There are very few decisions of the IASB and FASB on the accounting standards for emissions allowances so far and even those already adopted are tentative only.



Very interesting document was published on the website of  the International Accounting Standards Board. In the draft of the “Research Paper Emissions Trading Schemes, IASB Meeting - Week beginning 17 May 2010, AGENDA PAPER 10A”

(, author Nikolaus Starbatty analyses the basic models of emission trading schemes, cap-and-trade as well as baseline & credit, mandatory and voluntary ones. He concentrates on these features of the schemes that seem to be of utmost importance for accountancy.


It is apparent from documents published on the website of IASB that after the withdrawal of IFRIC 3, both IASB and FASB are still not certain, how the accounting rules relating to emission allowances should be designed.


In the another project update document dated February 2010 IASB refers to the tentative decisions taken in March 2009, according to which “an entity should recognise emission allowances received free of charge from government as assets. The allowances should initially be measured at fair value.”


The further tentative decision of the Board of the IASB is that “if an entity receives allowances free of charge from the government, the entity incurs an obligation to reduce its emissions below the level represented by those allowances" (i.e. its cap).


As is expressly reserved in these documents, all conclusions reported are tentative and may be changed as the project develops.


The afore-mentioned Research Paper cites, nevertheless, the survey by PwC and the International Emissions Trading Association (IETA), which mentions that despite as many as fifteen variations to account for the effects of EU ETS, there can be highlighted the three main approaches and there is evidence that the largest European emitters primarily rely on approach which provides for following rules:


1) the initial recognition – allocated allowances are recognised and measured at cost, which for granted offsets is nil;


2) the recognition of a liability when incurred (i.e. as emissions are produced). However, the way in which the liability is measured means that often no liability is shown in the statement of financial position until emissions produced exceed the offsets allocated to the participant;


3) subsequently measurement of allowances at cost. This means that the (net) effect on profit or loss from participation in the scheme is the amount required to settle any emissions that a participant emits in excess of the allowances it holds. If a participant’s emissions are equivalent to the amount of free allowances that the participant has received, no effect on profit or loss arises.


So, the most common approach among the largest European emitters only presents allowances as assets on the statement of financial position to the extent the allowances have been purchased in the market (even though the allowances are indistinguishable from the allowances that were granted free of charge to the participant). This approach only recognises a liability if, and to the extent that, a participant’s emissions exceed the amount of allowances that a participant holds (for the particulars of the main approaches see the source cited above).


It is worth noting that, as follows  from the document titled “Information for observers Board Meeting: 20 May 2008, Cover note (Agenda paper 03)”, the working staff of the IASB and FASB adopted (for the purposes of developing a project) a definition of the emissions trading scheme, which is “an arrangement designed to improve the environment, in which participating entities may be required to remit to an administrator a quantity of tradable rights that is linked to their direct or indirect effects on the environment.”


The analysis of the important features of this definition leads to the conclusion that tradable rights that are not tied to the environment are not in the scope of the project of IASB and FASB.

The said document also explains in that regard that the obligation to remit may be related not only to an entity’s own direct effects on the environment but also to its indirect effects. This aspect of the definition is intended to capture schemes that cover an entity’s indirect emissions as well as government requirements to remit tradable renewable energy certificates, which are not called schemes but have many of the same characteristics as schemes.

To conclude, despite the cap-and-trade schemes being in place  at least since 2005, the accounting standards still fall behind the markets' development, and we have to wait further for any guidance that would not be "tentative".



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