The Board was presented with, but did not discuss, a paper that explained the mechanisms in an emissions trading scheme. The staff had prepared this paper as useful background for the Board in deciding on an approach for the initial accounting of an allocation of tradable offsets in a 'cap and trade' scheme.

Accounting for issued tradable offsets in the context of a cap and trade scheme

The Board discussed the initial accounting for instruments that may be used to offset an emissions obligation ('tradable offsets') that have been issued to an entity free of charge in an emissions cap and trade scheme.

Is there and asset and, if so, what is its initial measurement?

The Board agreed that a tradable offset met the definition of an asset in the IASB Framework in that they are a resource controlled by the receiving entity that provide future economic benefits. The entity can use issued offsets in settling emissions obligations or it can sell issued offsets on the open market for cash. Issued offsets held result from a past event (the receipt of tradable offsets) and are a present resource.

The Board considered whether the tradable offsets should be measured at cost (nominal amount) or fair value and concluded that measuring the tradable offsets on initial recognition fair value provides more transparent and decision-useful financial information than cost.

How to account for the credit

The Board considered three possible approaches:

• Approach A: Non-reciprocal transfer model — This model considers whether an entity incurs a present obligation when it is issued offsets. The staff noted that this most likely results in a gain upon initial recognition of issued offsets. Only if a claw-back attaches to issued offsets and the Board concluded that this to give rise to a present obligation might entities recognise a liability, reducing (or perhaps eliminating) the gain. The staff noted that they had spoken with a wide variety of interested parties, including large emitters, other standard setters, auditors, analysts, ratings agencies, and investors. They generally believe that recognizing a gain on initial recognition of issued offsets does not provide useful information.
• Approach B: Performance obligation model — Under this model, when an entity is issued offsets, it has a performance obligation that it must fulfil in order to realise income from the offsets. Effectively, the entity enters into an agreement with the scheme administrator. The entity agrees to reduce its emissions below the level represented by the allocation of tradable offsets. That is, the offsets exist only as a result of the agreement with the scheme administrator. The agreement establishes a performance obligation. The performance obligation model does not result in a gain on initial recognition of issued offsets.
• Approach C: Compensation model — The compensation model takes the view that the issuance of tradable offsets is not a non-reciprocal transfer from the scheme administrator to an entity. Instead, the compensation approach considers the issuance of tradable offsets in the context of the whole package of requirements imposed by an emissions trading scheme. The model adjusts for a measurement mismatch that arises as a result of different measurement bases.

In the discussion that followed, none of the Board members supported the Compensation model.

The Board was finely balanced between the non-reciprocal transfer model (6 in favour) and the performance obligation model (6 in favour). One Board member put forward a model somewhere between the two.

Those who favoured the non-reciprocal transfer model noted that, when the tradable offsets were issued (presumed to be prior to the emission year), there was no obligation that meets the definition of a liability in IFRS. One member noted that the IFRIC had debated this issue for several meetings as it developed IFRIC 3, had come to an appropriate answer under the existing IFRS requirement, and the Board had not supported them.

Those who supported the performance obligation model did so for a variety of reasons-not all of them consistent. Some saw tradable offsets as a sort of conditional government grant (cf IAS 41); others supported the performance obligation approach because they liked the answer, even though it did not fit nicely with the Framework or existing IFRS.

The conclusion of the debate was not clear, but the Board will need to address the issue at a subsequent meeting given the lack of consensus.