EFRAG issues feedback statement on their draft comment paper on accounting for Emission Trading Schemes

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

12 Nov 2013

The European Financial Reporting Advisory Group (EFRAG) has released a feedback statement on their draft comment paper on accounting for Emission Trading Schemes. Eleven comment letters were received with most respondents agreeing that specific accounting guidance is needed for emission trading schemes.

The EFRAG draft comment paper, issued in December 2012, recognised that since the withdrawal of IFRIC 3 Emission Rights, this has resulted in diverging practices on the accounting of assets and liabilities arising from participation in an Emission Trading Scheme.  The expected result of the draft comment paper was to help shape an EFRAG recommendation to the International Accounting Standard Board (IASB) on specific accounting guidance for emission rights.  

The key points from the responses to the comment paper are: 

  • Almost all respondents agreed that specific accounting guidance for Emission Trading Schemes was required.  Many of the respondents agreed that although Emission Trading Schemes exhibit similar characteristics to inventory and intangible assets, “no perfect analogy can be drawn from existing IFRSs”.  Many agreed that due to the existence of diverging accounting practices, reducing comparability of information disclosed, specific guidance would be required.
  • Other respondents noted that the practices currently being applied, are considered “best practice” and “robust” and have already been “accepted by users” so questioned the requirement for additional guidance.
  • Most respondents agreed that any accounting guidance should consider the way in which emission rights are being consumed (either through sale or to discharge the entity’s obligation).
  • Most respondents agreed that any rights held for trading should be measured at fair value.
  • There were split views on the initial measurement of rights allocated for free.  Some respondents favoured initial measurement at fair value based upon a market price at the date of acquisition, some disagreed and others believed that there should be an initial recognition value of nil. 
  • For those who agreed with initial recognition at fair value some respondents supported crediting the other side of the entry to deferred income rather than other comprehensive income (OCI) and some favoured OCI.
  • Views were also split about whether an entity should present separately its emission rights and its obligation or present the balance net. 

At the same time as the EFRAG draft comment paper, the IASB reactivated its project on emission trading schemes as an IASB-only research project.  EFRAG does not consider that a research project is required and this is supported by some respondents who feel that the IASB should just develop a standard. 

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