) MV of units (purchased) 3 Cost of units (purchased) 3 MV of units (all)Cost of units (all) Impact on net profit before income tax Cost of purchased units + effect of fluctuation in market price on liabilityCost of purchased units 1.Assuming financial year = compliance year (ie 30 June year end) and no settlement of obligation until following compliance year 2.Assuming entity does not apply revaluation model under AASB 138. 3.Only recognise liability when obligation exceeds units allocated for free, ie when required to purchase units to settle obligation. 4.Deferred income is recognised in income over the period of emissions consistent with the basis on which the expense is recognised, regardless of whether units are held or sold. Cost = market price of units at date of purchase Deemed cost = market price of units at date of receipt MV = market value of units at reporting date Nominal amount = (in Australia) zero http://www.ifrs.org/The+organisation/Members+of+the+IFRIC/About+the+IFRIC.htm

28. Entity A: ► Total emissions for the year: 30,000 tonnes of CO 2 -e ► Carbon units for the year (1 unit = 1 tonne of CO 2 -e) 28 Example Fact set Free unitsPurchased units Number of units20,00010,000 DateReceived beginning of year Purchased end of year FV at that date$15/unit$20/unit

29. IFRIC3 Example T-accounts end of year before settlement 29 Carbon unit Cash Loss Liability 500 (200) (600) 300 Net liability Reimbursement rights method Carbon unit Cash Loss Liability 200 (200) 200 Government grant Carrying value method Government grant Reimbursement right method Carbon unit Cash Loss Liability 500 (200) (500) 200 Carbon unit Cash Loss Liability 600 (200) (600) 200

30. AASB September and October meetings: ► Discussion on application of international practice in Australia ► Specific focus - accounting treatment during fixed price period ► Consideration – is unit financial instrument? ► Still under review by Board and no decisions made 30 AASB discussions

31. ► Emissions Trading Schemes currently inactive ► Options being discussed: ► Recognition of ► Purchased units - asset at fair values ► Free units - asset at fair values ► Liability: ► Obligation recognised for free units at fair value upon allocation ► Excess emissions with price input initially and subsequently measured at fair value; and recognition: ► Liability capped at quantity allocated until entity actually emits above allocated quantity; or ► Liability recognised for expected emissions throughout the compliance period 31 Future developments IASB project

32. Pre-effective date considerations: ► Impairment trigger at 31 Dec 2011 or 30 June 2012? ► Onerous contracts? Practical implications 1 July 2012 1 July 2015 Present Fixed price periodFlexible price period Other implications ► Impact on budgeting and forecasting ► Impact on inventory costing ► Carbon units acquired in business combination ► Accounting by brokers / traders ► Forward contracts for carbon units ► (income) tax consequences Practical implications 32

33. Impact on Regulatory Reporting 33

34. Impact on Regulatory Reporting ► Reporting Schemes ► NGERS ► EEO ► RET ► GGAS, ESS, VEET, etc. 34 Carbon pricing Treasury Tax Procurement HRLegal Regulatory IT Finance

35. Reporting Greenhouse Gas emissions NGERS Reporting Thresholds (www.climatechange.gov.au) 35

36. National Greenhouse and Energy System (NGERS) ► Now in fourth year of reporting ► Mandatory for companies that report on: ► energy consumed and energy produced ► scope 1 and 2 greenhouse gas emissions ► Based on invoices for electricity, gas, fossil fuels ► Calculate emissions for each ‘facility’ and each type of greenhouse gas for each facility expressed as tCO2-e. ► Department of Climate Change and Energy Efficiency audits and fines. ► NGER methodology underpins: ► Carbon Pricing Mechanism ► Government National Greenhouse Inventory ► National Carbon Offset Standard 36

37. Financial and NGERS reporting timelines 37

38. Energy Efficiency Opportunities (EEO) Act ► Requires businesses to identify, evaluate and report publicly on cost effective energy savings opportunities ► Mandatory for corporations that use more than 0.5 petajoules (PJ) of energy per year (45% of energy use in Australia) 38

39. National Carbon Offset Standard (NCOS) ► Voluntary offset market ► Sets minimum requirements for calculating, auditing and offsetting the carbon footprint of an organisation or product to achieve ‘carbon neutrality’. ► Provides guidance on what is a genuine voluntary offset ► Administered by Low Carbon Australia 39

40. Exercise 2: Data capture issues and solutions ► What information are you asked to provide for management in relation to NGERs or other sustainability reporting measures. What additional information do you foresee having to provide under the carbon scheme? ► What issues are associated with this? ► What can you suggest to overcome these issues? 40

41. Tax implications 41

42. Impact on tax function Tax implications and strategy ► Deductibility ► Timing of deduction ► Tax cost of EITE carbon units ► Import of international units 42

43. Impact on tax function Fuel and pass-through costs ► Effective carbon price on business use of fuels ► Reductions in fuel tax credits ► Reductions in the automatic remission or exemption of excise 43

44. Impact on tax function Restructures, grants, R&D and others ► Business restructures ► R&D incentive ► Grants and financial assistance ► Passing on carbon costs – experiences from GST ► Developing carbon compliance systems 44

45. Where to next? Quick 10 step implementation check-list for liable and impacted entities 45 Action to be taken 1.Establish a governance committee 2.Identify your obligations and develop systems for compliance 3.Review joint venture agreements 4.Determine asset valuations and perform impairment tests 5.Assess the impact from upstream suppliers 6.Develop strategy to pass carbon costs to customers 7.Develop your accounting treatment policy 8.Validate the quality of emissions data gathering and timing of carbon reporting 9.Develop MACC to assess short and long term investment strategies 10.Considering grant schemes if eligible

46. Resources ► Ernst & Young publications ► Accounting for a clean energy future ► Navigating the complexities of carbon pricing policy Key issues from the Australian Government’s Clean Energy Legislation Package ► Accounting for emissions reductions and other incentive schemes ► Mastering the Challenge – Practical IFRS guidance for power and utilities ► Ernst & Young’s International GAAP 2011 http://www.ey.com/AU/en/Services/Specialty-Services/Climate-Change-and- Sustainability-Services/The-business-of-climate-change---Carbon-pricing ► Institute of Chartered Accountants Australia publications ► Australia needs a consistent basis for the financial reporting of emission rights ► Australia’s Proposed Emissions Trading Scheme – The Tax Policy Dimension 46

47. Further resources available 47 Visit : www.ey.com/au www.ey.com/au

48. Sustainability and Financial Reporting 48

49. 49 Sustainability – Who values it, and how is it communicated? Sustainability: is creating long-term shareholder value by embracing opportunities and managing risks derived from social, environmental and economic factors. To know how to respond to sustainability and maximise value, businesses need to understand the external drivers related to sustainability and how this translates to their own business in terms of risks and opportunities. Number of Sustainability Reports published. Source: Corporate Register

50. ► Non-Financial or Sustainability Reporting: the practice of measuring, disclosing and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development ► Corporate Social Responsibility (CSR): the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large ► Triple bottom line: reporting on financial, environmental and social performance ► Environmental and Social Governance (ESG): focussing on those areas of sustainability not associated with financial performance, ESG is the oversight and corporate function for managing environmental and social impacts and opportunities. Key Sustainability Terms 50

51. A typical Sustainability Reporting Journey Include some disclosures on current performance in the Annual Report Produce a stand- alone Sustainability Report Increase reporting of sustainability performance 51

52. What are the global reporting trends? Trends in Asia Sustainability reports published from the Asian region have historically been from Japan. However, companies across the Asia pacific are increasingly reporting. The most significant growth in recent years has come from Chinese companies. ► Europe was the first to report ► Continual trend of increased reporting, particularly in Europe 52

53. The sustainability frameworks companies use The GRI framework is the most widely used frameworks globally. It provides guidance on indicators to be. Sector supplements for selected industries are provided in addition to the core guidelines ► Global Reporting Initiative (GRI-G3) ► AccountAbility’s Principles Standard (AA1000APS) ► Accounting for Sustainability’s Connected Reporting Framework ► Various industry-specific guidelines 53

54. GRI – Indicators that provide a framework for sustainability report content 54

55. More information on Sustainability Reporting ► The first and most widely adopted global framework for sustainability reporting. ► Benchmarking tool to build business strategy to incorporate corporate responsibility issues. ► Adoption is mostly by large companies. ► Measures the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies. ► Tracks the environmental, economic and social performance of Australian companies that lead their industry in terms of corporate sustainability. ► Global Reporting Initiative (GRI) www.globalreporting.org ► Corporate Responsibility Index (CRI) www.corporate-responsibility.com.au ► FTSE4GOOD www.ftse.com/Indices/FTSE4Good_Index_Series ► Dow Jones Sustainability Index (DJSI/AuSSI) www.aussi.net.au Sustainability reporting occurs in many different formats. Four of the world’s leading practice frameworks are: 55

56. Towards Integrated Reporting 56

57. Why is Integrated Reporting on the agenda? ► Financial crisis ► Focus on short-term profits and rewards irrespective of their long-term sustainability ► Demonstrated the need for capital market decision-making to reflect long- term considerations ► Called into question extent to which standard corporate reporting disclosures highlight systematic risks to business sufficiently ► Limitations of current reporting ► Do not fully consider the social, environmental and long-term economic context within which the business operates 57 Integrated reporting brings together data that is relevant to the performance and impact of a company in a way that creates a more profound and comprehensive picture of the risks and opportunities a company faces, specifically in the context of the drive towards a more sustainable global economy

58. Integrated Reporting – bringing together financial and non-financial disclosures ► Integrated Reporting is the combination of financial and non-financial reporting in a single document, either in place of, or additional to separate financial and sustainability reports. Integrated Report Governance Statement Annual Financial Statement Sustainability Report Financial Analysts Sustainability Analysts 58

59. How the IIRC proposes to address these issues ► The Discussion Paper Towards Integrated Reporting – Communicating Value in the 21st Century presents the rationale for Integrated Reporting ► Offers initial proposals for the development of an International Integrated Reporting Framework and outlines the next steps towards its creation and adoption ► Purpose is to prompt input from all those with a stake in better reporting, including producers and users of reports ► Integrated Reporting proposals were put forward to the G20 Finance Ministers meeting held in October 2011 59

60. Integrated Reporting ► The bringing together of financial and non-financial information for reporting is the future of company disclosures. ► South Africa are leading the way by mandating integrated reporting for all listed companies. The chart on the right shows what is required. 60

61. The Benefits of Integrated Reporting ► Emphasises an organisation's use of and dependence on different resources and relationships or “capitals” (financial, manufactured, human, intellectual, natural and social), and the organisation’s access to and impact on them 61

62. The Benefits (cont.) ► Results in a broader explanation of performance than traditional reporting ► Reporting this information is critical to: ► a meaningful assessment of the long-term viability of the organisation’s business model and strategy; ► meeting the information needs of investors and other stakeholders; and ► ultimately, the effective allocation of scarce resources. 62

63. The building blocks ► Five Guiding Principles underpin the preparation of an Integrated Report ► Strategic focus ► Connectivity of information ► Future orientation ► Responsiveness and stakeholder inclusiveness ► Conciseness, reliability and materiality 63

64. Key Content Elements ► Presentation of the Elements should make the interconnections between them apparent. ► Organisational overview and business model ► Operating context, including risks and opportunities ► Strategic objectives and strategies to achieve those objectives ► Governance and remuneration ► Performance ► Future outlook 64

65. Mandatory disclosures under the ASX ►Principles 7 of the Australian Stock Exchange (ASX) Corporate Governance Council’s Principles of good corporate governance and best practice recommendations for the disclosure of material business risks. ►“material business risks may include, (but are not limited to): operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks.” ►These requirements have recently been extended (3.2), to introduce a requirement for disclosure on gender diversity. ►Companies must make disclosure relating to a diversity policy which includes measurable objectives for achieving gender diversity. They must also disclose in their annual report their achievement against those objectives, as well as the proportion of women on the board, in senior management and employed throughout the whole organisation. 65

66. Report Assurance 66

67. Improved confidence through assurance Three ‘tiers’: ► Reasonable Assurance – like financial statement audit ► Limited Assurance – selected scope and more limited procedures ► Verification (not assurance) – sometimes referred to as agreed- upon-procedures Most commonly used standards: ► International Standard for Assurance Engagements (ISAE) 3000: ► Accountability’s AA1000 Assurance Standards (and its AA1000 Assurance Principles Standard) ► Mix of both 67

68. Trends in Assurance 68 ► Most companies that have assurance utilise the ISAE3000 standard ► The majority engage an assurance provider for limited assurance ► New ‘standards’ require recommendations to be included in the statements – but this has led to some confusion

69. Over to you...reflect and plan 69

70. Identify the desired business outcomes? Starting point for your Change Management activities: ► Identify the business outcomes desired from the project or the change. Current State Desired Future State Describe in terms of: ► Business KPIs ► Operational KPIs ► Behaviours 70

71. Thank you Module 2