Combining Environmental and Spatial Discount Rates for Valuation of Assets According to International Financial Reporting Standards

Open access

Abstract

Application of discount rate in finance and accounting is founded on the concept of time value of money. Discounted cash flow model is widely used for asset valuation under the International Financial Reporting Standards (in abbreviation, IFRS). The discount rate applied in valuation models normally is the best rate of return that investors would earn alternative investments. With emergence of ecological economics as a separate branch of economics, the concept of ecological (or in other words, environmental discount rate) has been elaborated. Muller (2013) in his paper ‘The Discounting Confusion: an Ecological Economics Perspective’, argues that traditional discounting can undermine long-term sustainability of the economy. In his work, Frank G. Muller considered adjusting the traditional discount rate in order to arrive at an environmental discount rate, which would help to ensure the sustainability of the economy. Hannon (2001) and Perrings (2001) in their paper ‘An Introduction to Spatial Discounting’ consider another variation of the discount rate - spatial discount rate. Spatial discount rate represents the rate at which the diffusion of environmental effects of economic activities is discounted over space. By February 2016, neither the application of environmental nor spatial discount rates under IFRS has been considered. The purpose of this paper is to analyse the implications that environmental and spatial discounting would have for the application of discounted cash flow model according to IFRS. The research methods applied are methods of economic analysis and synthesis.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Carpenter S.R. Brock W.A. & Ludwig D. (2005). Uncertainty in Discount Models and Environmental Accounting. Ecology and Society 10(2):13. [Accessed 16.02.2016]. Available from Internet: http://www.ecologyandsociety.org/vol10/iss2/art13/

  • Constanza R. Cumberland J. Daly H. Goodland R. & Norgaard R. (1997). An Introduction to Ecological Economics. Boca Raton FL: St. Lucie Press.

  • Daly J. & Farley H. (2004). Ecological Economics: Principles and Applications. Washington DC: Island Press.

  • Eckel L. Fortin S. Fischer K. (2003). The Choice of Discount Rate for External Reporting Purposes: Considerations for Standard Setting. Accounting Forum Vol. 27(1) 28-59.

  • Fisher I. (1906). The Nature of Capital and Income. New York: Macmillan.

  • Fisher R.A. (1930). The Genetical Theory of Natural Selection. Oxford: Clarendon Press.

  • Hampicke U. (2000). The Capacity to Solve Problems as Rationale for Inter-temporal Discounting. Draft paper.

  • Hannon B. (1973). The Structure of Ecosystems. Theoretical Biology (41) 535-546.

  • International Accounting Standards Board (2001). International Accounting Standard 36 “Impairment of Assets”. [Accessed 16.02.2016]. Available from Internet: http://eifrs.ifrs.org/eifrs/bnstandards/en/2015/ias36.pdf

  • International Accounting Standards Board (2010). The Conceptual Framework for Financial Reporting. [Accessed 16.02.2016]. Available from Internet: http://eifrs.ifrs.org/eifrs/bnstandards/en/2015/framework.pdf

  • Jaunzeme J. (2013). Starptautiskie finanšu pārskatu standarti. Ventspils: Ventspils Augstskola.

  • Muller F.G. (2013). The Discounting Confusion: An Ecological Economics Perspective. Economia Vol. XXXVI (71) 57-74.

  • Perrings C. & Hannon B. (2001). An Introduction to Spatial Discounting. Journal of Regional Science Vol. 41 (1) 23-38.

  • U.S. Department of the Inferior (2016). The Water Cycle. [Accessed 16.02.2016]. Available from Internet: https://en.wikipedia.org/wiki/Water_cycle

Search
Journal information
Cited By
Metrics
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 225 117 3
PDF Downloads 131 83 5