The purpose of the Outreach session was:
- to provide an update on the progress and tentative decisions of the IASB in respect of the project to develop a standard on emissions trading
- to get feedback on the experience of ETS participants on the practical accounting challenges of dealing with the scheme and how the tentative IASB approach works in that context
- to create a forum for open dialogue over the technical and theoretical issues associated with accounting for emissions trading.
This article summarises the key issues considered in the outreach session and gives some initial views on the tentative IASB conclusions in relation to the emissions trading standard development project to date1.
IASB Discussion and Tentative Views
The IASB is currently focussing on the accounting under “cap and trade” schemes. Under these schemes there is a emissions “cap” and emission units are allocated or sold to the value of the cap. Participants in the scheme that need additional units (i.e. exceed the cap) must acquire units from participants who have emitted below the cap and have units available. The New Zealand scheme isn’t a cap and trade scheme. However, many of the issues under consideration by the IASB will be relevant in New Zealand.
To date, the accounting issues associated with emissions trading addressed by the IASB has focussed on emission units allocated under cap and trade schemes and the associated liability for the allocation received and any additional liability where excess units are required. The IASB has also discussed the treatment of purchased units and presentation and disclosure options.
1Refer the ETS project pages at www.iasb.org
Allocated and Purchased Units
The IASB has tentatively decided that allocated emission units (or “allowances”) should be initially and subsequently recognised at fair value. In addition, for consistency the tentative decision is that purchased units should also be recognised initially and subsequently at fair value.
Liability measurement
The liabilities currently being considered by the IASB in respect of ETS are effectively two-fold: 1) the liability relating to the allocation received; and 2) the liability for any excess units required. The tentative conclusion is that the measurement of the liability should be consistent with the treatment of allocated units – i.e. initially and subsequently at fair value. In respect of the liability for emission units required in excess of the allocation the IASB has not yet reached a tentative conclusion as to when this liability should be recognised.
One view is that the excess liability should be measured only when the entity’s emissions exceed the liability for the allocation. A counter view is that the expected excess is recognised on a systematic basis as the entity emits.
Presentation and Disclosure
The IASB is yet to reach a tentative position in relation to the presentation of emission unit assets and liabilities. The favoured options appear to be either presenting emission unit assets and liabilities gross on the balance sheet or some form of linked presentation. Linked presentation is where the assets and liabilities are recognised gross but together, showing a net position on the face of the balance sheet
Our initial view as that a gross presentation appears to be the most appropriate to the New Zealand scheme. While units may be held by participants for the purpose of meeting an emissions obligation, this is not necessarily always going to be the case, therefore a linked presentation may not always be appropriate.
KPMG Comment
Based on the tentative views expressed by the IASB, the following summarises some of our observations:
- In our experience, the majority of New Zealand entities are not recognising allocated units at fair value adopting instead a nominal value approach. This differs from the proposed IASB fair value approach.
- The ability to revalue units using current accounting guidance is problematic due to the challenges of defining an “active market” for emission units in New Zealand. As a result, in our experience the majority of entities are not revaluing units once received (whether purchased or allocated).
- In the New Zealand context, an allocation of units does not reflect an entities obligation in respect of its emissions. This is a conceptually different position to that articulated by the IASB and may result in some challenges in applying the model developed to the New Zealand scheme.
- Because of there being no direct link between allocation and emissions liabilities, the fair value model may also create difficulties where the ETS cost forms a component of inventory. This raises concerns about inventory valuation and the extent of income statement variability.
- In terms of presentation our initial view is that gross presentation appears to be the most appropriate to the New Zealand scheme. While units may be held by participants for the purpose of meeting an emissions obligation, this is not necessarily always going to be the case, therefore a linked presentation may not always be appropriate.
Concluding Comment
The IASB would acknowledge that the project still has many aspects to consider. The following are the key aspects that are important in New Zealand and which we feel should be addressed in future deliberations.
- Forestry - particularly in respect of the timing of liability recognition and the impact of carbon on forest valuations.
- The relevance of the "active market" definition which may apply to several jurisdictions as new emissions trading schemes emerge.
- Guidance on how barter transactions between direct participants and customers should be accounted for.
- How the interaction with existing standards will apply where the specific situation in a jurisdiction is not addressed in the standard.
- Further consideration of what constitutes the obligating event in emissions trading.
We acknowledge the work of the IASB to date on what is, from an accounting perspective, a complex and varying set of requirements. However we note that there is some way to go on this project which we hope will develop a standard that can be applied as broadly to all emissions trading schemes and not restricted to cap and trade.
Contact us
If you have questions of the Emissions Trading Scheme, please contact Jamie Sinclair at KPMG.