Commission Recommendation of 30 May 2001 on the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies (notified under document number C(2001) 1495)
Date: 2001-05-30
Institutions: European Commission
Subjects: accounting, consolidated account, environmental policy, exchange of information, organisation, report

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Official Journal of the European Communities

L 156/33

COMMISSION

COMMISSION RECOMMENDATION

of 30 May 2001

on the recognition, measurement and disclosure of environmental issues in the annual accounts
and annual reports of companies

(notified under document number C(2001) 1495)

(2001/453/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community and in particular Article 211 EC,

Having regard to the fourth Council Directive 78/660/EEC of
25 July 1978 based on Article 54(3)(g) of the Treaty on the
annual accounts of certain types of companies (1), as last
amended by Directive 1999/60/EC (2),

Having regard to the seventh Council Directive 83/349/EEC of
13 June 1983 based on Article 54(3)(g) of the Treaty on
consolidated accounts (3), as last amended by Directive 90/
605/EEC (4),

Whereas:

(1)

(2)

In 1992 the Commission published its fifth action
programme on the environment ‘Towards sustainability’
(COM(92)23) (5). Among a range of proposals in the
area of environmental protection,
it provides for a
Community initiative in the area of accounting. This
initiative should relate primarily to the ways and means
used by companies
to report on financial aspects
relating to the environment. An enhanced attention to
financial aspects could contribute to achieving the goals
of the programme; ensuring that environmental expen-
ditures and risks are taken into account could increase
the company's awareness of environmental
In
2001 the Commission has adopted a communication
concerning the sixth action plan for the environment
(COM(2001)31 final of 24 January 2001).

issues.

The Amsterdam Treaty recognised that a key element for
promoting sustainable development (Article 6 of the EC
Treaty) is the principle of the integration of environ-
mental requirements into other policies. In view of this
objective,
the Cardiff European Council endorsed a
strategy for the integration of environmental objectives

(1) OJ L 222, 14.8.1978, p. 11.
(2) OJ L 162, 26.6.1999, p. 65.
(3) OJ L 193, 18.7.1983, p. 1.
(4) OJ L 317, 16.11.1990, p. 60.
(5) OJ C 138, 17.5.1993. Programme as last revised by the European
and the Council by Decision No 2179/98/EC of

Parliament
24.9.1998 (OJ L 275, 10.10.1998).

(3)

(4)

into all Community policies and actions. This strategy
was confirmed and further developed by the Vienna
European Council
invited the Internal Market
Council
to consider how such integration could be
achieved in this particular domain.

that

In 1999 the Commission adopted a communication on
the single market and the environment (COM(99)263 of
8 June 1999) which is intended to contribute to making
environmental and single market policies mutually.
supportive and reinforcing, whilst at
the same time
developing synergies between them. This Communi-
cation identifies specific single market policy areas in
which the Commission will strive for a closer integration
with environmental policy, and lays down a series of
further measures, among which to issue a recommenda-
tion on environmental issues in financial reporting. Such
recommendation is also a direct
the
November 1995 Accounting advisory forum paper on
environmental issues in financial reporting (Document
XV/6004/94).

follow-up of

different

including

stakeholders,

The lack of explicit rules has contributed to a situation
regulatory
where
authorities, investors, financial analysts and the public in
general may consider the environmental
information
disclosed by companies to be either inadequate or unre-
liable. Investors need to know how companies deal with
issues. Regulatory authorities have an
environmental
interest in monitoring the application of environmental
regulations and the associated costs. Nonetheless, volun-
tary disclosure of environmental data in the annual
accounts and annual
still
running at low levels, even though it is often perceived
that enterprises face increasing environmental costs for
pollution prevention and clean-up equipment and for
waste clean-up and monitoring systems,
in particular
those enterprises operating in sectors that have signifi-
cant impacts on the environment.

reports of companies

is

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(5)

(6)

In the absence of harmonised authoritative guidelines in
relation to environmental issues and financial reporting,
comparability between companies becomes difficult.
When companies do disclose environmental information
it is often the case that the value of the information is
seriously handicapped by the absence of a common and
recognised set of disclosures that includes the necessary
definitions and concepts with regard to environmental
issues. The information is often disclosed in a variety of
non-harmonised ways
and/or
reporting periods, rather than being presented in an
integrated and consistent manner throughout the annual
accounts and the annual report.

companies

among

The costs of collecting and reporting environmental data
and the sensitiveness or confidentiality that might be
associated, in certain cases, with such information are
frequently regarded as deterrent factors for disclosure of
environmental information in the financial statements of
companies. Nevertheless, these arguments do not elimi-
nate the need to stimulate the provision of environ-
mental information. Users of financial statements need
information about the impact of environmental risks
and liabilities on the financial position of the company,
and about the company's attitude towards the environ-
ment and the enterprise's environmental performance to
the extent that they may have consequences on the
financial health of the company.

(7) While the European legislative framework for financial
reporting does not explicitly Address Environmental
issues, the general principles and provisions laid down in
the Fourth and Seventh Company Law Directives apply
(Directives 78/660/EEC and 83/349/EEC, respectively).

(8)

(9)

As part of its 1995 accounting strategy (1) the Commis-
sion seeks to integrate European harmonisation in the
accounting field within the broader context of inter-
national accounting harmonisation. Consequently, the
Commission has lent its support to the work of the
International Accounting Standards Committee (IASC)
which, in turn, set as its objective the development of a
core set of high quality international accounting stan-
dards (IASs). The Commission is committed to work
towards maintaining consistency between the European
Union financial reporting, framework and international
accounting standards developed by the IASC.

The IASC has published several international accounting
standards that lay down provisions and accounting prin-
ciples that are relevant when dealing with environmental
issues. Nevertheless,
there is little guidance directly
related to such matters and no specific international
accounting standard solely focused on environmental
issues.

(1) Accounting harmonisation: A new strategy vis-à-vis international
Commission

Communication

from

the

harmonisation.
(COM(95)508), 14 November 1995.

(10)

(11)

The recommendation has been prepared with a view to
support policies linked to the single market and to
contribute to ensuring that users of financial statements
receive meaningful and comparable information with
regard to environmental issues, thereby reinforcing the
Community initiatives in the area of environmental
protection. The Commission is of the opinion that there
is a justified need to facilitate further harmonisation on
what to disclose in the annual accounts and annual
reports of enterprises in the European Union as far as
environmental matters are concerned. The quantity,
transparency and comparability of environmental data
flowing through the annual accounts and annual reports
of companies must also be increased. In order to achieve
these objectives, and given the increasing importance
attached to environmental issues in the European Union,
the Commission aims at clarifying existing rules and
providing more specific guidance on the subjects of
recognition, measurement and disclosure of environ-
mental issues in the annual accounts and annual reports
of companies.

The recommendation recognises that there has been a
gradual development of separate environmental reports,
particularly by companies that operate in sectors with
significant environmental impacts. It is not a purpose of
this recommendation to identify the reasons underlying
this trend. However, this recommendation recognises
that different groups of stakeholders have different infor-
mation needs or rank them differently. Separate environ-
mental reports satisfy the information needs of stake-
holder groups that are only partially met by the infor-
mation provided in the annual accounts and annual
reports of enterprises. Therefore, the aim should be to
make separate environmental reports and the annual
accounts and annual reports more consistent, cohesive
and closely associated. The purpose of this recommenda-
tion is to promote this aim by ensuring that environ-
mental disclosures are incorporated in the annual
accounts and annual reports in a way that complements
the more detailed and wide-ranging separate environ-
mental reports.

(12) Appropriate disclosures are considered a key factor that
facilitates transparency of information. Disclosures are
appropriate where they affect the user's understanding of
the financial statements. This recommendation is not
intended to establish unjustified burdensome obligations
on the preparers of financial statements. The recommen-
dation aims at providing comprehensive guidance in the
area of disclosure, and identifies relevant disclosures that
allow for comparability and consistency of the environ-
mental
information presented. This is particularly the
case for the disclosure in the notes to the accounts of
environmental expenditures either charged to the profit
and loss account or capitalised, as well as the expendi-
fines and penalties for
tures incurred as a result of

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(13)

(14)

(15)

regulations and
non-compliance with environmental
compensations to third parties, paragraph 6 of section 4
of the Annex to this recommendation. The disclosure in
the annual
report of appropriate information with
regard to environmental performance, where relevant to
the financial performance or position of the enterprise
or its development, is specifically addressed paragraph 2
of section 4 of the Annex to this recommendation.

For the recommendations on disclosures to be effective
they need to be supplemented with workable definitions
of the concepts covered. In order to meet this objective
the recommendation includes a section on definitions.

to environmental

issues are recommended in order

The recommendation aims to present guidance on the
application of the provisions of the fourth and seventh
(Directives 78/660/EEC and 83/349/EEC,
Directives
respectively) with respect
issues.
Therefore, certain accounting treatments with regard to
environmental
to
enhance the provision of more meaningful information
by the preparers of
the financial statements. While
encouraging particular solutions, this approach is not
aimed at eliminating the possibility of applying altern-
ative treatments where permitted by the Directives. In
the light of this, account is also taken of the Commis-
sion's 1997 interpretative communication concerning
certain Articles of the fourth and seventh Directives on
accounting (1) and of the November 1995 Accounting
advisory forum paper on environmental issues in finan-
cial reporting (Document XV/6004/94).

international accounting standards (IAS)

The recommendation takes as a source of reference
several
that
have been published by the International Accounting
Standards Committee (IASC) which are of specific rele-
vance to environmental issues, in particular IAS 36 on
impairment of assets, IAS 37 on provisions, contingent
liabilities and contingent assets and IAS 38 on intangible
assets. The provisions contained in this recommendation
are intended to be consistent with these International
Accounting Standards, unless stated otherwise.

(16)

The recommendation is also influenced by a statement
of position on Accounting and financial reporting for
environmental costs and liabilities prepared by the

United Nations Working Group on International Stan-
dards of Accounting and Reporting (2).

(17) As described in recitals 14 to 16 above, in response to
the need to integrate environmental considerations into
financial reporting, some guidelines have been developed
at Community and international level. This recommen-
dation builds upon such developments and at the same
time seeks to provide a suitable Community framework
for further improvements. The Commission believes that
to meet the objectives of the recommendation, action by
Member States is necessary. The Commission encourages
and leaves scope to Member States for measures at
national
to
improve the present situation are likely to continue at
international

level. Moreover, discussions on ways

level,

HEREBY RECOMMENDS:

That the Member States:

1. Ensure that for accounting periods commencing within 12
months from the date of adoption of this recommendation
and for all future accounting periods, companies covered by
the fourth and seventh Company Law Directives (Directives
78/660/EEC and 83/349/EEC respectively) apply the provi-
sions contained in the Annex to this recommendation in the
preparation of the annual and consolidated accounts and
the annual report and consolidated annual report.

2. Take the appropriate measures to promote the application

of this recommendation.

3. Notify the Commission of the measures taken.

Done at Brussels, 30 May 2001.

For the Commission

Frederik BOLKESTEIN

Member of the Commission

(1) OJ C 143, of 21.1.1998.

(2) ISAR — Td/B/COM.2/ISAR/3, 12 March 1998.

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ANNEX

1. SCOPE

1. The recommendation is limited to information provided in the annual and consolidated accounts and in the annual
reports and consolidated annual reports of companies with regard to environmental issues. It does not deal with
special purpose reporting, such as environmental reports, except where it is considered appropriate to relate annual
accounts, annual reports and separate environmental reports with a view to making their information content
consistent.

2. The recommendation covers requirements for recognition, measurement and disclosure of environmental expendi-
tures, environmental liabilities and risks and related assets that arise from transactions and events that affect, or are
likely to affect, the financial position and results of the reporting entity.

3. The recommendation also identifies the type of environmental information that is appropriate to be disclosed in the
annual and consolidated accounts and/or the annual and consolidated annual report with regard to the company's
attitude towards the environment and the enterprise's environmental performance, to the extent that they may have
consequences on the financial position of the company. The recommendation applies to both individual accounts and
In the case of consolidated accounts, disclosures should be related to the group. The
consolidated accounts.
requirements for recognition and measurement should be consistently applied to all consolidated entities.

4. The recommendation applies to all companies covered by the fourth and seventh Company Law Directives, having
due regard to the exemptions that Member States are permitted to introduce for small and medium-sized companies
in accordance with Articles 11 and 27 of the fourth Directive.

5. Although the specific accounting requirements for banks, other financial institutions and insurance companies are
institutions and
issues are not different for these types of

dealt with in separate directives (1), this recommendation also applies to banks, other financial
insurance companies, as the financial
companies.

implications of environmental

2. DEFINITIONS

1.

2.

For the purposes of this recommendation the term environment refers to the natural physical surroundings and
includes air, water,

land, flora, fauna and non-renewable resources such as fossil fuels and minerals.

Environmental expenditure includes the costs of steps taken by an undertaking or on its behalf by others to prevent,
reduce or repair damage to the environment which results from its operating activities. These costs include, amongst
others, the disposal and avoidance of waste, the protection of soil and of surface water and groundwater, the
protection of clean air and climate, noise reduction, and the protection of biodiversity and landscape. Only additional
identifiable costs that are primarily intended to prevent, reduce or repair damage to the environment should be
included. Costs that may influence favourably the environment but whose primary purpose is to respond to other
needs, for instance to increase profitability, health and safety at the workplace, safe use of the company's products or
production efficiency, should be excluded. Where it is not possible to isolate separately the amount of the additional
costs from other costs in which it may be integrated, it can be estimated in so far as the resulting amount fulfils the
condition to be primarily intended to prevent, reduce or repair damage to the environment.

3. Costs incurred as a result of fines, or penalties for noncompliance with environmental regulation, and compensation
to third parties as a result of loss or injury caused by past environmental pollution are excluded from this definition,
as discussed in paragraph 6(f) of section 4 of this Annex. Whilst related to the impact of the company's operations
on the environment, these costs do not prevent, reduce or repair damage to the environment.

4.

Furthermore, the Statistical Office of the European Union (Eurostat) has produced a series of detailed definitions of
expenditures by environmental domain, which are included in the implementation documents of the Council
Regulation (EC, Euratom) No 58/97 of 20 December 1996 concerning structural business statistics (2). These
to regular updating, are the basis for statistical reporting requirements on environmental
definitions, subject
protection expenditures in the European Union. When using the general definition in paragraph 2, it is recommended
that companies take into consideration these detailed definitions for making the disclosures for environmental
expenditures stated in section 4 of this Annex to the extent that they are consistent with the recognition and
measurement requirements stated in section 3.

(1) Council Directive of 8 December (86/635/EEC) on the annual accounts and consolidated accounts of banks and other financial
institutions (OJ L 372, 31.12.1986, p. 1 to 17); Council Directive of 19 December 1991 (91/674/EEC) on the annual and consoli-
dated accounts of insurance undertakings (OJ L 374, 31.12.1991, p. 7 to 31).

(2) OJ L 14, 17.1.1997, p. 1. See also implementation document ENV/96/10c. The European Classification of Environmental Protection
Activities (CEPA) distinguishes between the following environmental domains: waste management; protection of ambient air and
climate; waste water management; protection of soil and groundwater; protection of biodiversity and landscape; other environmental
protection activities.

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3. RECOGNITION AND MEASUREMENT

Recognition of environmental liabilities

1. An environmental liability is recognised when it is probable that an outflow of resources embodying economic
benefits will result from the settlement of a present obligation of an environmental nature that arose from past
events, and the amount at which the settlement will take place can be measured reliably. The nature of this obligation
must be clearly defined and may be of two types:

— legal or contractual: the enterprise has a legal or contractual obligation to prevent, reduce or repair environmental

damage, or

— constructive: a constructive obligation arises from the enterprise's own actions when the enterprise has committed
itself to prevent, reduce or repair environmental damage and has no discretion to avoid such action because, on
the basis of published statements of policy or intention or by an established pattern of past practice of the
enterprise, the enterprise has indicated to third parties that it will accept the responsibility to prevent, reduce or
repair environmental damage.

2.

3.

Past or current industry practice result in a constructive obligation for the enterprise only to the extent that
management has no discretion to avoid action. It will only occur when the enterprise has accepted the responsibility
to prevent, reduce or repair environmental damage by a published specific statement or by an established pattern of
past practice.

Environmental damage which may be related to the enterprise or may have been caused by the enterprise but for
which there is no legal, contractual or constructive obligation to rectify the damage's extent, does not qualify to be
recognised as an environmental liability in the enterprise's annual accounts in accordance with paragraphs 1 and 2.
This does not prejudice the application of the criteria set out in paragraph 5 for contingent environmental liabilities.

4. An environmental liability is recognised when a reliable estimate of the costs derived from the obligation can be
made. If, at the date of the balance sheet, there is an obligation the nature of which is clearly defined and which is
likely to give rise to an outflow of resources embodying economic benefits, but uncertain as to the amount or as to
the date, then a provision should be recognised, provided that a reliable estimate can be made of the amount of the
obligation. This treatment is in accordance with Articles 20(1) (1) and 31(1)(bb) of the fourth Directive. Uncertainties
as to the date or as to the amount relate, for example, to evolving clean-up technologies and the extent and nature of
the clean up required. In the rare circumstances where a reliable estimate of the costs is not possible, the liability
should not be recognised. It should be regarded as a contingent liability, as mentioned in paragraph 26.

Contingent environmental

liabilities

5. A contingent liability should not be recognised in the balance sheet. If there is a possibility, which is less than
probable, that the damage has to be rectified in the future but the obligation has yet to be confirmed by the
occurrence of an uncertain event, a contingent liability should be disclosed in the notes to the annual accounts. If it is
a remote possibility that the enterprise will have to incur an environmental expenditure or such expenditure will not
be material, disclosure of such contingent liability is not required.

Offsetting of liabilities and expected recoveries

6. Where the enterprise expects that some or all of the expenditures related to an environmental

liability will be
reimbursed from another party, the reimbursement should be recognised only when it is virtually certain that it will
be received if the enterprise settles the obligation.

7. An expected recovery from a third party should not be offset against the environmental

liability. It should be
separately shown as an asset in the balance sheet, at an amount that does not exceed the amount of the related
provision. It can be offset against the environmental liability only when there is a legal right for such netting that the
enterprise intends to use. When, on the basis of this provision, netting is appropriate, the full amount of the liability
and the expected reimbursement should be disclosed in the notes.

8.

Expected proceeds from the sale of related property should not be offset against an environmental liability or taken
into account in measuring a provision, even if such expected disposal is closely linked to the event giving rise to the
provision.

9. Normally the enterprise is liable for the whole environmental liability. If not, only the enterprise's portion would be

recorded as an environmental

liability.

(1) Where, in accordance with paragraph 20 of the Commission's 1998 interpretative communication concerning certain Articles of the
fourth and seventh Council Directives on accounting, Member States have implemented the option contained in Article 20(2) of the
fourth Directive,

it is also applicable to environmental charges.

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Recognition of environmental expenditure

10. Environmental expenditures should be recognised as an expense in the period in which they are incurred unless they

meet the criteria to be recognised as an asset set out in paragraph 12.

11. Environmental expenditures that relate to damage that has occurred in a prior period do not qualify as prior period

adjustments but should be expensed in the current period,

i.e. the period in which they are recognised.

Capitalisation of environmental expenditure

12. Environmental expenditure may be capitalised if it has been incurred to prevent or reduce future damage or conserve
resources, brings future economic benefits and satisfies the condition laid down in Article 15(2) of the fourth
Directive.

13. Environmental expenditures incurred to prevent or reduce future damage or conserve resources can only qualify for
recognition as an asset if, in accordance with Article 15(2) of the fourth Directive, they are intended for use on a
continuing basis for the purpose of the undertaking's activities and if, in addition, one of the following criteria is met:

(a) the costs relate to anticipated economic benefits that are expected to flow to the enterprise and extend the life,
increase the capacity or improve the safety or efficiency of other assets owned by the enterprise (in excess of their
originally assessed standard of performance); or

(b) the costs reduce or prevent environmental contamination that is likely to occur as a result of future operations of

the enterprise.

14. If the criteria for recognition as an asset laid down in paragraphs 12 and 13 have not been met, environmental
expenditure should be charged to the profit and loss account as incurred. If they have been met, environmental
expenditure should be capitalised and amortised to the profit and loss account over the current and appropriate
future periods,

i.e. systematically over their expected useful economic life.

15. Environmental expenditure should not be capitalised but charged to the profit and loss account if it does not give rise
to future economic benefits. This situation occurs when environmental expenditure relates to past or current activities
and to the restoration of the environment to its pre-contamination state (e.g. treatment of waste, clean-up costs
relating to current operating activities, clean-up of damage incurred in prior periods, environmental administration
costs or environmental audits.

16. Items such as plant and machinery may be acquired for environmental reasons, for example, technical installations
for pollution control or pollution prevention in order to comply with environmental laws or regulations. If they meet
the criteria for recognition as an asset laid down in paragraphs 12 and 13, they must be capitalised.

17. There are cases when no anticipated future economic benefits result from the environmental expenditure itself, but
rather future benefits are received from another asset that is used in the enterprise's operations. When the
environmental expenditure that is recognised as an asset is related to another existing asset, it should be included as
an integral part of that asset, and should not be recognised separately.

18. There can be rights or items of a similar nature acquired in connection with the impact of the operations of the
enterprise on the environment (for example patents, licences, pollution permits, and emission rights). If, in accord-
ance with Articles 9(C)(I)(2)(a) and 10(C)(I)(2)(a) of the fourth Directive, they have been acquired for valuable
consideration and, in addition, they meet the criteria for recognition as an asset laid down in paragraphs 12 and 13,
they must be capitalised and amortised systematically over their expected useful economic lives. If not, they should be
charged to the profit and loss account as incurred.

Asset impairment

19. Environmental developments or factors may cause an existing fixed asset to be impaired, for example in the case of
site contamination. A value adjustment should be made if the amount recoverable from the use of the site has
declined below its carrying amount. This situation should,
in the context of Article 35(1)(c)(bb) of the fourth
Directive, be regarded as permanent. The amount of this value adjustment should be charged to the profit and loss
account. In accordance with Article 20(3) of the fourth Directive, provisions for liabilities and charges, as defined in
paragraph 4, cannot be set against the values of assets.

20. Where in accordance with paragraph 17, environmental expenditure is recognised as an integral part of another asset,
the combined asset should at each balance sheet date be tested for its recoverability and, where appropriate, written
down to its recoverable amount.

21. If the carrying amount of an asset already takes account of a loss in economic benefits because of environmental
reasons, the subsequent expenditure to restore the future economic benefits to its original standard of performance
can be capitalised, to the extent that the resulting carrying amount does not exceed the recoverable amount of the
asset.

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Measurement of environmental liabilities

22. An environmental liability is recognised, when a reliable estimate of the expenditure to settle the obligation can be

made.

23. The amount of the liability should be the best estimate of the expenditure required to settle the present obligation at
the balance sheet date, based on the existing situation and taking into account future developments both technical
and in legislation,

in so far as their occurrence is probable to occur.

24. The amount should be an estimate of the full amount of the liability irrespective of the date on which the activity is
ceased or the liability is due to be settled. A gradual build-up of the full amount of the liability over the period of the
enterprise's operations is allowed under Article 20(1) of the fourth Directive.

25. In estimating the amount of an environmental liability, the following rules apply. If the liability being measured
involves different possible outcomes, according to paragraph 23, the best estimate should be accounted for. In the
extremely rare cases where it is not possible to determine the best estimate of the liability with sufficient reliability,
that liability should be regarded as a contingent liability and, therefore, its existence should be disclosed in the notes
to the annual accounts. In addition, disclosure should be given of the reasons why no reliable estimate should be
made.

26. Furthermore, for measuring the amount of an environmental liability, the following should be taken into considera-

tion:

— incremental direct costs of the remedial effort,

— cost of compensation and benefits for those employees who are expected to devote a significant amount of time

directly to the restoration effort,

— post-remedial monitoring requirements,

— advances in technology, so long as it is probable that the governmental authority will approve the technology.

Provisions for site-restoration and dismantling costs

27. Expenditure relating to site restoration, removal of accumulated waste by-product, closure or removal of fixed assets,
that the company is under obligation to incur, should be recognised in accordance with the criteria laid down in
paragraphs 1 to 4. If these criteria are met, the obligation to incur the future expenditure must be accounted for as an
environmental

liability.

28. In accordance with paragraph 24, this environmental liability for site restoration, removal or closure should be
recognised at the date that the company's operations start and consequently the obligation arises. The recognition of
this liability should not be delayed until the activity is completed or the site is closed. Where this liability is
recognised, the estimated expenditure is included as part of the cost of the related asset that has to be dismantled and
removed. This capitalised expenditure is then depreciated as part of the depreciable amount of the related asset.
Additional damage could be caused during operations; the company's obligation to restore it arises when this
environmental damage occurs.

29. In accordance with International Accounting Standard 37, paragraph 14,

in the case of site-restoration and
dismantling costs of long-term operations, the accounting treatment laid down in paragraph 28 is the preferred
approach. This accounting treatment is anyway allowed on the basis of Article 20(1) of the fourth Directive together
with the gradual build-up of a provision for such costs which is the other option. The enterprise may recognise
long-term decommissioning costs over the period relating to the operations. In each reporting period a portion of the
costs is charged as an expense, with the resulting balance shown as a separate liability.

Discounting of long-term environmental

liabilities

30. For environmental

liabilities that will not be settled in the near future, measuring them at present value (i.e.
discounting) is allowed, but not required (1), if the obligation and the amount and timing of the payments are fixed or
can be reliably determined. Measuring at current cost (i.e. non-discounting estimated cost)
is also acceptable.
However, where the effect of the time value of money is material, it is a more appropriate treatment to measure
environmental

liabilities at present value.

31. The method chosen should be disclosed in the notes. The expected cost to be incurred should be based on a
site-specific plan for the clean-up and/or remedial treatment of the contamination. The amount and timing of the
payments should be based on objective and verifiable information.

32. The undiscounted estimated cash flows should be the estimated amounts expected to be paid at the dates of
settlement (including estimates of inflation) and should be computed using explicit assumptions derived from the
clean-up and/or remedial plan, such that a knowledgeable party could review the computation and concur with the
estimated cash flows.

(1) International accounting standard 37, paragraph 45, requires discounting where the effect of the time value of money is material.

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33. If an enterprise uses discounting in the measurement of its environmental liabilities this should be applied on a
consistent basis. Any asset, relating to the recovery of a portion or all of a liability that is measured on a discounted
basis, should also be discounted. In addition, if liabilities are measured on a discounted basis, the recoverable amount
of assets should also be measured on the basis of discounted cash flows.

34. Measuring at present value requires the determination of a discount rate and information about the factors that may
affect the timing and the amount of the estimated cash flows required. Moreover, the amount of the liability should
be reviewed each year and adjusted for any change in the assumptions.

4. DISCLOSURES

1.

Environmental issues should be disclosed to the extent that they are material to the financial performance or the
financial position of the reporting entity. Depending upon the item, disclosures should be included in the annual and
consolidated annual report or in the notes to the annual and consolidated accounts. Paragraphs 2, 5 and 6 deal with
the disclosure of items in the annual and consolidated annual report, or in the notes. Paragraphs 3 and 4 deal with
the presentation of items on the face of the balance sheet.

Disclosure in the annual and consolidated annual report

2. On the basis of the provisions laid down in Article 46(1) and (2) of the fourth Directive and Article 36(1) and (2) of
the seventh Directive on the contents of the annual and consolidated annual report of companies, where environ-
mental issues are relevant to the financial performance and position of the undertaking or its development, the
annual report should include a description of the respective issues and the undertaking's response thereto. This
information must provide a fair review of the development of the undertaking's business and position to the extent
issues can directly affect it. For this purpose, the following disclosures are recommended:
that environmental

(a) the policy and programmes that have been adopted by the enterprise in respect of environmental protection
measures, particularly in respect of pollution prevention. It is relevant for users of the annual report to be able to
ascertain to what extent environmental protection is an integral part of the company's policies and activities.
Where applicable, this may include reference to the adoption of an environmental protection system and required
compliance with a given set of associated standards or certifications;

(b) the improvements that have been made in key areas of environmental protection. This information is particularly
useful if, in an objective and transparent manner, it provides a record of the performance of the enterprise with
respect to a given quantified objective (for example emissions over the past five years) and reasons as to why
significant differences may have arisen;

(c) the extent to which environmental protection measures, owing to present legislation or resulting from change in
future legal requirements that have been substantially enacted, have been implemented or are in process of
implementation;

(d) where appropriate and relevant to the nature and size of the business operations of the company and to the types
information on the environmental performance of the

of environmental
enterprise: such as energy use, materials use, water use, emissions, waste disposals;

issues relevant to the enterprise,

This information could usefully be provided by means of quantitative eco-efficiency indicators and, where
relevant, detailed by business segment. It is particularly relevant to provide quantitative data, in absolute terms,
for emissions and consumption of energy, water and materials (1)
for the reporting period together with
comparative data for the previous reporting period. These figures should preferably be expressed in physical units
rather than in monetary terms; moreover, for a better understanding of their relative significance and evolution,
figures in monetary terms could be put in relation with items shown on the balance sheet or the profit and loss
account;

(e) if the company issues a separate environmental report that contains more detailed or additional quantitative or
qualitative environmental
information, a reference to this report. If the environmental report contains the
information mentioned in (d), a summary description of the issue and an indication that further relevant
information can be found in the environmental report could also be made. Information provided in a separate
environmental report should be consistent with any related information in the annual report and annual accounts
of the enterprise. If the environmental report has been subject to an external verification process, this should be
stated in the annual report. It is relevant to inform users of the annual report as to whether or not the
environmental report contains objective, externally verifiable data.

(1) The European Commission is one of the partners in the ‘Eco-efficiency indicators and reporting’ project being developed by the
World Business Council of Sustainable Development. This project aims at developing standardised eco-efficiency indicators, of which
the ‘core indicators’ are intended to be relevant to all enterprises.

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The scope and boundaries of the reporting entity should preferably be the same in both the annual report and the
separate environmental report. If not, they should be clearly stated in the environmental report so that it can be
identified to what extent it corresponds to the entity reporting in the annual report. Furthermore, the reporting
date and period of the separate environmental report should also preferably be the same as that of the annual
report.

Disclosure in the balance sheet

3.

4.

Provisions should be shown in the balance sheet under the caption ‘Other provisions’. In accordance with Article 4 of
the fourth Directive, a more detailed subdivision of the items prescribed in Articles 9, 10 and 23 to 26 for the layout
of the balance sheet and the profit and loss account is permitted provided that the layouts are complied with.
Member States may require such subdivisions.

If material, it is more appropriate to show environmental liabilities separately on the face of the balance sheet.
Otherwise, if material, they should be separately disclosed in the notes on the accounts, in accordance with Article 42
of the fourth Directive and Article 29(1) of the seventh Directive.

Disclosure in the notes to the annual and consolidated accounts

5.

In conformity with the provisions of the fourth and seventh Directives, the following information should be disclosed
in the notes:

(a) description of the valuation methods applied, and the methods applied in calculating the value adjustments, on
environmental issues as part of the disclosure required by Article 43(1)(1) of the fourth Directive and Article
34(1) of the seventh Directive;

(b) extraordinary environmental expenditures charged to the profit and loss account, in accordance with Article 29

of the fourth Directive and Article 17 of the seventh Directive;

(c) disclosure and details of the caption ‘Other provisions’, if not disclosed on the face of the balance sheet, in line

with paragraph 4;

(d) contingent environmental liabilities, in conformity with Article 43(1)(7) of the fourth Directive and Article 34(7)
of the seventh Directive, including narrative information in sufficient detail, so that the nature of the contingency
can be understood. If significant measurement uncertainties make it impossible to estimate the amount of an
environmental
liability, this fact together with the reasons therefor should be disclosed along with, where
possible, the range of possible outcomes.

6.

In addition to the requirements of the fourth and seventh Directives, the following disclosures should be provided in
the notes:

(a) for each material environmental liability, a description of its nature and an indication of the timing and terms of
settlement. An explanation of the damage and of the laws or regulations which require its remediation and the
restoring or preventive steps being taken or proposed. Where the nature and conditions of the items are
sufficiently similar this information could be disclosed in an aggregated manner. If the amount of costs is
estimated based on a range of amounts, a description of how the estimate was arrived at, with an indication of
any expected changes in the law or to existing technology that are reflected in the amounts provided for;

(b) where the present value method has been used and the effect of discounting is material, the undiscounted amount

of the liability and the discount rate used should be disclosed;

(c) in the case of long-term site-restoration, decommissioning and dismantling costs, the accounting policy. Where
the company uses a gradual build-up of a provision under paragraph 29 of section 3, the amount of the full
provision that would be required to cover all such long-term costs. The provisions 6(d) and 6(e), with regard to
disclosure of environmental expenditure charged to the profit and loss account and environmental expenditure
capitalised, should also be taken into consideration;

(d) the amount of environmental expenditure charged to the profit and loss account and the basis on which such
amounts are calculated. Where relevant, a subdivision of the items the enterprise has identified as environmental
expenditure, in a manner that is appropriate to the nature and size of the business operations of the company
and to the types of environmental issues relevant to the enterprise. To the extent that it is possible and relevant, a
breakdown of the expenditure by environmental domain as referred to in paragraph 4 of section 2 is appropriate;

(e) to the extent that it can be reliably estimated, the amount of environmental expenditure capitalised during the
reporting period. If applicable,
it should also be disclosed what part of the amount concerned relates to
expenditure aimed at removing pollutants after their creation, and what part represents the additional expenditure
to adapt the installation or the production process in order to generate less pollution (i.e. that relates to
technologies or practices for pollution prevention). To the extent that is possible and relevant, a breakdown of
capitalised expenditure by environmental domain as referred to in paragraph 4 of section 2 is appropriate;

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(f) where significant, costs incurred as a result of fines and penalties for non-compliance with environmental
regulations, and compensations paid to third parties, for example as a result of loss or injury caused by past
environmental pollution, should be disclosed separately, if not already separately disclosed as extraordinary items.
Whilst related to the impact of the company's operation on the environment, these costs do not prevent, reduce
or repair damage to the environment, therefore separate disclosure from environmental expenditures is appro-
priate;

(g) government incentives related to environmental protection received or entitled to by the company. The terms of
each item concerned, or where similar a summary of the conditions. The accounting treatment adopted should
also be disclosed.