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Accounting for schemes that are based on a 'cap and trade' model whereby participants are allocated (typically by a government body) emissions rights equal to a 'cap' (that is, a target level of emissions) and are permitted to trade those emission rights.

Discussion at IFRIC Meeting July 2002:

IFRIC's discussions were educational, and no decisions were reached.

Discussion at IFRIC Meeting November 2002:

The staff proposed that on receipt of the rights, the entity should recognise an asset gross of any liability. They further proposed that the asset should be classified as an intangible asset and that intangible assets tradeable in an active market should be remeasured at each reporting date to fair value, with gains and losses recorded in profit and loss. An alternate proposal also discussed was that the asset could be classified as a financial asset as it is tradeable and readily convertible into cash and could be analogised to a government bond. The majority of IFRIC believed that:

• An asset should be recognised when the rights were received, and that it should be classified as an intangible asset;
• The asset should initially be recognised at cost where there was a cost or at fair value where there was no initial cost;
• The asset should not be subsequently remeasured at fair value; however they noted the staff's concerns around potential mismatches between recording the asset at cost and remeasuring to fair value at each reporting date any emission liabilities recognised under IAS 37;
• When an asset is recognised, a liability should be recognised in the amount of the minimum obligation assumed by accepting the asset;
• These would differ in each situation, and consequently the asset and liability would not necessarily be recognised initially at the same value. To the extent the initial values of the asset and liability differed, IFRIC believed the remaining credit should be treated as deferred income under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.

Discussion at IFRIC meeting February 2003:

IFRIC previously had agreed that the proposed interpretation should make reference to IAS 20. As a result of the Board's decision to withdraw the current IAS 20 and replace it with something that has not yet been decided, IFRIC members questioned whether this approach should continue. IFRIC members expressed concern that there should not be an immediate gain recognised on recording the emission certificates as an asset. However, they recognised that since the Board has not yet indicated specific changes to IAS 20 that it will propose, an interpretation should continue to refer to IAS 20 but that a section would be included in the preamble to the proposed interpretation regarding accounting for these grants in the absence of IAS 20 and requesting comment in this area. IFRIC agreed that the proposed interpretation would provide that:

• The government grant should be taken to income on a systematic basis over the period to which it relates.
• The staff would include guidance that the liability to be recognised in respect of the environmental damage would be based on the best estimate of whether it would be settled by the delivery of emission certificates at their current market value or the penalty provisions of the scheme as a result of sufficient certificates not being available.
• The interpretation would not address accounting by traders in emission certificates.
• The staff would address the issues raised and that a draft interpretation would be prepared with a view to approving it for issue at the next meeting

Discussion at IFRIC Meeting April 2003:

A pre-ballot draft Interpretation was sent to the IASB Board for review. The staff reported that six IASB members have raised serious reservations about the current draft for the following reasons:

• Four Board members believe that emission rights should be required to be recorded at fair value (although this is inconsistent with IAS 38),
• One Board member believes the liability should be raised as measured at market value, and
• One Board member believes a separate asset should not be recognised.

Therefore, the final interpretation (assuming it is released prior to the rescission or amendment to IAS 20) will be based on IAS 20. A footnote pointing out the Board's intentions to rescind IAS 20 will be added to the Draft Interpretation. The staff noted that the current requirement would most likely result in an asset and deferred income being recorded at the date the emission right was granted. However, the Board does not believe this deferred credit meets the definition of a liability. The IFRIC reiterated its conclusion that the current guidance will generally not allow immediate recognition of income and that the only other option is to record a deferred credit in the balance sheet. One observer noted that the fact that a deferred tax liability does not meet the definition of a liability (no current obligating event) has not stopped the Board before.

The IFRIC concluded that the deferred credit should be amortised to income on a systematic and rational basis. That is, the IFRIC will not prescribe an amortisation method, but will provide an example based on the units of emission. The IFRIC members agreed that impairment should not be addressed in detail in the final Interpretation.

A ballot draft will be sent to IFRIC members shortly for a final vote. No IFRIC member stated an intention to vote against the proposed ballot draft.

IASB Discussion at the April 2003 IASB Meeting:

Subsequent to IFRIC's April 2003 meeting, the IASB discussed the IFRIC draft interpretation at the Board's April 2003.

The IASB noted that six Board members previously objected to the IFRIC's conclusions on Emission Rights. Consequently this issue was discussed again at the April IASB meeting. As a result of the discussions, some of the Board members who had previously disagreed with IFRIC's conclusions did not object to the revised draft based on the fact that the IFRIC has no other choice but to interpret current guidance. However, three members continue to object to the draft interpretation. Two members believe that emission rights are not assets to be recorded separately from the liability for emissions, unless those rights are sold.

If by Tuesday, 6 May 2003, 5 Board members still object to the current draft, this issue will be brought back to the May 2003 IASB meeting with the intention of providing specific guidance to the IFRIC.

Draft Interpretation D1 Published May 2003

On 15 May 2003, the IFRIC published for comment the draft Interpretation on accounting for transferable emissions (pollution) allowances. Draft Interpretation D1, Emission Rights, is IFRIC's first draft Interpretation. Comment deadline is 14 July 2003.

D1 would require companies to account for the emission allowances they receive from governments as intangible assets, recorded initially at fair value. Emissions of pollutant would then give rise to a liability for the obligation to deliver allowances to cover those emissions. Any excess of the fair value of the allowance over the amount paid to the government is initially recognised as deferred income in the balance sheet and subsequently recognised as income on a systematic basis over the compliance period (per IAS 20). Click for Press Release (PDF 29k). The draft Interpretation is available publicly on IASB's Website.

More Information on IFRIC D1.

Discussion at the September 2003 IFRIC Meeting

At its September 2003 meeting, the IFRIC considered the comments received on the exposure draft D1, Emission Rights. The main categories of comments were:

1. Should the IFRIC proceed with the Interpretation at this time

Some respondents questioned whether it was appropriate for the IFRIC to issue an Interpretation at this time given that projects on the Board's active agenda (amendments to IASs 20 and 38 and Performance Reporting) affect the proposals. Other respondents considered the scope of the Interpretation to be very narrow and thought that the IFRIC should cover a wider range of emission rights schemes.

It was noted that the projects named were unlikely to be completed in the short-term. Some IFRIC members supported the comments that the scope was narrow. The majority however believed that sufficient schemes exist to warrant the interpretation and that it contained sufficient principles to provide guidance in other circumstances. Other specific schemes could however be dealt with separately if necessary.

2. Principal concerns of respondents

Many respondents commented on the lack of symmetry in measuring and reporting the changes in the three elements in the scheme (the allowances, the liability for emissions to date, and the government grant). These respondents were concerned that the lack of symmetry resulted in an entity reporting artificial volatility in its income statement.

Many respondents commented that reporting under D1's proposals failed to reflect the substance of an emission rights scheme. Some respondents therefore proposed alternative accounting solutions. These included:

• A net model, under which an entity does not recognise allocated allowances, and accounts for actual emissions only when it holds insufficient allowances to cover those emissions.
• An amortising model, under which an entity recognises allocated allowances as an asset, but then amortise the allowances as it pollutes. The entity therefore recognises a liability for actual emissions only when it holds insufficient allowances to cover those emissions.

Other respondents suggested amendments to the IFRIC's proposals. These included:

• Measuring the liability that the entity incurs as it emits at the cost of the allowances held by the entity.
• Accounting for the allowances as financial assets and measuring them at fair value with gains and losses recognised in income.
• Classifying the allowances as a derivative and accounting for them as a cash flow hedge.
• Amending IAS 38 so that gains and losses on allowances are recognised in income rather than equity.
• Measuring the government grant by reference to the market value of the number of allowances it represents.

The IFRIC confirmed its belief in the gross approach and rejected the netting of the asset and liability. In addition the IFRIC did not support the amortisation approach. The wording will be clarified regarding the non-amortisation of the intangible asset.

The amendments to the proposals suggested by commentators were considered. The IFRIC agreed to continue with the proposals as exposed in these regards but that the Board should be informed that IFRIC believes a better approach would be to require revaluation of the intangible asset through the profit and loss statement and that this would require an amendment to IAS 38.

It was agreed to proceed with the interpretation, to draft a proposed amendment to IAS 38 to require fair value for these intangible assets and request the Board to either approve the interpretation as exposed, or expose the proposed amendment and delay the interpretation.

3. Other issues

The IFRIC discussed some of the other issues raised by respondents:

• Is it appropriate for the IFRIC to eliminate an option in a Standard?

  The IFRIC believed that the Board would only allow the interpretation to be issued if they are comfortable with the restriction and consequently did not need to address this issue further.

• Are allowances and/or Renewable Energy Certificates inventory?

  The IFRIC concluded that the emission rights are not inventory.

• Should the government grant be recognised in income immediately rather than recognised as a deferred credit?

  The IFRIC did not support the suggestion that the government grant should be treated as immediate income.

• Should the Interpretation specify disclosure requirements?

  The IFRIC did not believe disclosure requirements should be specified.

• Should the Interpretation include guidance for those cases where allowances are not traded in an active market?

  The IFRIC did not support providing additional guidance in this area.

Discussion at the IFRIC Meeting December 2003

Four issues were discussed during this meeting:

• Whether IFRIC should propose the amendment of IAS 38 to the Board.
• Measurement of inventory.
• Additional guidance when there is no active market.
• Disclosure.

The staff noted that EITF is taking this topic off their agenda.

The staff proposed that IFRIC create a new category of intangible asset – intangible asset that will be used to extinguish a liability – to be accounted for at fair value if there is an active market. Though some members expressed concerns, IFRIC generally agreed with the proposal because it solves a part of the mismatch problem (change in liability to income and change in asset to equity under current IAS 38). Two members still support the net approach; however the majority view supports the gross approach. If the IASB agrees to amend IAS 38, this would require re-exposure and, therefore, this Interpretation may not be part of the 2005 "stable platform".

IFRIC agreed that the final Interpretation should not address whether emission right payments should be a component of the cost of inventory. However, there was general agreement that emission payments should not be considered a penalty (and therefore prohibited from inclusion in the cost of inventory). Also, no additional guidance will be given on how to calculate the fair value of emission rights when there is no active market. The IFRIC will not require or encourage additional disclosures requested by respondents.

Some members asked the staff to redraft the scope of the Interpretation to clarify that it would not apply to potential new emission rights schemes that are not consistent with a cap and trade scheme.

The IFRIC discussed when the allowance should be first recognised under IAS 20 – when it is received or when it becomes receivable. The staff will consider this further.

Discussion at the IFRIC Meeting February 2004

The staff updated the IFRIC on the progress and plans for this project. Consistent with the decision made by the IFRIC in December, the IASB decided to amend IAS 38 with the result that the emission rights and liabilities should be measured at fair value, with changes in value recognised in profit and loss. The IASB has decided that the IFRIC should re-expose its interpretation on emission rights at the same time as the Board exposes its intention to withdraw IAS 20 and to amend IAS 38. An exposure draft is expected in June 2004 with a final interpretation issued in November 2004. The staff was unclear whether it would recommend a required effective date for those adopting IFRS in 2005.

Discussion at the IFRIC Meeting March 2004

The staff provided the IFRIC with an update of the IASB's ongoing project of amending IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. No decisions were made as the IASB will continue its discussions in this area.

Discussion at the October 2004 IASB Board Meeting

One Board member made the point that the IFRIC's consensus could be viewed, not as a government grant, but rather, a revenue recognition issue in general. Some debate ensured around this point. The Board however approved the issue of this Interpretation.

IFRIC 3 Emission Rights

IFRIC Interpretation 3 Emission Rights was issued in December 2004.

February 2005: Consideration of Possible Approaches for Revision of IAS 38

The IFRIC is considering possible approaches for alleviating the effects of mixed measurement bases when accounting for an emission rights scheme under IFRIC Interpretation 3 Emission Rights. The problem arises when allowance are measured either at cost or fair value with value changes above cost recognised in equity, while the emissions liability is measured under IAS 37 at the fair market value of the number of allowances required to settle the obligation, with the value change recognised in profit or loss.

IFRIC is considering whether to propose an amendment to IAS 38 that would allow the emissions allowance asset to be measured at fair value through profit and loss, rather than through equity.

IFRIC is also considering whether the emission allowances can be a designated hedging instrument for forecast emissions.

June 2005: IASB Withdraws IFRIC 3

At its June 2005 meeting, the IASB withdrew IFRIC 3. Click for More Information.