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We comment on IFRIC D1 on emission rights

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11 Jul 2003

Deloitte Touche Tohmatsu has submitted a on IFRIC Draft Interpretation D1, Emission Rights (PDF 59k).

We agree with the general conclusions in the draft Interpretation, particularly that emission rights are intangible assets and not financial assets; receipt of the emission right is a government grant; and emission rights received can not be offset against the liability caused by emitting pollutants. However, as regards the accounting for government grants arising from emission trading schemes, we express some concerns:

We have concerns as to the effects this interpretation may have on the accounting for government grants not within the scope of this Interpretation. Specifically, the prohibition of the allowed alternatives in IAS 20 because "this would not be a faithful representation of the resources that the entity controls" could be interpreted as a removal of this option from IAS 20. That is, when would an understatement of the assets received as a result of the allowed alternative be a faithful representation? This does highlight an issue with respect to IAS 20, but the issue is not particular to emission rights and should be considered at a wider level. If it is concluded that the options in IAS 20 undermine the quality of financial information reported, IAS 20 should be amended.

The conclusion by the IFRIC (as directed by the IASB) to prohibit options in a Standard creates confusion as to the role of the IFRIC. We understand the mandate of the IFRIC allows it to set new standards and interpret existing standards. However, this decision apparently allows (and encourages) the IFRIC to take on its own improvements project – a result we do not support.

We also understand the IASB has two projects (IAS 20 and IAS 38) that could, when finalised, potentially amend the requirements of this Interpretation. As a general matter, we question whether the IFRIC should interpret a Standard the IASB intends to replace or withdraw in the near term.

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