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Emissions trading schemes

Date recorded:

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.

At this meeting, the Boards discussed:

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.

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