## I nternalization of environmental liability into business accounting

In order to extend environmental conscious business activities while realizing sound economic development in the future, promoting the improvement of accounting standards related to the environment are important in business accounting.

A new accounting system related to this issue will start from FY2010 and will be applied to all listed companies. Listed companies will be obliged to post fixed assets, such as land and buildings they possess into their accounts upon the removal of their tangible fixed assets in the future, according to the "Accounting Standards for Asset Retirement Obligations" (ASBJ Statement No.18) announced on March 31, 2008 by the Accounting Standards Board of Japan, and its implementation. Asset Retirement Obligation (ARO) includes costs of removal and disposal of pollution that generated from past business activities before fixed assets were removed. That means companies will account the ARO, including environmental costs for the future (the so-called "Environmental Liability"), in their financial reports in advance, in order to understand the total cost in the future and to allocate these as a depreciation expense in each quarter.

Therefore, the system functions to urge environmental conscious business activities, such as preventing environmental pollution beforehand, when companies set their major management policies. The introduction of the system is expected to promote preventive measures against pollution and early appropriate management, and will lead to curb unnecessary works in each company by recognizing the environmental burden as costs.

This ARO is closely related to concrete legal systems in the environmental sector, including measures such as handling and disposal of asbestos materials—stipulated in the prevention of health impairment due to asbestos, based on the provision of the Industrial Safety and Health Act (Act No.57 of 1972) and the Enforcement Order of the Industrial Safety and Health Act (Cabinet Order No.318 of 1972), the proper disposal of polychlorinated biphenyl (PCB) stipulated in the Law concerning Special Measures for Promotion of Proper Treatment of PCB Wastes (Law No.65 of 2001, hereinafter referred to as "PCB Special Measures Law") and the examination of the specific facilities at the abolished time—stipulated in the Soil Contamination Countermeasures Law. As removal or containment of Japan's environmental pollution on fixed assets is considered to be in the range of several tens of trillion yen in total, changes of the accounting system that will order companies to register partial costs of removing such pollution in the balance sheets will greatly impact the economy and business activities.

One of the points to be noted for promoting companies' environmental measures, under this systemic revision, is that not all of the costs on environmental measures will be posted as ARO. From such awareness of the issues, the EU for example is advancing consideration toward describing environmental liabilities in detail. Some advanced companies in Japan as well, are in the trend of recognizing overall environmental liabilities.

Image of a Balance Sheet Incorporating ARO

Assets	Liabilities
Current assets	Current liabilitiesNotes and accounts payable tradeShort-term loans payableAllowance for doubtful accounts
Fixed assetsTangible assetsBuildings and structuresMachinery and toolsLandAccumulated depreciation	Asset Retirement Obligation (ARO)Others current liabilitiesLong-term liabilitiesCorporate bondsReserve for retirement benefitsReserve for special repairsAsset Retirement Obligation (ARO)Others long-term liabilitiesShareholders equityTotal shareholders equity
Total Assets	Total liabilities and shareholders equity

Source: Compiled by the Ministry of the Environment from the Accounting Standards for Asset Retirement Obligations and its Implementation

## Comparison of Profits and Losses Calculation around the Implementation of the System

Source: Compiled by the Ministry of the Environment from the Accounting Standards for Asset Retirement Obligations and its Implementation