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IFRIC

Date recorded:

The Board noted a summary of recent IFRIC activities.

Rights of Use of Assets

It was noted that an exposure draft on Rights of Use had been approved by the Board and once an editorial review had been completed would be issued.

Emission Rights

In addition the Board considered a request from the IFRIC to make a limited amendment to IAS 38 arising from the IFRIC's redeliberation of its proposals for accounting for emission rights.

The IFRIC proposals dealt with schemes where a participant is set a target to reduce its emissions to a specified level (the cap) in a compliance period. At the start of the compliance period, the government allocates the participant allowances equal to its cap, normally free of charge. Participants can trade their allowances with other participants or brokers. At the end of the compliance period (normally a year) the participant must deliver to government an allowance for each tonne of pollutant emitted in the year. If it fails to do so, it incurs a penalty.

The IFRIC proposed a model that accounts for the allowances independently to the obligations arising under the scheme. Accordingly:

  • allowances, whether allocated by government or purchased in the market, are intangible assets and are accounted for in accordance with IAS 38. Allowances that are allocated for less than fair value are measured on initial recognition at fair value. Allowances are not amortised but are tested for impairment.
  • when allowances are allocated by government for less than fair value, the difference between their fair value and the amount paid is a government grant that is accounted for in accordance with IAS 20.
  • as emissions are made, a provision is recognised for the obligation to deliver allowances to cover those emissions (or to pay a penalty). The provision is accounted for under IAS 37 and therefore is normally measured at the market value of the required number of allowances.
Most respondents to the draft Interpretation were concerned about the lack of symmetry (or mismatch) in the accounting and the resulting volatility of reported profit or loss. This arises because:

  • Under the benchmark treatment in IAS 38, the asset for allowances held is measured at cost. If the participant uses the allowed alternative treatment, the asset is measured at fair value but changes in value above cost are recognised in equity.
  • The liability for the obligation to deliver allowances to cover emissions to date is measured under IAS 37 by reference to the market value of the allowances needed to settle it, and changes are recognised in profit or loss.
  • The government grant is initially recorded as a deferred credit at cost and subsequently that cost is amortised to profit or loss.

The IFRIC reviewed alternative models suggested by respondents to the draft Interpretation, but concluded that its proposals are the most appropriate interpretation of current IFRSs. Nonetheless, the IFRIC acknowledged that the constraints of existing Standards lead to a mismatch in measuring and reporting the changes in the values of the assets and liabilities that arise in an emission rights scheme.

The IFRIC considered the characteristics of an emission allowance that distinguish it from most other intangible assets referred to in IAS 38. The IFRIC concluded that its unique feature is that it is akin to a currency. This is because the value of an allowance derives from the fact that it is used to settle an obligation (ie the obligation to deliver allowance as a result of past emissions).

The IFRIC agreed that the most representationally faithful way to report any intangible asset that, like an allowance, is akin to currency and which is traded in an active market, is at fair value with changes in value recognised in profit or loss.

The staff and the IFRIC recommended that the Board amend IAS 38 so that an intangible asset (a) that is like a currency, in that it has value only because it is used to settle an obligation; and (b) whose fair value is determinable by reference to an active market (as defined in IAS 38) is measured at fair value with changes in value recognised in profit or loss.

The Board discussed this issue and the treatment of the deferred credit arising under IAS 20. Some Board members queried why this should be restricted only to these types of intangible assets and should not include all intangible assets. The Board agreed to consider papers proposing to withdraw IAS 20 and consider the related revenue recognition issues. In addition the Board agreed that IFRIC could proceed with a proposal to require the subset of intangible assets to be revalued through profit and loss but this would only be issued at the same time as the IAS 20 proposal.

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