Background

IFRIC 3

In December 2004, the (then) IFRIC issued IFRIC 3 Emission Rights, which specified:

• 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 IASB 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:

• Are the tradeable permits in emission trading schemes (allowances and credits) assets? If so:
• How should an entity account for any allowances that it receives from government for less than fair value?
• How should allowances and credits be accounted for?
• 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.

The reactivated project

In December 2012, as part of its response to the Agenda consultation 2011, the IASB formally reactivated this project as an IASB-only research project.

The project is expected to result in the publication of a Discussion Paper considering the financial reporting consequences of government developed schemes designed to encourage reductions in the production of greenhouse gases, which will include:

• an inventory of trading schemes
• an analysis of common economic characteristics of those schemes
• an initial assessment of the potential reporting solutions.

The following issues are expected to be considered as part of this project:

• how to account for allowances awarded by a scheme administrator
• when, and how, to account for liabilities associated with the emission of greenhouse gases.

Current status of the project

In November 2010, the IASB and FASB agreed to defer joint work on their joint project.

This project was reactivated as an IASB-only research project as part of the IASB's response to its Agenda consultation 2011.

Project milestones