Emissions trading schemes
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 favoured 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.