Accounting for how, when and where water is used is critical to properly managing the precious resource, write Associate Professor Keryn Chalmers CPA and Professor Jayne M. Godfrey FCPA.
From health, hygiene and horticulture to wealth, wellbeing and viticulture, the fabric of Australia's social, environmental and economic life depends upon water.
Not surprisingly, accounting for how, when and where water is used is critical to properly managing the precious resource. The National Water Initiative (NWI) is a comprehensive strategy to improve water management in Australia. Water accounting goes to the heart of that initiative.
Water accounting is vital to decisions that will ensure that our water resources are managed in a sustainable way. It has the potential to help transform water policy and the water industry by improving the nature and integrity of data underpinning decision making.
So, what is water accounting? Consistent with many definitions of financial accounting, water accounting can be regarded as a systematic pro-cess of identifying, measuring, monitoring and communicating information about water-related transactions, transformations and events to allow informed judgements and decisions about the allocation of scarce resources.
An emerging discipline, water accounting is central to knowing about water sources (for example, rainfall and desalinated water), water stocks (surface and groundwater), atmospheric water interchanges (evaporation and transpiration) and water flows (water distributions for household, industrial, environmental and irrigation uses).
Under the joint Commonwealth and State Government National Water Initiative, responsibility for developing water accounting standards resides with the Water Accounting Development Committee (WADC).
The WADC is entrusted with developing standards that support water management decision making and the evaluation of that decision making, in turn supporting public and investor confidence in the amount and price of water being traded, extracted for consumptive use, and recovered and managed for environmental and other public benefit outcomes.
The WADC, constituted in 2007, comprises experts from fields including accounting, hydrology, geology, water management, farming and other areas of stakeholder interest.
The WADC will establish water standards for entities to collect, record, measure, disclose and present information about water resources so users can confidently understand and evaluate the economic, social and environmental effects of water resource transactions, transformations and events.
The existence and application of national standards for measuring, metering, and monitoring including knowing the degree of accuracy of any measurement system will be critical in developing nationally compatible water accounting systems.
The WADC aims to work towards developing water accounting standards that are consistent with Australian Equivalents to International Financial Reporting Standards (AIFRS).
In developing standards to achieve these goals, the WADC is adopting a two-pronged approach, recognising its three-year establishment and the need to promulgate useful standards during that period. The WADC also recognises the need to leave a framework for future water accounting standards development. In the short term, the WADC will address gaps in reporting to improve data and reporting quality.
These gaps include requirements to disclose volumes and values of water held by water authorities for particular purposes, their encumbrances and environmental consequences of water trade.
In the longer term, the WADC will develop and apply a water accounting conceptual framework to provide the basis for ensuring consistency of reports, defence against bias in standards and reporting, and to facilitate relevance, timeliness, comparability and neutrality of data.
The conceptual framework
A conceptual framework for water accounting will enable a consistent and logical approach to water accounting standard setting. It will assist the WADC in setting sound standards, and provide consistent terminology and a set of common premises from which discussions of specific water accounting problems can emanate.
Formulating water accounting standards around concepts articulated in the framework will enhance the credibility of water reports because the standards will be more internally consistent. This facilitates understanding of water reports by users, preparers applying the standards and auditors who examine the water reports.
Not dissimilar to the accounting conceptual framework, the conceptual framework for water accounting will comprise the nature and scope of water accounting, the recognition and measurement of the elements disclosed in water accounting reports and compliance, and assurance of information contained in water accounting reports.
In understanding the role of the WADC it is important to understand the nature of the water accounting conceptual framework that is currently being developed. This framework builds from, and extends, the financial accounting framework that has underpinned financial reports for at least two decades.
The key difference from the financial reporting framework is that the water accounting framework has multiple dimensions economic, social, environmental and physical.
The structure described for a financial reporting conceptual framework may be applied to monitoring and reporting quantitative and qualitative information related to water.
Importantly, the development of the water accounting conceptual framework may be able to progress beyond that of the conceptual framework for financial reporting.
While considerable progress has been made on the conceptual framework for accounting, the framework remains incomplete. In particular, no statement of accounting concept has been developed to deal with measurement issues.
Further, some criticise the conceptual framework scope for being limited to providing principles for the recognition and reporting of economic transactions that can be measured in monetary terms.
In developing the water accounting conceptual framework, attention will be paid to social and environmental issues in addition to economic issues. Also, the issue of measuring and reporting on water activities will not be confined to monetary measures.
Accordingly, this project may inform the development of financial reporting, given that it will embrace social and environmental reporting and non-monetary measurement techniques. The financial reporting conceptual framework will be developed into a multi-dimensional framework that has physical, environmental, social and economic facets covered by statements of water accounting concepts.
While the water accounting conceptual framework is still being developed, it is likely that the objective of water reports will be to provide information for users who are unable to command special-purpose water reports.
However, the concepts and standards being developed by the WADC will also be applicable to special-purpose water reports. For example, it is expected that they will assist water pricing authorities as identifiable users of either general purpose water reports or specific--purpose water reports. Given that water is a precious resource, numerous stakeholder groups can be identified.
Consistent with financial accounting, an appropriate categorisation of users may be: water resource and infrastructure providers such as water authorities, the financial sector and the natural environment; recipients of water and water services such as agriculture, industries and households; and agencies with a regulatory or overseeing function including government author-ities and policy makers.
Each of these user categories will have different information needs, and it will be important for the WADC to identify and cater to the information needs of each.
Issues to be addressed in the development of the conceptual framework for water accounting are likely to parallel financial reporting deliberations. For example, the accounting profession is debating Australia's preservation of the reporting entity concept given the recent IASB-proposed IFRS for small and medium-size entities.
Inevitably, similar deliberations will ensue when determining the entities that need to prepare water accounting reports in compliance with water accounting standards.
Water reporting entities are likely to include institutions responsible for water policy, management and planning, and institutions responsible for service delivery.
However, there will be some elements in water accounts that are useful in decision making that are not controlled by any institutions such as rainfall and river flows.
These elements will only be captured in water reports prepared using a physical, rather than institutional, boundary. Physical water entities identified include groundwater provinces, delivery systems, river basins and trading zones.
The accuracy of data
Water accounting can only be as good as the quality of the data it uses, and Australia will not always be able to achieve complete accuracy in water measurement. Similar to financial accounting, water accounting will most likely involve multiple measurement bases. At present, measurement of some water sources, water stocks, atmospheric water interchanges and water flows does occur.
Water sources such as rainfall are measured on a daily basis using gauges across Australia. Some water stocks can be quantified and reported at a given point in time in a similar manner to assets in a balance sheet.
The volume of water held in major storages is measured (usually daily) using a stagevolume relationship by the water authorities responsible for their management. The flow of water in rivers and channels is also monitored.usually in megalitres per day.
However, there are few examples in Australia where the actual volume of water held in a river or channel is estimated. The storage volume of farm dams at any given time is currently not measured, modelled or estimated, although techniques for doing so do exist in some states. The water volume in aquifers is based on the porosity of the aquifer, which is determined using field tests covering a limited sample and extrapolated to a larger geographical region.
Atmospheric water interchanges such as evaporation and transpiration can be estimated for major water storages using the evaporation measured at a nearby gauge and the surface area of the water body or using the residual term in the water balance of the storage. For example, evaporation = change in volume + rainfall + inflows outflows.
Water authorities report water extraction as measured by rated structures, formulae based on gate openings, ultrasonic devices and dethridge wheels. Rather than being supplied by a water authority, consumers may extract water directly from a water source, such as a farm dam, river or creek, or groundwater. While these extractions are mostly unmetered, estimates of usage can be made on water use based on licensed volumes, average water use, modelling of crop water requirements or survey.
Sinclair Knight Merz (2006) report that almost all water delivery is metered and used to bill customers for their water use. A further issue that is likely to result in the recognition of assets and liabilities on balance sheets as a consequence of the conceptual framework approach is water accounting entitlements and their trading.
Water reports, prepared in accordance with water accounting standards, will be a key tool in providing relevant and faithfully represented information useful for making and evaluating economic, social and environmental assessments of water policies, water management, water allocations and water delivery.
In particular, water accounting is likely to make a significant contribution to water markets in general, by providing cost and/or value information to assist in economic decisions and trade-offs between economic and environmental or social considerations for water policy, management, planning, allocations and delivery. It will also provide environmental and resource information to facilitate incorporating environmental and social externalities into pricing and allocation decisions.
The WADC will work collaboratively with the AASB and is not a competitor in the accounting standards-setting arena. Established liaison arrangements already ensure that regular communication occurs between the two bodies.
Of particular importance to the relationship is the role of WADC in expediting the development of standards specifically dedicated to water accounting during a period of enormous and urgent need for such guidance. These standards will be developed according to a water accounting conceptual framework consistent with that of the AASB, thus contributing to the objectives of both bodies.
Disclaimer: The views expressed in this article are those of the authors, and not necessarily the views of any organisations with which they are affiliated.
About the authors
Associate Professor Keryn Chalmers CPA is associate dean (research-led teaching) for the faculty of business and economics, and deputy head (financial accounting and auditing) in the department of accounting and finance at Monash University. She is a director of the Accounting and Finance Association of Australia and New Zealand, has served on CPA Australia committees, and is involved in major projects developing a conceptual framework for water accounting.
Professor Jayne M. Godfrey FCPA is a member of the Water Accounting Development Committee. She is deputy dean (research) for the faculty of business and economics, and vice-president of the academic board at Monash University. She is a former divisional president of CPA Australia, and has served on CPA Australia committees. She also served on the Australian Accounting Standards Board for five years.
