Mainly the legal nature of the allowances for the emissions have been issued and also are traded under the rules of the European emission Trading Scheme (EU ETS). This is though has not been harmonised at the level of the EU.
The definition of the term allowances has been done under the Article 3(a) of the ETS Directive wherein it has been prescribed that only one tonne of carbon dioxide shall be emitted during any period. This would be valid in order to meet the requirements that have been laid done under the ETS Directive. This would also be transferrable as per the provisions of the ETC Directive. The notification issued in this regard reports on the functioning of the carbon market of Europe. This accompanies the report on the documentation which forms the part of the council. There has been a climate action progress report that includes the functioning of the carbon market f Europe and also the report which lays down its view of the Directive 2009/31/EC. This has been done on the geological storage of the carbon dioxide as on the date of November 18, 2015. This describes the emission allowances as the following:
As per the IASB rules, wherein the accounting standards fail to apply on the company, then the disclosure has to be made as per the IAS 8 Accounting Policies, Changes in accounting Estimates and Errors. This requires in the fact that the management must use their judgment when it comes to the development and the application of the policy of accounting which result in the information which is relevant and also reliable. This has to be done in consultation with the auditors of the firm. The following are the accounting standards as per which the accounting would take place:
The carbon emissions are taken into account in accounts as per the Commodities, for trading purposes etc.
Under the system, the producers of the electric power were given or also they had acquired in the credits with regard to the free credits which covers up the SO2 and also the NOx emissions but there is as such no accounting standard under the US GAAP which would throw some light on the financial accounting for the programs of emissions. The FASB has joined hands with the International Accounting standards Board or the IASB that would address in the scheme of the carbon emissions for the purposes of accounting. There are some more regulations that relates with the emissions that have been produced by the largest sources of the nation. The EPA has been making it compulsory for the companies to report the GHG levels (Hindu business line, 2017). There are many of the companies that would account for the cap and trade activities which are connected with the program when there are as such no specific authoritative guidance on the procedure. There are many of the companies that are duty bound to report the impact of the change in the climate and the regulations of the GHG emissions in their financial statements on Form 10 K. it is of an utmost importance that the companies have the management strategy for carbon since those activities would help them in complying and accounting for these stated activities but also the company will be allowed to take the advantage of all of the credits and offset the same through the way of strategic acquisition (ACCA global, 2017).
There are many of the companies that have been operating in the United States and these companies mostly belongs to the power and the utilities industry. These have been acquired for the purposes of participating in the EPA, RGGI and other such programs related with such carbon emissions and these have been associated since a long number of years. There are many of the programs that have a cap and trade model as well. Since there is an absence of a set standard in the US GAAP or in the (IFRS) which takes into account the emission credits, renewable energy, emission offsets or such similar allowances, hence different practices are being followed in this respect. Hence, there is an urgent need of providing a framework for the purposes of accounting for the climatic changes, the one that could be applied to all of the industries without any issue. The FASB and the IASB have joined in hands so as to work for the emissions trading schemes since the year 2007 (PBR, 2017).
The companies that have been following the US GAAP today participate in the programs that are related with the carbon emissions follow one of the two different accounting practices. The first being the intangible asset model and the other being an inventory model.
Under this method, the companies measure the emission credits or the allowances that have bene issued to then and the same have been acquired by them in the open market and values them at cost. Hence, as and when the company issues the emissions credits or the allowances, then it would have the nominal cost of 0. Also, there are many of the emission credits or the allowances that have been purchased will have some cost associated with the same. When commonly applied, under the model of the intangible asset accounting, it is also possible for the company to indicate the emissions credit or the allowance that have been issued at their fair value when the same have been received (WordPress, 2017). On the basis of these disclosures, the companies would not amortize the emissions credits since the economic benefit of the same does not diminish till the time the same are consumed by the company. Also, the costs of the credits would not be charged till the time the same are sold or have been used. These emission credits or the allowances are subject to the accounting standard on impairment. These are considered to be indefinite and would live as an intangible asset and the same will be reported under the model of impairment or for the impairment model of the fixed assets for the intangible assets that have certain life. This is in line with the amount that the company would amortise in the credit of the emissions. These are the credits of the emissions that would be considered to be of long term in nature and also would amortise the credit of the emissions. These emission credits are termed as being long term in nature in the balance sheet and the cash inflows and the cash outflows are connected with the emission credits which are further classified as the investment activities in the statement of cash flows of the financial statements of the company.
Under this model, the emission credits are measured at the weighted average costs. Each of the emission credit as have been issued by the EPA or other such regulatory body would have a 0 cost basis while when the same are purchased, then the emission credit’s would be valued at the purchase price. The credits of the emission are valued using the weighted average cost of the emission credits would be used for each one of the periods which is then to the fuel costs or to the cost of sales. These credits are valued at the lower of cost of the market approach to the impairment under the model of inventory accounting. These emission credits are reported as inventory in the statement of financial position. The cash inflows and the outflows as are connected with the emission credits are classified as the operating activities in the statement of cash flows. The companies that trade in the emission credits would follow this model. In case the company trades in the emission credits which is within the scope of industry guidance for the broker dealer. These are considered to be the emission credits that are held for sale ta their fair values at each of the reporting date (desai, 2017).
Under both of the above stated models, the practice if that the obligation is recorded for the purposes of delivering in the emission credits to the regulatory agency till the time actual level of the emissions for any given period exceeds the credits that have been held in the balance sheet. The gain which is recorded or is recognised in the period in which the emission credits have been sold. But there is still a practise wherein there is a recognition of the gain since there are many of the companies that have adopted the stated accounting policy. This further requires in the deferral of the gain in the case the emission credits have been granted for the future vintage year but then are sold within the current year. In such a case, the gain may not be termed a being realizable since the company is not bale to cover its emission in the future vintage and this is mainly due to the sale of the emission credit’s that were granted for the purposes of covering the future vintage year emissions.
It is a common practise for these companies to enter into the future contracts, swaps and the options that pertain to the emission credits. These are the arrangements that meets in the definition of the derivative under the US GAAP. There are many of the forward contracts that could be delivered physically wherein the net settlement would not take place and the same will not be exposed to the normal amount of the purchases of the exemption of the normal sales. These are the products that would settle in financially and are required to be accounted at their fair values. Since these markets still continues to expand, more number of contracts that could be covered within the stated scope would some under the definition of a derivative (EY, 2017).
The following are the impact of the emission credits on the financial statements:
The following are the journal entries of the same:
|
Cost model |
Asset Recognition |
Revenue Recognition |
||
|
Stage |
Dr |
Cr |
Dr |
Cr |
|
Receipt of free allowance |
Intangible asset |
Government grant (deferred income) |
||
|
Purchase of allowance |
Intangible asset |
Cash/Accounts Payable |
||
|
Allowance used (emit emissions) |
Government grant (deferred income) |
Income |
||
|
Used allowance delivered(surrendered) |
Intangible asset |
Loss (Diff between Allowance & Liability to deliver) |
Profit (Diff between Allowance & Liability to deliver) |
|
|
Liability Recognition |
||||
|
Dr |
Cr |
Dr |
Cr |
|
|
Allowance used (emit emissions) |
Liability to deliver allowances |
Emissions expense |
||
|
Used allowance delivered(surrendered) |
Liability to deliver allowances |
|||
|
Revenue Recognition |
Asset Recognition |
|||
|
Dr |
Cr |
|||
|
Revaluation (Upward) |
Intangible asset |
|||
|
Revaluation (Downward) |
Intangible asset |
|||
|
Use of Revalued amount |
Intangible asset |
|||
|
Equity Recognition |
||||
|
Revaluation (Upward) |
Equity (revaluation surplus) |
|||
|
Revaluation (Downward) |
Equity (revaluation surplus) |
|||
|
Use of Revalued amount |
Equity (revaluation surplus) |
References:
A study on accounting Aspects of carbon credits. (2017). Fincirc Dossier. Retrieved 7 September 2017, from https://fincirc.wordpress.com/2013/03/13/a-study-on-accounting-aspects-of-carbon-credits/
Accounting for Carbon. (2017). www.accaglobal.com. Retrieved 7 September 2017, from https://www.accaglobal.com/content/dam/acca/global/PDF-technical/climate-change/rr-122-001.pdf
Accounting for carbon credits. (2017). The Hindu Business Line. Retrieved 7 September 2017, from https://www.thehindubusinessline.com/todays-paper/tp-opinion/accounting-for-carbon-credits/article1057460.ece
Accounting guidance for emissions programs. (2017). Ey.com. Retrieved 7 September 2017, from https://www.ey.com/us/en/industries/oil—gas/carbon-market-readiness—4—accounting-guidance-for-emissions-programs
Carbon accounting – Effects on financial reporting. (2017). www.eurelectric.org. Retrieved 7 September 2017, from https://www.eurelectric.org/media/71686/carbon_accounting_effects_-_final-2013-540-0001-01-e.pdf
Carbon Credit Accounting. (2017). www.pbr.co.in. Retrieved 7 September 2017, from https://www.pbr.co.in/September2015/15.pdf
Accounting for Emissions Trading: How Allowances Appear on Financial Statements Could Influence the Effectiveness of Programs to Curb Pollution. (2017). Lawdigitalcommons.bc.edu. Retrieved 9 September 2017, from https://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=2084&context=ealr
Legal nature of emission allowances. (2017). Emissions-euets.com. Retrieved 7 September 2017, from https://www.emissions-euets.com/carbon-market-glossary/968-legal-nature-of-emission-allowances
The Concept of Carbon Credit Accounting and Comparison of Co2 Emission of India with selected Developing Countries. (2017). www.ijritcc.org. Retrieved 7 September 2017, from https://www.ijritcc.org/download/browse/Volume_3_Issues/October_15_Volume_3_Issue_10/1444627844_12-10-2015.pdf
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