Accounting implications of carbon emissions trading

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15 Apr 2009

The Australian government has published an exposure draft of proposed legislation that would establish a 'Carbon Pollution Reduction Scheme' that would be effective from 1 July 2010. Under the proposal, organisations with facilities in specified sectors (stationary energy, transport, etc) that emit more than 25,000 tonnes of CO2-equivalent will be required to surrender an emissions permit for each tonne of CO2-equivalent produced in that year.

The legislation will create a 'cap and trade' scheme. The Government will set the volume of allowable emissions (the cap) and the market will determine the price of the permits based on supply and demand. Deloitte Australia has published Australian Accounting Alert 2009/3 (PDF 447k) that examines the potential effects of the legislation on current financial reporting. Such effects may include:
  • Reassessment of impairment models – Is the legislation an impairment trigger? How does it affect the measurement of recoverable amount?
  • Provisions and contingent liabilities – The legislation may affect the recognition and measurement of provisions, for example, s provision for the rehabilitation of waste disposal sites
  • Impact of contractual 'carbon clauses' on the valuation of derivatives and hedging
  • Disclosure of significant adjustments and estimation uncertainties
  • Accounting for emission rights. In this regard, the Alert notes:

    There is currently no formal guidance at international or Australian levels on how to account for permits issued under emission trading schemes. IFRIC 3 Emission Rights was withdrawn in June 2005 by the IASB because of a lack of symmetry between the recognition and measurement of the permit asset and the emissions obligation. The IASB and Australian Accounting Standards Board have both added the accounting for emission rights to their respective agendas; however an exposure draft is not expected from the IASB until mid 2009. At the March 2009 meeting, the IASB agreed that free permits or allowances should be recognised as an asset and measured at fair value. However, the Board could not agree on how the credit arising from the recognition of the asset should be treated (as revenue or a performance obligation liability) – this will be debated at a future meeting.

  • Disclosures under Australian Stock Exchange rules – The ASX requires disclosure of how an entity manages its material business risks


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