I think the need for including negative values for some waste assets within accounting is self-evident. Every business needs to include its future costs within its accounting. I hope some with more accounting knowledge could provide a more detailed overview of the principles for this. But I do not think accounting is a solution, since bad actors do not do accounting.
In addition to what we know are future costs for treatment we should also consider the possibility that some of our usually valuable products actually may be hidden costs. In recent years one of the larger construction companies in the Stockholm area discovered that 500 000 tonnes of rock material contained too high levels of sulfur turning a valuable asset to a large future debt.
My conclusion is that we as providers of aggregates and recyclers of waste material might all benefit from a higher level of public traceability. Traceability (some sort of required registration for every transport) for waste materials but maybe also for products will cause a very small nuance to our business. But maybe could traceability weed out the criminals trying to game the waste industry by collecting the fee without ever planning to recycle the material?
When waste management business evolved from the need to dispose waste in a more controlled way the solution that ruled for several decades was landfilling. When you landfill (or as later, incinirate) you finalize the "value chain" of that material. This is a service you as a waste management company provide, and your cost of producing that service coincides with your income; no need to periodize anything.
In latter years, mainly due to regulations that prohibit landfilling, you need to pre-treat waste before landfilling, inciniration or use as "material recovery". By this you delay some of the expenditures you will have to dispose the waste.
To manage this in the account waste management companies started to balance some of the income as a future cost connected to your stock. This stock could be compared to a raw material stock; a material that will undergo a production process in order to become a final product (or in this case, a "finalized" waste).
The profit, however, is still accounted for when you receive your waste!
What if we apply industrial accounting to recycling?
When you produce products you also balance your raw material stock, BUT you do it not based on the future cost of producing your product, you do it based on the value you obtained it to, since this (normally) is the lowest value the material will have.
When you then process your material you add value to it, and in the end you will have a product in stock valued to its earned value. And when you then sell your product you hopefully can account for some profit (price - earned value).
The profit occurs when have disposed (sold) your material! Compare this to the waste management principle!
If we look at recycling procedure as a production process we find that it differ in some key aspects;
Profit occurs when you obtain your raw material
The obtained material is valued based on future value, not lowest value
Which are the effects of this accounting principles? lets think about that:
If you already have accounted for your profit, you will have less incentatives and less hurry to proceed with your production process; a risk that waste will be stored without action untill it becomes a sanitary and environmentally issue.
The focus will be to have as low cost as possible, instead of increase in value (focus on the starting poiny instead of end point)
If you want to sell your processed material it will be valued to high, since you already have accounted for your profit. This may lead to that recycled materials are regarded as more expensive than virgin alternatives.
In fact, in industrial accounting, it is not allowed to account for a higher value then the obtained value when you store your raw material. When you think about it it makes sense; Why should you be able to account for a profit just by purchasing your raw material!?
HOWEVER, that is the case in waste management, and this, according to me, is one huge reason that we see an increasing activity from criminal actors, or actors with short term financial interest, that see an oppertunity to make profit; They collect a lot of waste and makes a good profit, and instead of process the waste that they have collected they put their business into bankruptcy; focus on the starting point, neglecting the end point.
Any actor that receives waste with the purpose to recycle should consider to change their accounting principles to an Industrial accounting model, in order to focus more on the end point and value adding activities.
And, in order to eliminate the incentatives that attract criminal elements the industrial accounting principles schould be norm even in waste mangement; No profit until you have disposed/sold the material you have collected!
Why is this not obvious? One explanation is probably that the value of a waste offen is negative. This makes most accounting systems confused; a raw material supply is an asset; it has a positive value! This "truth" that an inventory has a positive value has led to use of other mechanisms when balancing waste stocks, and as a consequence we have not applied the same standards.
Do you agree? Please comment or ask if anyone have questions, and pleas feel free to contact me if you want to discuss this topic further.
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