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Pollutant pricing mechanisms — Agenda Consultation feedback

Date recorded:

The paper provided the Board with a status update relating to the pollutant pricing mechanisms (PPM) research project and a summary of feedback received from the Agenda Consultation relating to the project.

The Board was not be asked to make decisions about the project at this meeting.

Overview and interaction with existing IFRS

The project is currently classified as an assessment stage project within the research programme.  Research to date has identified diversity in practice relating to PPM accounting – due largely to gaps in IFRS standards or inconsistencies in standards. Some of these issues are interrelated with issues currently on the Board’s work plan (including the Conceptual Framework and IAS 37 projects).

Four categories of PPMs have been identified:

a) Emission trading schemes (ETS) including cap-and-trade and baseline-and-credit type schemes

These schemes make use of tradeable emission allowances to incentivise participants to reduce emissions – participants may buy and sell allowances depending on emission levels

b) Clean Development Mechanism schemes

Participants receive tradeable emissions allowances (to be used to offset obligations under ETS) or cash or other financial incentives to reduce emissions

c) Carbon-capture schemes

Participants are incentivised to capture pollutants through forestry and land management activities.  Tradeable emission allowances are granted as reward.

d) Carbon taxes or levies

A direct tax or levy is imposed on pollutants emitted or an indirect tax on the manufacture or sale of specified products.

Interaction with IFRIC 21

Despite the economic effects of a carbon tax applicable to volume of pollutants emitted and an ETS being similar, the expense recognition patterns differ significantly. An expense is recognised for a carbon tax only when a threshold is exceeded whereas an expense relating to an ETS is recognised over a period.

Interaction with the Conceptual Framework – the definition of a liability

Participants, in many cap-and-trade ETS, receive emissions allowances from governments free of charge. These are treated as a receipt of a non-monetary government grant and accounted for in accordance with IAS 20.

However, a policy choice is permitted where participants can either:

a) Recognise an asset and deferred income initially at the fair value of the emissions allowances granted; or

b) Recognise an asset and the grant at a nominal amount (in this case, nil).

Stakeholders have questioned whether the deferred income balance recognised in a) would meet the definition of a liability given that any obligation to return the emissions allowances is contingent upon future emissions. Further, stakeholders do not think that recognition of a gain on receipt of the allowances is appropriate given the temporary nature of the gain (allowances are to be returned as pollution occurs).

Other issues identified during research

The research conducted to date has identified the following additional issues:

  1. Measurement diversity

    There is diversity in practice relating to the
    • measurement of the liability to remit allowances received free of charge;
    • measurement of the obligation to remit allowances (covering pollution during the period) to the government

    The majority of participants measure the liability at the carrying amount of the emissions allowances.  When a participant expects to emit a higher volume of pollution than the quantity of allowances held, a liability for this excess is measured at reporting date based on the market value of allowances.

  2. Net presentation:

    The liability referred to above would be presented net of any allowances with a carrying amount of nil.  This is a form of net presentation. It is questionable whether this provides useful information to users.

  3. Recognition of gains

    In various schemes, participants are rewarded for reducing emissions in the form of further allowances, cash or other financial incentives. The area of contention is when to recognise any expected asset and the categorisation of any subsequent income.

  4. What type of asset is an emissions allowance?

    It is not clear whether emission allowances should be classified as intangible assets, as they do not meet the strict definitions of financial assets, inventories or PPE. There is diversity in practice with many participants classifying allowances as intangible assets while others apply IAS 2 Inventories.

  5. What is the period of account?

    In many schemes, governments set requirements for the mechanism over a commitment period (spanning several years) which is split into several compliance periods (commonly one year). There is uncertainty regarding whether the rights and obligations should be accounted for looking at compliance periods in isolation or for the entire commitment period.

Feedback from the 2015 Agenda Consultation

Comment letter responses

Over half of the respondents to the Agenda Consultation referred to the PPM project.  Some ranked PPM as a project of high importance (these respondents included Standard-setters and accountancy bodies) as PPM are becoming increasingly widespread, no guidance in IFRS exists and practice is diverse. The strongest support for the project comes from economies where PPM are growing (including Korea, Canada and India).

The majority of other respondents ranked it of low urgency.

Online survey of the investor community

Almost two-thirds of the respondents ranked the project as low priority. However, some respondents did comment regarding the increasing relevance of the issue given climate change and emission controls.

Other information and next steps

The staff noted that the IPSASB is also conducting research relating to PPM and aims to publish a Background Paper on ETS in mid-2016 and a Consultation Paper focusing on government-accounting of the schemes.

Staff will, at future meetings, present further papers to the Board where it will be asked to provide views relating to the PPM project.

Board discussion

The primary point made by many Board members was that many preparers in a number of jurisdictions have already developed their own approach to PPM accounting.  These positions may not be consistent but are entrenched and may be difficult to change – even if accounting guidance is developed.

Other Board members highlighted that climate change (and the related accounting) is a topic being discussed by many groups globally and is gaining importance and relevance. Therefore, it would be desirable for an accounting approach for PPM to be discussed and determined before more schemes emerge globally. The likelihood in accounting diversity for the new schemes would increase in the absence of sufficient accounting guidance.

One member questioned whether diversity actually exists in PPM measurement. He conceded, however, that diversity does exist in the presentation of PPM schemes (i.e. gross or net presentation of assets and liabilities). The notion of a ‘quick win’ through development of presentation guidance was raised by some members in response to this point, but was not considered in too much detail.

In addition, the importance of the project relative to others was discussed in light of Agenda Consultation respondents’ project ratings.  The key concerns raised by the Board related to resource allocation to the various projects and the robustness of the process for ‘ranking’ projects for such resource allocation.

Related Topics

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