• Added to Agenda at December 2007 IASB Meeting (jump to notes below)
• Discussed at May 2008 IASB Meeting (jump to notes below)
• Discussed at March 2009 IASB Meeting (jump to notes below)
• Discussed at November 2009 IASB Meeting (jump to notes below)
• Discussed at December 2009 IASB Meeting (jump to notes below)
• Discussed at May 2010 IASB Meeting (jump to notes below)
• Discussed at September 2010 IASB Meeting (jump to notes below)
• Discussed at October 2010 IASB Meeting (jump to notes below)
• Discussed at November 2010 IASB Meeting (jump to notes below)

Background

IFRIC 3

In December 2004, the IFRIC issued IFRIC 3 Emission Rights. IFRIC 3 specified that:

• emission rights (allowances) are intangible assets that should be recognised in the financial statements in accordance with IAS 38 Intangible Assets.
• when allowances are issued to a participant by government (or government agency) for less than their fair value, the difference between the amount paid (if any) and their fair value is a government grant that is accounted for in accordance IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
• as a participant produces emissions, it recognises a provision for its obligation to deliver allowances in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. This provision is normally measured at the market value of the allowances needed to settle it.

At the June 2005 IASB meeting, the IASB voted to withdraw IFRIC 3. That decision was made primarily because EFRAG Recommended (PDF 303k) that IFRIC 3 not be endorsed for use in the European Union.

In withdrawing IFRIC 3, IASB Board Members acknowledged that IFRIC 3 had expressed a correct and appropriate interpretation of existing standards. Board Members expressed similar reservations over the effects of that Interpretation to those that had been expressed by IFRIC members at the time it was finalised but observed that they, like IFRIC, had been under the impression at the time that an Interpretation was needed urgently because of the imminent start of the EU 'cap and trade' scheme. However, it was apparent that this urgency was no longer there. Consequently, the Board decided to take the time to conduct a broader assessment of the nature of the various volatilities resulting from the application of IFRIC 3 to a 'cap and trade' scheme and to consider whether and how it might be appropriate to amend existing standards to reduce or eliminate some of those volatilities.

In July 2005 the Board issued a Public Statement on Withdrawal of IFRIC 3 (PDF 42k).

This Project

In December 2007, the Board agreed to add to its agenda a project limited to addressing the following key issues:

1. Are the tradeable permits in emission trading schemes (allowances and credits) assets? If so:
2. How should an entity account for any allowances that it receives from government for less than fair value?
3. How should allowances and credits be accounted for?
4. How should changes in assets and liabilities (arising from emission trading schemes) be reported in profit or loss?

The outcome of the project is not expected to result in a new IFRS. Rather, the Board plans to address the issues by:

• a revision of either IAS 38 Intangible Assets or IAS 39 Financial Instruments: Recognition and Measurement to accommodate the accounting for tradeable permits, and
• a revision of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance so that the accounting for allowances (and similar assets) issued by governments free of charge is addressed.

Thus, the scope of the project addresses only emission trading rights, including any government grants associated with such emission trading rights, but does not address government grants more generally.

Timetable

• Click for IASB Project Timetable

Discussion at the December 2007 IASB Meeting

IASB staff presented an agenda proposal to re-activate the project to provide guidance on how to account for emission trading schemes. Staff noted that emission trading schemes were becoming increasingly common and that subsequent to the withdrawal of IFRIC 3, there was no clear accounting guidance on how to account for such schemes.

The staff paper presented to the Board for the agenda decision included the following table outlining the main approaches that are being accepted in practice to account for emissions trading schemes:

Staff also noted that the FASB has added a similar project to its agenda. One Board member questioned whether the project would deal only with emission trading schemes, and any government grants related to such schemes, or whether the IAS 20 project should also be reactivated.

The IASB research director put forward the recommendation to restart work on the emission trading schemes project. The IASB research director did not believe that the scope of the work should extend to a review of IAS 20. It was suggested by one Board member that the project could be split into two phases:

• Phase 1 could deal with emissions trading schemes
• Phase 2 could deal with a revised IAS 20.

Staff did not support this proposal.

Another Board member queried why there was diversity in practice when the IAS 8 hierarchy was in place and IFRIC 3 exists (although not effective). It was noted that it is important that the project defines what an emission right is.

The staff proposed that the scope of the project should only address emission trading rights, including any government grants associated with such emission trading rights, but not address government grants more generally. The Board voted (10 in favour) to proceed with this project.

Discussion at the May 2008 IASB Meeting

(The FASB staff joined the meeting by video link for this session.)

Background and objective

The purpose of this session was to clarify the scope of the joint project with the FASB on emissions trading schemes. The Board activated the work on this project in December 2007 and this was the first time it was discussed at the Board since then.

The staff highlighted the following:

• Presently, there is no authoritative accounting literature in either IFRSs or US GAAP that addresses these issues. In June 2005, the IASB withdrew IFRIC 3 Emissions Rights, which addressed the accounting for the rights and obligations arising from participation in the European Union's Emissions Trading Scheme (EU ETS).
• Clarification of the scope of the project is a key issue because it will have the following implications:
  • The accounting questions that will need to be answered (and therefore the staff's direction of research) depend on the scope of the project.
  • Neither Board has clearly defined the scope (in light of the variety of schemes that exist) when it added the project to its agenda.
  • An opportunity exists to align each Board's respective scope.
• There is a wide range of emissions trading schemes. In common, they are all aimed at reducing the damage to the environment. The theory behind emissions trading relies on the creation of value through the allocation of a right to emit. This target is normally below actual physical levels of emissions currently being made by entities. Hence, an artificial scarcity is created, which in turn creates a value for the holders of such rights. Emissions trading schemes are believed to reduce emissions in a manner that is cost effective and efficient.

Scope alternatives and Board decisions

Based on the staff's research, three possible scopes for the project have been identified:

Alternative A: Government mandated cap and trade schemes only (narrow scope).

Alternative B: All emissions trading schemes and tradable rights (broad scope).

Alternative C: A scope between the narrow scope and broad scope

The Board supported Alternative B mainly for the following reasons:

• Constituents, particularly financial statement preparers, are asking for guidance is this area.
• There is currently no authoritative literature in IFRSs or US GAAP that addresses the subject; consequently, preparers are uncertain about the proper accounting and diversity has developed in practice.
• The lack of authoritative guidance might produce diversity between different schemes and/or tradable rights.
• A consequence of a limited-scope project might be that preparers and auditors bombard the Board with questions about how to account for schemes or tradable rights that were excluded from the scope of the project.
• The number and types of emissions trading schemes continue to increase over time as more and more citizens, entities, and governments all around the world grow increasingly concerned about the environment.

The Board then discussed the definition of emissions trading scheme. The staff proposed the following definition:

'An emissions trading scheme is an arrangement designed to improve the environment, in which participating entities may be required to remit to an administrator a quantity of tradable rights that is linked to their direct or indirect effects on the environment.'

Finally, the Board agreed with the staff's recommendation not to constrain itself to existing authoritative literature when developing possible accounting models, but only to ensure that the accounting model developed will comply with the Framework.

Discussion at the March 2009 IASB Meeting

The Board was presented with, but did not discuss, a paper that explained the mechanisms in an emissions trading scheme. The staff had prepared this paper as useful background for the Board in deciding on an approach for the initial accounting of an allocation of tradable offsets in a 'cap and trade' scheme.

Accounting for issued tradable offsets in the context of a cap and trade scheme

The Board discussed the initial accounting for instruments that may be used to offset an emissions obligation ('tradable offsets') that have been issued to an entity free of charge in an emissions cap and trade scheme.

Is there and asset and, if so, what is its initial measurement?

The Board agreed that a tradable offset met the definition of an asset in the IASB Framework in that they are a resource controlled by the receiving entity that provide future economic benefits. The entity can use issued offsets in settling emissions obligations or it can sell issued offsets on the open market for cash. Issued offsets held result from a past event (the receipt of tradable offsets) and are a present resource.

The Board considered whether the tradable offsets should be measured at cost (nominal amount) or fair value and concluded that measuring the tradable offsets on initial recognition fair value provides more transparent and decision-useful financial information than cost.

How to account for the credit

The Board considered three possible approaches:

A: Non-reciprocal transfer model

This model considers whether an entity incurs a present obligation when it is issued offsets. The staff noted that this most likely results in a gain upon initial recognition of issued offsets. Only if a claw-back attaches to issued offsets and the Board concluded that this to give rise to a present obligation might entities recognise a liability, reducing (or perhaps eliminating) the gain. The staff noted that they had spoken with a wide variety of interested parties, including large emitters, other standard setters, auditors, analysts, ratings agencies, and investors. They generally believe that recognizing a gain on initial recognition of issued offsets does not provide useful information.

B: Performance obligation model

Under this model, when an entity is issued offsets, it has a performance obligation that it must fulfil in order to realise income from the offsets. Effectively, the entity enters into an agreement with the scheme administrator. The entity agrees to reduce its emissions below the level represented by the allocation of tradable offsets. That is, the offsets exist only as a result of the agreement with the scheme administrator. The agreement establishes a performance obligation. The performance obligation model does not result in a gain on initial recognition of issued offsets.

C: Compensation model

The compensation model takes the view that the issuance of tradable offsets is not a non-reciprocal transfer from the scheme administrator to an entity. Instead, the compensation approach considers the issuance of tradable offsets in the context of the whole package of requirements imposed by an emissions trading scheme. The model adjusts for a measurement mismatch that arises as a result of different measurement bases.

In the discussion that followed, none of the Board members supported the Compensation model.

The Board was finely balanced between the non-reciprocal transfer model (6 in favour) and the performance obligation model (6 in favour). One Board member put forward a model somewhere between the two.

Those who favoured the non-reciprocal transfer model noted that, when the tradable offsets were issued (presumed to be prior to the emission year), there was no obligation that meets the definition of a liability in IFRS. One member noted that the IFRIC had debated this issue for several meetings as it developed IFRIC 3, had come to an appropriate answer under the existing IFRS requirement, and the Board had not supported them.

Those who supported the performance obligation model did so for a variety of reasons-not all of them consistent. Some saw tradable offsets as a sort of conditional government grant (cf IAS 41); others supported the performance obligation approach because they liked the answer, even though it did not fit nicely with the Framework or existing IFRS.

The conclusion of the debate was not clear, but the Board will need to address the issue at a subsequent meeting given the lack of consensus.

Discussion at the November 2009 IASB Meeting

Accountng for items in a voluntary scheme

The staff introduced the session by explaining that the staff was asking for direction rather than decisions from the Boards. The staff paper presented at the meeting described the items that an entity exchanges when it becomes a member of a scheme with voluntary participation, and it discussed which items met the element definitions in the Boards' frameworks.

The Boards were not invited to discuss the criteria for recognition, measurement, or presentation of the elements in a voluntary scheme.

The discussion used the following simple example:

On 1 January 2010 an entity becomes a member of a voluntary scheme with a one year commitment period, starting on 1 January 2010. The entity is entitled to an allocation of 100 allowances. The allowances that result from the allocation are issued on 1 January 2010.

In exchange for membership in the scheme and the right to an allocation, the entity promises to pay one allowance for each unit of emissions occurring during the commitment period.

The entity estimates it will emit 110 units of emissions during the commitment period. That means the entity expects that its demand for allowances will exceed its allocation of 100 allowances by 10 units. The entity plans to make up the expected shortfall by acquiring allowances on the market.

The staff analysed the example by reference to each of the Boards' conceptual frameworks and relevant accounting standards. The staff presented two views as to what created the obligating event in a voluntary scheme:

• View 1: The entity's actual emissions create the obligating event. A member of a voluntary scheme does not incur a present obligation until it has emitted. Until emissions have occurred, the member can avoid the outflow of allowances by its future actions.
• View 2: The membership contract signed by the entity creates the obligating event. The entity incurs a present obligation as result of becoming a member of a scheme. As of signing the membership contract, the obligation to pay allowances is unconditional. Only the amount of allowances due under the membership contract is uncertain.

Applying the two views to the base example, the staff suggested that:

• Under View 1, an entity would have a scheme liability on 1 January 2010 only if, and to the extent that, the entity had emitted on 1 January 2010.
• Under View 2, an entity would have a liability on 1 January 2010 that reflects the promise to pay allowances throughout the commitment period. The entity estimates it would pay 110 allowances for the one year commitment period. The liability exists irrespective of whether the entity had already emitted.

IASB and FASB members individually expressed support for both Views. Some saw View 1 as the only view that was consistent with IFRS, US GAAP, and the frameworks. Supporters of View 2 thought that the information provided was more useful to users of the financial statements. Some supporters of View 2 expressed levels of discomfort with how the staff had applied existing standards in supporting their conclusions and suggested alternative ways of achieving the same conclusions. A third alternative was put forward by an IASB member and received some support from a FASB member. Under this third alternative, the analysis should be based on the net position: on Day 1 the entity would estimate the liability or asset based on 'expected emissions less allowances'. Another IASB member, while admitting instinctive support for View 1, suggested that the transaction was similar to a conditional government grant (IAS 20.8).

The IASB Chairman asked for indications of support for the two views as a way of giving direction to the staff. In the 'directional' vote that followed, a majority of both the FASB and IASB supported View 2.

Responding to this direction, the staff noted that the Boards would now have to face the question of justifying how an entity could have an obligation (for the consequences of emitting pollutants) prior to creating the emissions that give rise to that obligation.

The Boards will consider that question, along with recognition, measurement, and presentation issues at a subsequent date.

Discussion at the December 2009 IASB Meeting

Accounting for the right to future instalments

The Board discussed a paper that was prepared for the November joint meeting, but that was not discussed due to time constraints, relating to the accounting for the right to receive allowances in an emissions cap and trade scheme before the related allowances have been issued. The staff explained that the right to future instalments is a prevalent feature in most emission trading schemes and that the right to receive future instalments is typically contingent on an eligible entity continuing its emitting operations. The question that arises is whether an entity should recognise the right to future instalments as an asset.

The Board considered the following alternatives:

• View 1 - An entity does not control a resource until the contingencies related to the right to receive allowances are resolved.
• View 2 - An entity controls a resource when the entity holds a right that will result in the entity receiving allowances if the entity takes specified actions (typically continuing to emit at a specified level). That right is regarded as an option and the entity exercises it by undertaking the specified actions.

As part of the deliberations of the alternatives, several Board members questioned the logic underlying the second alternative, especially regarding what the exercise price of the option and nature of the corresponding liability would be. One Board member expressed difficulty in understanding how an option could be exercised by just continuing in business.

Several Board members expressed concern about considering whether there is an asset to be recognised without first considering whether the entity has an obligation under the scheme. There should also be symmetry in the treatment of the related asset and liability.

One Board member suggested that the staff should consider the situation in the US where farmers are paid not to farm in order to maintain the price of corn. This analogy could help provide guidance in accounting for emission trading schemes. Several other Board members supported this analogy and agreed that the issue should be considered as a whole, together with the question whether an obligation has arisen.

When asked whether there would be a difference in accounting when the emission trading scheme is a statutory/mandatory scheme as opposed to a voluntary scheme, the Board unanimously agreed that there should be no difference.

February 2010: Deloitte paper on 'cap and trade programs'

Deloitte's Climate Change and Sustainability Services team has published a paper on Cap and Trade Programs for Greenhouse Gas. Concern for the potential implications of climate change is leading governments to consider policies and programs designed to reduce greenhouse gas (GHG) emissions. Cap and trade programs are one option that is considered to be effective in creating a financial incentive for emissions reductions for large emitters in industrial sectors. The purpose of the paper is to present the key characteristics of greenhouse gas emissions cap and trade programs. A knowledge of cap and trade mechanisms is essential to understanding the impact on business, including carbon management, accounting, and tax implications. The IASB's Emissions Trading Schemes Project The IASB has on its agenda a project on Emissions Trading Schemes. The goal of that project, being conducted jointly with the US FASB, is to develop comprehensive guidance on the accounting for emissions trading schemes. The Board has decided tentatively that if an entity receives emission allowances free of charge from the government: The entity should recognise the allowances as assets and measure them initially at fair value. Because the entity incurs an obligation to reduce its emissions below the level represented by those allowances (ie its cap), the entity should recognise a liability that represents its promise to pay allowances throughout the commitment period. The liability exists irrespective of whether the entity has already emitted. Click to download Cap and Trade Programs for Greenhouse Gas (PDF 1,123k).

Discussion at the May 2010 IASB Meeting

The Board was presented with a staff research paper on emission trading schemes prepared by a former IASB Industry Fellow. The research paper is intended to be a helpful resource for those interested in the joint project and to serve as background information to future Board deliberations on the topic. The Board was not asked to make any decisions at the meeting, but to provide feedback on the scope and general direction of the paper.

The Board commended the author for the good work he did while at the IASB and continues to do on the research paper. In general, the Board felt that the paper lacks some background and guidance on the accounting issues arising from emission trading schemes and that the Board aims to answer as part of the project. It was suggested that an additional chapter be added to the paper to highlight the key accounting questions, the current industry practices applied and the discussion the Board had to date on the topic without committing the Board to any specific accounting treatment. The Board also asked that the staff paper not be published during another comment period, so as to avoid constituents to be distracted from the Board's current projects.

Discussion at the September 2010 IASB Meeting

The staffs of the IASB and FASB continued their previous discussions on the accounting for emissions trading schemes with both Boards. At the March 2009 meeting, the IASB had tentatively decided that an entity should recognise allocated allowances in a cap and trade scheme as assets. The FASB also discussed these issues at their April 2009 meeting but made no tentative decisions.

The staffs presented why allowances granted by a scheme administrator meet the definition of assets under the conceptual framework of each Board. The FASB agreed with the IASB's previous decision that allocated allowances are assets.

The staffs then discussed the question of whether a corresponding liability exists and is recognised when an entity receives an allocation of allowances from the scheme administrator. The staffs presented the Boards with two views:

• View 1 – The allocation creates a present obligation and there is a liability for the allocation.
• View 2 – The allocation is not a present obligation and thus no liability exists until the entity emits.

The staffs further disaggregated View 1 into three alternative views on what the present obligation is:

• View 1(a) – an obligation to refrain from emitting to keep the allowances,
• View 1(b) – an obligation to return the allowances (if the entity emits), or
• View 1(c) – an obligation to comply with the scheme requirements, to refrain from emitting to keep the allowances or to return the allowances.

The staffs were of the view that the allocation does create a present obligation but had split views between whether there was an obligation to refrain from emitting or whether there was an obligation to comply with the scheme requirements by refraining from emitting.

The FASB was overall in view 1 although they differed in the reasoning with one Board member preferring view 1(b), one preferring view 1(c) and another not expressing a specific subview. However, one of the FASB Board members mentioned that he was not of view 1(a) or 1(c) and would therefore be somewhere between view 1(b) and view 2.

One IASB Board member mentioned that he felt the substance of the transaction was akin to the government grant standard which requires recognition of an asset and an obligation to perform under that asset. The rest of the IASB Board members agreed that there was an obligation supporting either view 1c or the analogy to the government grant accounting requirements. One IASB Board member asked the staff if there were subsequent ramifications contingent on what subview of view 1 was concluded. The staff mentioned that during the future discussions on measurement the rational for the liability recognition may have the potential to impact the measurement determination.

Discussion at the October 2010 IASB Meeting

The Boards continued their discussions on accounting for emissions trading schemes. During the September 2010 Board meeting the Boards tentatively agreed that both purchased and allocated allowances under emissions trading schemes should be recognised as assets. Additionally, a liability is incurred upon the allocation of an allowance.

Measurement of Allowances and the Associated Liabilities

The IASB and FASB staff provided the Boards with various alternatives of measurement for the allocated allowances (both initial and subsequent) and the associated liability. Those alternatives include 1) fair value at initial and subsequent measurement, 2) initial fair value measurement, subsequent measurement not at fair value but subject to impairment, 3) initial measurement at transaction price with no remeasurement and subject to impairment, and 4) a business model approach (which would require an assessment of the intention on how an entity intends to use their purchased and allocated allowances).

Most Board members were generally supportive of the model to fair value at initial and subsequent measurement. One FASB Board member suggested an approach of fair value for initial and subsequent measurements when an entity was net long or net short with a net presentation approach (such that neutral positions would be recognised at nil).

However, a few Board members expressed support for a business model approach as it was consistent with the approach taken under the Board’s respective financial instruments projects. The Board tentatively agreed to proceed in development of an approach where the allowances and associated liabilities would be measured at fair value at initial recognition and subsequently.

Quantity of Allowances Expected to be Returned

The Board also discussed how to determine the quantity of allowance expected to be returned. The staff provided the Boards with two alternative approaches, the expected return and the derecognition approach. The expected return approach would require an entity to estimate the initial measurement of the quantity of allowances to be returned based upon expectations (and could permit a day 1 gain). The derecognition approach would require the initial measurement of the quantity of allowances to be returned as all allocated allowances with subsequent derecognition based on passing a threshold criterion. The Boards both tentatively decided (by narrow votes; IASB - 8/FASB - 3) to proceed with further development of the expected return approach.

Recognition and Measurement of Excess Emissions

The Boards also discussed when an entity should recognise a liability for emissions that exceed the allocated amount. The Boards considered whether the additional liability would be recognised only after emissions have surpassed the allocated allowances or whether an amount should be accrued prior to exceeding the allowance amount. The FASB was unanimous in supporting an approach of recognising a liability prior to exceeding the allocated allowances amount however the IASB was split in their views. The IASB and FASB staff will further develop the two approaches including examples for additional consideration at a future meeting.

Discussion at the November 2010 IASB Meeting

The Boards continued their discussion on the accounting for emissions under a cap and trade scheme. Discussions focused on the following three topics:

• recognition of a liability for emissions in excess of the initial allocation, and measurement of liabilities in an emissions trading scheme
• initial and subsequent measurement of purchased allowances (assets) (cap and trade scheme)
• balance sheet presentation of the assets and liabilities in an emission trading scheme.

The staff noted that due to the Boards' calendars, further discussion on the emissions project after the current meeting would not resume until the second half of 2011. Accordingly, the staff presented a number of questions to the Boards that when combined with previous decisions of the Boards, would result in a proposed accounting model for cap and trade schemes. In turn, the staff noted its intent to use the proposed model to perform outreach activities with constituents that can be discussed at a future meeting.

Recognition of a Liability for Emissions in Excess of Initial Allocation and Measurement of Liabilities in an Emission Trading Scheme

The staff provided the Boards with background on the project and an overview of the tentative decisions reached at previous meetings. The staff presented the Boards with three views for determining the quantity of allowances to be returned or submitted, and thus be recognised as a liability when an entity is allocated allowances:

• View 1: An entity is obligated to submit allowances for the entire scheme and thus must initially measure the liability based upon the quantity of its total expected emissions for the compliance period that those allocated allowances relate

• View 2: An entity is obligated to return only the allocated allowances (i.e., a maximum), and thus the liability for the allocation is capped at the quantity of allocated allowances. If the entity expects to emit more than the liability for the allocation for the compliance period (i.e. over emitter), a liability for excess emissions is recognised as the entity emits throughout the compliance period

• View 3: An entity is obligated to return only the allocated allowances (i.e., a maximum), and thus the liability for the allocation is capped at the quantity of allocated allowances. A liability for excess emissions is recognised upon actual emissions exceeding the liability for the allocation.

The staff then provided a brief overview of the two proposed alternatives for determining the quantity of allocated allowances to be returned (when the allowances are allocated):

• Alternative 1: Expected Return Approach – requires an entity to estimate the initial measurement of the quantity of allowances to be returned or submitted based upon expectations

• Alternative 2: Derecognition Approach – requires the initial measurement of the quantity of allowances to be returned, as the total number of allowances allocated. Subsequent derecognition would be based upon passing a specific threshold.

After noting their split opinion between views 2 and 3, the staff asked the Boards which of the three views the Boards preferred. The Board members discussed the merits and drawbacks of each view, with most Board members stating a preference for either view 2 or view 3. Those members who favored view 2 believed the view most accurately captured the costs of the entire term of an emissions program, and equated the returning of allowances to a cost of production. In turn, those members in favor of view 3 generally believed that an entity does not incur an additional obligation in excess of the original allocation until its emissions actually exceed the allocation. Other supporters of view 3 also noted a belief that it was the most consistent view with the conceptual framework. One FASB member indicated support for view 1.

Given the lack of overall support, the Boards determined that view 1 could be removed as a plausible option. As Board members were divided between views 2 and 3, one Board member suggested that the staff perform user outreach on both of the proposed models, each under the expected return and derecognition approaches for determining the quantity of allowances to be returned. Both the FASB and IASB agreed with this course of action.

Initial and Subsequent Measurement of Purchased Allowances (Assets) (Cap and Trade Scheme)

The staff provided the Boards with an overview of their analysis on possible measurement models for purchased allowances, presenting the Boards with two models:

• Model 1: Fair value at initial and subsequent measurement
   
• Model 2: Intended use approach, with two categories:
• Held for use – allowances determined to be held for use will be used to settle liabilities under the scheme (that is, not sold) and will be initially measured at fair value and will not be remeasured in subsequent periods
• Trading – allowances determined to be traded in the market will be measured in accordance with Model 1 (i.e., fair value with remeasurement).

The staff recommended to the Boards that purchased allowances should be initially and subsequently measured at fair value (i.e., Model 1). The staff also noted that regardless of which model the Boards selected, the measurement model for purchased and allocated allowances should be the same, and also reminded the Boards of their tentative decision at the October joint meeting to measure allocated allowances at fair value with remeasurement.

The Boards discussed the attributes, benefits and drawbacks of both measurement models. A couple of IASB members expressed their preference for the intended use approach, noting an importance for entities to have a distinction between production-related allowances and allowances in a trading portfolio. Board members in favor of the fair value approach cited it as the simpler model, and also noted it would be consistent with their previous decision on allocated allowances.

By majority vote, both the IASB and FASB agreed with the staff's recommendation.

Balance Sheet Presentation of Assets and Liabilities in a Cap and Trade Scheme

The staff provided an overview of its analysis on possible balance sheet presentation models, presenting the following three views for the Boards' consideration:

• View 1: Presenting the allowances with the related liabilities on a net basis should be prohibited
• View 2: Offsetting of allowances with the related liabilities should be permitted when the entity intends to offset because the current guidance is met in principle
• View 3: Allowances and the related liabilities should be presented on a net basis, using a form of linked presentation, when the entity intends to offset.

Before asking the Boards for its preferred view, the staff indicated that its views were split between view 1 and view 3, and also noted that the topic of presentation may need to eventually be revisited pending the outcome of other projects.

The Boards debated the merits and drawbacks to each of the views. Board members were mixed in their views, with some preferring a gross balance sheet presentation (i.e., view 1) and others preferring a net presentation under view 3. Supporters of view 1 noted that a net presentation was the more complicated of the two options, and that a gross presentation would likely provide more useful information to financial statement users. Many of the supporters of view 3 believed the requirement for an entity to demonstrate intent was unnecessary. Some Board members indicated that presentation disclosures could also be included in the footnotes to the financial statements. When brought to a vote, a majority of both the IASB and FASB indicated it would not object to View 3. The staff will also perform outreach on the balance sheet presentation of allowances.