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.