The Senior Technical Manager informed the Board that the title of the project had been changed to pollutant pricing mechanisms to extend the scope of the project beyond emission trading schemes which had been the previous title of the project. She conceded that this session would only deal with emission trading schemes.

Agenda paper 6A provided some background on the issue and outlined the difficulties that had been encountered in the model for emission trading schemes. The staff had received views at the joint meeting of the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF). The majority agreed that tradable rights were assets but some saw them as inventory assets as they had characteristics of commodities and some saw them as financial assets as they had characteristics of a currency. Others thought there was no definition in existing IFRS that covered those rights. They saw them more generically as intangible assets. The Senior Technical Manager said that the allowances could also be seen as a hedging instrument for future emissions. She asked the Board for their views on accounting for the allowances considering the simplified numerical example included in agenda paper 6B and to decide whether the accounting solution considered each compliance year separately or whether it considered the entire commitment period.

One Board member said that it should be considered that markets for emission rights might not always be active and that any accounting solution should reflect the fact that there were different market situations.

A Board member asked what the obligation would be at the start of the scheme. He asked whether the obligation was to deliver a certain number of allowances. The Senior Director of Technical Activities added that the question was whether it was the scheme that needed to be accounted for or the scheme-related transactions.

The Vice-Chairman asked whether the entity could also sell all allowances at the beginning of the scheme and then pay the fine for not having allowances at the end of the scheme. The Senior Technical Manager confirmed that this was a possibility, depending on the scheme. She conceded that in many schemes the allowances would not be granted upfront for the entire commitment period but only in instalments. The allowances would have to be delivered after each compliance year (usually about 3 months after). If the entity did not have enough allowances at that point they would face a fine.

One Board member wondered when the time of initial recognition was for those schemes. The Senior Technical Manager replied that usually she would think it would be the first day of the scheme although some administration was performed before that day.

The Senior Technical Manager cited an example of an entity that had heavy emissions and knew that the allocated allowances would not be enough under the normal conduct of business. She said that in that case the entity had several alternatives. They could stop emitting (and hence producing) once the allowances were used, they could make an investment in clean technology or they could buy more allowances. Accounting for each of these options was different. One Board member asked whether this would lead to accounting that reflected management intent. The Senior Technical Manager refuted that and said that intent could change and that switching between models would bring too many accounting problems. She therefore favoured one model only.

One Board member asked what the magnitude of the emission trading schemes issue was. He also asked what would happen if the system as a whole did not have enough allowances. He asked whether a power supplier, for example, would be able to appeal against the granted allowance if there had been a very cold winter and therefore more emissions than usual were made for the public good. The Senior Technical Manager said that in 2014, allowances in the amount of 45 billion Euros were traded. However, trading would increase as governments started to auction off the allowances instead of granting them free of charge. A climate conference would be held in Paris in December and it was likely to result in new commitments to reduce the level of emissions. In the EU, the market prices for allowances were relatively low following the financial crisis. The financial crisis had led to less production and thus less pollution. Granting the allowances free of charge had been a way to introduce the scheme. The governments would typically now be moving away from that and had already started auctioning the allowances off. The Chairman noted that auctioned allowances would present less of an accounting problem.

One Board member preferred a model that did not incur a profit or loss under the scheme (i.e., a modified cost model or nil cost model in agenda paper 6B). In his view, there was no economic gain or loss under the scheme as the entity used all their allowances and did not have to buy any excess allowances. This would, in his view, be consistent with the exposure draft of the Conceptual Framework. He said that he saw a similarity with cash flow hedging with all gains or losses on the allowances recognised in OCI. Amounts recognised in OCI should subsequently be recycled. The Research Director disagreed by saying that the ED of the Conceptual Framework would only allow OCI for remeasurement, not for day 1 gains.

A Board member agreed with not recognising a profit or loss and said that allowances could indeed be seen as a currency since it was a paper issued by the government that could only be used to do certain things. Therefore, he favoured a current measure which would be consistent with IAS 37. He proposed to recognise a government grant for the same amount of the allowances as this would prevent a day 1 gain. The government grant should then be updated in his view so it would always offset with the allowances. In that case, it would not make a difference whether an allowance had been granted or bought. The liability would also be measured at current value under his proposal. This way, there would not be a liability on the first day of the scheme. Several Board members agreed with this approach, especially with the fact that it included gross recognition, that it treated granted and bought allowances equally and that neither P&L nor OCI would be affected. One Board member said that the cost to ‘clean’ the pollutants should also be considered.  The Research Director added that the allowances could also be seen as a foreign currency loan that needed to be repaid in the foreign currency. Several Board members agreed with this view. One Board member said that this approach would also work if the allowances were seen as a business licence granted by the government.

One Board member warned that the Board should also focus on the P&L as this had been the point of criticism in the previous emission trading schemes project. The important thing was to avoid volatility in the P&L.

No decisions were taken.