Accounting for circularity
Accounting practices have evolved to support a linear economy. As climate change pushes companies to rethink how resources flow through their production cycles, accountants have an opportunity to improve the value and efficacy of circular systems.
The circular economy offers a closed-loop alternative to traditional production and service provision cycles. By sharing, recycling, reusing or refurbishing inputs for as long as possible, circular systems reduce or eliminate waste and support regeneration by design. These systems have the potential to reduce emissions and climate change risks dramatically. While some investors are beginning to realise the benefits of these systems, accelerating investment will require better reporting tools and accounting practices designed to fully capture the circular economy's positive financial and environmental impacts.
Circularising accounting in a traditionally linear economy has specific challenges. First, production leftovers are often considered–and accounted for–as waste. In a circular economy, marking leftovers as potential assets means less waste in the system, higher values placed on these assets, and new business opportunities.
A second challenge is the depreciation of assets. Standard depreciation over an asset’s useful life is not conducive to recognising the value of reusing, repurposing or refurbishing assets for another useful life. Accountants are uniquely positioned to reimagine the standards and policies that would make asset longevity a profitable and attractive option.
Circular systems present a third challenge to traditional accounting practices. Using fewer resources and making them last longer means that the value of circular products and services requires different kinds of revenue recognition. If products are designed to last longer and to be repaired, recycled or refurbished, a linear model that simply recognises sales will only partially capture the lifetime value of an asset or product. Circular systems require accountants to rethink how revenue can be recognised through right-of-use purchases, leases and buy-back models.
While these may appear mere technical problems for accountants, their solutions fundamentally shape the perception of value in circular systems. Better accounting for circularity will be reflected on the balance sheet. Providing investors with a better picture of circularity will attract more capital and allow the cycle to continue.
