Agenda Paper 6A: Emission Trading Schemes: Background scheme information

The Assistant Technical Manager informed the Board that a research project on Emission Trading Schemes had been started during 2014. She said that the agenda paper contained information on the ‘cap and trade’ and the ‘baseline and credit’ schemes as well as other emission reduction schemes in the appendix.

Agenda Paper 6B: Emission Trading Schemes: Summary of accounting issues

One Board member asked the Assistant Technical Manager when exactly a right and obligation would be triggered and what the trigger would be.  He said that many Board members had believed that the past event was the emission of carbon dioxide. However, entering the scheme could also be seen as the past event.

The Assistant Technical Manager replied that they would examine whether emission trading schemes led to recognisable assets and liabilities. One example was whether allowances that were granted free of charge met the asset definition in the Conceptual Framework and if there should be a corresponding liability. The question of whether purchased allowances should be treated similarly ensued. The paper also examined measurement options, i.e. fair value with or without remeasurement, cost measurement or a business model approach. Another question revolved around the unit of account. The Assistant Technical Manager said that IFRIC 3 had not been well accepted because of the accounting mismatches it caused. The main reason for that was that the Interpretation considered each component separately instead of seeing the scheme as a whole.

One Board member made reference to the appendix in the agenda paper. It comprised previous tentative decisions that had been taken by the Board on the issue. He said that those decisions had not been unanimous. He also said that recognition and measurement of emission trading schemes was difficult as the timing was unclear. Similar to rate regulation schemes, true up mechanisms could be in place which might lead to refunds in a later period.

A Board member agreed with the scope that had previously been tentatively decided by the Board. He proposed renaming the project as this scope was much broader. Besides emission trading schemes, it included project-based certificates and renewable energy certificates. He also said that the concept of liabilities in the project needed to be aligned to the tentative decisions taken on the Conceptual Framework.

Another Board member agreed with an alternative view presented in the agenda paper. This view stated that allowances issued by the government free of charge should be treated differently from purchased allowances and that they did therefore not warrant recognition as an asset. He agreed with the rationale that in order to receive those rights the entity had to forego unlimited free emission. However, he disagreed with the conclusion in the agenda paper that this fact might indicate that the entity’s assets were impaired. He said that the right to unlimited free emission had been an unrecognised asset which had been lost and the other assets did therefore not necessarily have to be impaired. The Senior Technical Manager agreed and said that in most cases there would not be an impairment. Another Board member said that it could also raise the question of whether this restriction represented a liability. The Chairman added that it was an obligation that was unavoidable by the entity. A Board member replied that the ability of the entity to make a certain profit had declined but that this would not affect assets and liabilities that were recognised in the balance sheet.

One Board member agreed with the reference in the agenda paper that the scheme as a whole was the unit of account. He found that the schemes were similar to a hedging situation. In this hedging situation, the risk to pay for an emission was being hedged by the emission rights received or purchased. He said that the entity was in a long position in this situation and that this advantage was valuable. He would therefore apply the hedging concept to this situation. The Vice-Chairman disagreed with this view.

Another Board member agreed as well with the proposal in the agenda paper to only consider the net position. He was concerned, however, that the users of financial statements needed the information on the gross position. The Senior Technical Manager replied that the concept of the net position would be to consider the scheme as a whole but it did not necessarily mean that only one item would be recognised in the financial statements.

One Board member asked what the first output on the project would be. She was concerned that pursuing the net approach might raise questions why for other accounting areas the approach was a gross approach. She said that the rationale stated by another Board member before that those schemes restricted the entity’s ability to make a certain profit was also applicable to many other situations and it was therefore not very helpful. For example, a tax levied on petrol would affect shipping companies. She asked whether this project would be started from zero or from where the discussions left off. A fellow Board member replied that in previous discussions, the Board had struggled with the liability definition in the Framework. He said with the revised Framework there would no longer be an issue. He said that it should therefore be assumed that the proposed Framework would be finalised and proposed to start from where the discussions stopped because of the Framework. Nonetheless, he preferred publishing a discussion paper first instead of an exposure draft.

A Board member said that the previous discussions focused on the trading scheme and it was therefore simple to determine the fair value of the certificates. He was concerned that if the scope was widened, it would not be as simple anymore.

The Senior Technical Manager said that they would take into account previous discussions but would not bring forward tentative decisions as the composition of the Board had changed significantly since those decisions had been made.

One Board member asked whether the previous tentative decision about focusing the scope on the trading scheme included other tradable rights. The Senior Technical Manager negated that. The Board member said that even if other tradable rights would not be scoped in, their accounting would be affected by decisions taken for emission rights.

A fellow Board member was concerned about the depth of the market for the trading schemes which would affect the reliability of the fair value.

One Board member said that emission trading schemes had been discussed at the Global Preparer’s Forum. They concluded that the accounting depended on the business model, i.e. whether the business model was purely trading allowances or whether the business model included actual emissions. If the business model included emitting, the scheme should be accounted for as a whole. The Senior Technical Manager replied that the most common schemes which were described in the appendix of the agenda paper all used a net approach.

One Board member said that the relationship between assets and liabilities should be contemplated to avoid accounting mismatches.

The Board continued discussing about allowances meeting the criteria of assets. One Board member pointed out that this would be influenced by the fact whether an entity would have to return free allowances if it stopped emitting. The Senior Technical Manager added that another question was whether allowances that were granted for several years but only issued at the beginning of each year would be accounted for at the grant date or the date of issuance.

The Senior Technical Manager summarised that the next step would be to draft a project plan and identify possible contents for a discussion paper.