User Cost Accounting in Extractive Industries: A Value-Based Framework for Sustainable Income Measurement

Khaled Aldhaferi^1,

¹Business Department, Hafr Al-batin University, Khafji, Saudi Arabia

Cite this paper:
Khaled Aldhaferi. User Cost Accounting in Extractive Industries: A Value-Based Framework for Sustainable Income Measurement. Journal of Finance and Accounting. 2025; 13(2):26-41. doi: 10.12691/jfa-13-2-1

Abstract

Conventional accounting practices in extractive industries systematically overstate income by failing to deduct the economic cost of non-renewable resource depletion. This leads to financial statements that present unsustainable earnings as if they were genuine profits, misinforming stakeholders and undermining capital maintenance. This paper addresses this deficiency by proposing a comprehensive user cost accounting framework that integrates natural capital depreciation, carbon budget constraints, and reinvestment behavior into corporate financial reporting. Inspired by Keynes and El Serafy, the user cost approach differentiates between true sustainable income and asset liquidation, allocating a portion of resource rents for capital replacement to ensure intergenerational equity. The framework is developed in eight dimensions: (1) a critical review of traditional vs. sustainable accounting, (2) creation of a Reinvestment Scorecard to measure capital replenishment performance, (3) introduction of a Sustainability-Weighted Cost of Capital (SWACC) to align discounting with long-term societal preferences, (4) construction of dual financial statements contrasting conventional and sustainable reporting, (5) extension to carbon budget accounting as an emissions depletion model, (6) integration of human and social capital depreciation metrics, (7) exploration of blockchain technologies to secure ESG data transparency, and (8) policy recommendations for standard-setters and regulators. Empirical validation includes case studies of Freeport-McMoRan, Anglo American, and Ørsted, with analysis of reinvestment, reserve trends, and financial outcomes under both accounting regimes. Findings reveal significant discrepancies between conventional and sustainable income, particularly in capital-intensive and carbon-intensive operations. Companies with high reinvestment and low-carbon strategies (e.g., Ørsted) demonstrate more future-proof business models, while others risk financial and reputational liabilities from unsustainable profit extraction. The study contributes a novel, operationalizable framework for sustainability accounting in extractive sectors, aligning corporate financial metrics with long-term resource stewardship and climate constraints. Recommendations include the adoption of mandatory supplemental “Statements of Resource Earnings and Reinvestment”, integration of sustainability-adjusted discounting practices, and use of digital tools for real-time ESG assurance. This research advances sustainable income measurement theory and offers practical tools to redefine corporate value in the resource-constrained 21st century.

Keywords:
User cost accounting Natural capital depreciation Sustainability-weighted discount rate (SWACC) Human capital accounting

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