Accounting for items in a voluntary scheme

The staff introduced the session by explaining that the staff was asking for direction rather than decisions from the Boards. The staff paper presented at the meeting described the items that an entity exchanges when it becomes a member of a scheme with voluntary participation, and it discussed which items met the element definitions in the Boards' frameworks.

The Boards were not invited to discuss the criteria for recognition, measurement, or presentation of the elements in a voluntary scheme.

The discussion used the following simple example:

On 1 January 2010 an entity becomes a member of a voluntary scheme with a one year commitment period, starting on 1 January 2010. The entity is entitled to an allocation of 100 allowances. The allowances that result from the allocation are issued on 1 January 2010.

In exchange for membership in the scheme and the right to an allocation, the entity promises to pay one allowance for each unit of emissions occurring during the commitment period.

The entity estimates it will emit 110 units of emissions during the commitment period. That means the entity expects that its demand for allowances will exceed its allocation of 100 allowances by 10 units. The entity plans to make up the expected shortfall by acquiring allowances on the market.

The staff analysed the example by reference to each of the Boards' conceptual frameworks and relevant accounting standards. The staff presented two views as to what created the obligating event in a voluntary scheme:

• View 1: The entity's actual emissions create the obligating event. A member of a voluntary scheme does not incur a present obligation until it has emitted. Until emissions have occurred, the member can avoid the outflow of allowances by its future actions.
• View 2: The membership contract signed by the entity creates the obligating event. The entity incurs a present obligation as result of becoming a member of a scheme. As of signing the membership contract, the obligation to pay allowances is unconditional. Only the amount of allowances due under the membership contract is uncertain.

Applying the two views to the base example, the staff suggested that:

• Under View 1, an entity would have a scheme liability on 1 January 2010 only if, and to the extent that, the entity had emitted on 1 January 2010.
• Under View 2, an entity would have a liability on 1 January 2010 that reflects the promise to pay allowances throughout the commitment period. The entity estimates it would pay 110 allowances for the one year commitment period. The liability exists irrespective of whether the entity had already emitted.

IASB and FASB members individually expressed support for both Views. Some saw View 1 as the only view that was consistent with IFRS, US GAAP, and the frameworks. Supporters of View 2 thought that the information provided was more useful to users of the financial statements. Some supporters of View 2 expressed levels of discomfort with how the staff had applied existing standards in supporting their conclusions and suggested alternative ways of achieving the same conclusions. A third alternative was put forward by an IASB member and received some support from a FASB member. Under this third alternative, the analysis should be based on the net position: on Day 1 the entity would estimate the liability or asset based on 'expected emissions less allowances'. Another IASB member, while admitting instinctive support for View 1, suggested that the transaction was similar to a conditional government grant (IAS 20.8).

The IASB Chairman asked for indications of support for the two views as a way of giving direction to the staff. In the 'directional' vote that followed, a majority of both the FASB and IASB supported View 2.

Responding to this direction, the staff noted that the Boards would now have to face the question of justifying how an entity could have an obligation (for the consequences of emitting pollutants) prior to creating the emissions that give rise to that obligation.

The Boards will consider that question, along with recognition, measurement, and presentation issues at a subsequent date.