Pollutant pricing mechanisms

Date recorded:

Agenda paper summary

The staff provided the IASB with an update and overview of the Pollutant Pricing Mechanisms (PPM) project. The staff set out the planned contents of the Discussion Paper, which is expected in H1 2016, (see Agenda Paper 6). The staff also set out the issues they have identified relating to cap-and-trade emission trading schemes (Agenda Paper 6A) for which the IASB will be asked to make decisions at subsequent meetings. No decisions were sought in this meeting, instead the session allowed for the staff to share their findings with the IASB and to allow for discussions before seeking decisions.

IASB discussion

The primary focus of the project is to develop accounting requirements that best reflect the financial impacts of the economics of PPM schemes.

Timing and project priority

When asked by Board members how urgent the project is, the Project Lead responded by referring to a number of meetings conducted by other organisations relating to climate change and concluded that more schemes will come into place in the near future. Hence, the need for accounting guidance is important. Although the financial effect of schemes may not be material now, these effects are expected to increase.

The staff are working to release a Discussion Paper in H1 of 2016. The staff want the DP to identify the model(s) preferred by the Board. This should help make the responses to the DP more focused, which should lead to new requirements being developed more quickly.

The staff mentioned that the International Public Sector Accounting Standards Board (IPSASB) is conducting a project to examine the effect on the administrators of the schemes. An IASB member questioned whether having similar accounting for the administrator and participant of a scheme (i.e. the IASB project) was a goal. The staff replied that this would depend on the nature of the schemes and the related financial effects. If these were symmetrical, they would expect the accounting to be symmetrical. The staff emphasised that sharing knowledge with the IPSASB is helpful.

The discussion that followed dealt with a number of issues and the staff made use the examples in the agenda papers to illustrate key aspects of the schemes.

Economic drivers for the schemes

The Project Lead highlighted that the main economic driver is reduced pollution. Governments planned to reduce the cap on emissions over time. The effect would be to make the cost of polluting more expensive because the reduced supply of allowances would lead to an increase in the unit cost of an allowance. A related consequence would be that allowances held by an entity, which should be able to be traded on a market, become more valuable.

Accounting for the financial effects

Board members were walked through the different components of the cap-and-trade schemes using the examples in the agenda paper. These schemes were compared and contrasted with baseline-and-credit type schemes to highlight similarities and differences that would need to be considered in developing accounting requirements. 

The staff used the definitions of assets and liabilities as proposed in the Conceptual Framework ED to analyse the examples in the agenda paper. Some members questioned whether it would not be better to wait until the Conceptual Framework project had been completed so as not to require updates to any models proposed should these definitions change. However, the overall feeling of members was that the PPM project was one that was to be used to ‘test’ the proposed definitions and therefore the project could and should run concurrently to the Conceptual Framework project.

Whether, and when, an entity has a present obligation (a liability) by participating in a scheme was discussed at length. Board members were asked to consider whether the present obligation occurs when the participant becomes party to the scheme and has no practical ability to avoid emissions; or because emission happens over time, the obligation arises as this occurs; or the obligation only exists once the participant has emitted more pollutants than its allocated allowances. A few board members focused on the consideration of practical ability to avoid the obligation and others highlighted that existing IFRS standards and interpretations, if consulted, would provide contrasting views (these include, IFRS 2, IAS 19, IAS 12 and IFRIC 21). In response to these queries, the staff once more emphasised the need to develop new principle-based models that could apply in a number of scenarios.

The discussion then turned to the accounting treatment of the allowances granted to the participant. Primarily, whether these would constitute assets of the participant, whether they can be recognised as such and what type of assets they are. The staff noted that previous IASB projects had suggested that the allowances were similar to intangible assets. 

If the allowances are assets, initial recognition poses a number of questions. Recognising them initially at cost would mean an asset of zero. Recognising them initially at fair value requires consideration of whether the resulting credit is an immediate gain or a liability.

On the basis of the underlying economics of the transactions, there was agreement that a large gain on initial recognition is counter-intuitive because the participant is not better off at this stage and reporting a gain would not provide useful information to investors. One approach, proposed by the Project Lead, was that if a liability was recognised initially it could be replaced by a liability for emitting, as the emissions occur. It was broadly agreed that the measurement basis for any liability recognised should be consistent with that of any asset recognised.

Finally, the Project Lead directed discussions to situations where a participant expects to emit more than it is allowed to (or expects to emit less than its allowed level). These issues, too, would require identification of when to recognise such excess (or shortfall) – should this be over the period or when there is supportable evidence of the emission levels?

As the period over which schemes operate may be a number of years, this may be problematic.

Presentation considerations

Throughout the discussion, presentation and disclosure was highlighted briefly by the staff and IASB. Discussions of net or gross presentations were limited, but a concern was raised by a member that the net basis would not allow users to determine how ‘big a polluter’ the participant in question was – this may be a key consideration for investors.

Another member highlighted that, given the overall objective of the schemes was to reduce pollution, many entities may make additional investment in measures to reduce pollution. He questioned whether the effects of such investment would have linked disclosure to the effects of the schemes.

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