Institutional determinants of carbon financial accounting practices

Abstract

This paper investigates how and why firms affected by Emissions Trading Schemes (ETSs) are financially accounting for carbon in a voluntary setting.

Using institutional theory, the authors seek to identify the determinants of a firm’s decision to adopt a particular carbon financial accounting practice. We identify the recognition and measurement practices for carbon-emission allowances using data gathered from the annual reports of ETS-affected firms in Australia. These practices are identified in the five stages of carbonemission allowance transactions, namely, when these are: (1) received for free, (2) purchased, (3) used, (4) sold and (5) surrendered.

Inconsistencies in carbon financial accounting practices are observed. The findings reveal that carbon-emission allowances are recorded as intangible assets, but most firms provide incomplete information on their carbon financial accounting practices. Firms also exhibit inconsistencies in specifying how they are ‘recognising’ and ‘measuring’ carbon-emission allowances. The results provide evidence of coercive (regulation) and mimetic (size, leverage and listing status) pressures being the main determinants of carbon financial accounting practice.

The findings will help accounting policy-makers in understanding how and why ETS-affected firms financially account for their carbon allowances. This can assist the development of a uniform carbon financial accounting guidance. Given the few studies in the field of financial accounting of carbon emissions under ETSs, this research will also give meaningful insights to academics and researchers.