The European Union Emissions Trading Scheme (Eu ETS) constitutes ‘cap-and-trade’ scheme. For example, not only the scheme applies to carbon-intensive industries at the inception of ETS such as electricity generation, but also it includes the aviation industries. In particular, if entities or industries surrender a corresponding number of emissions allowances, they can be allowed to emit carbo dioxide into the atmosphere.
Since emission allowances are tradable, most companies including operators of covered installations recognize them received at free of charge and purchased them at cost as intangible assets on carbon markets, which is recorded as a corresponding credit entry to a provisional liability or to cash. Actually the entities are unwilling to disclose the practices relating to the intangible assets i.e. amortization, revaluation and impairments. Hence, the entities will recognise the cost in income statement and a provisional liability when they emit emissions. In the aspects of surrendering carbon rights, the entities always recognize its account as a provisional liability with the corresponding credit entry to intangible assets. For the purpose of resolving this issue, most companies usually adopt IAS 8 to implement and develop their own accounting policy(CPA Australia, 2008). Because policies and practice with respect to recognition and measurement of emission allowances among the different companies are considerably diversity and inconsistencies, resulting in impeding the comparability in the financial statements of the companies. In other words, the various treatments of carbon rights would give a rise to material or volatility effects on financial statements such as timing of recognition of assets, liabilities and profits or losses(KPMG, 2008).
In accordance with the above, emission allowances may be accounted for as intangible assets, government grants and financial instruments(Mackenzie, 2009). There are some investigations of the recognition of allowances during the different stages, which involves receipts of free allowances, purchase of allowances, use of allowances when emitting emissions and surrender of allowances when used allowances are delivered. The International Accounting Standards Board (IASB) released Carbon Emission Rights (CER or IFRIC3), which aims at providing a guidance on accounting for ‘cap-and-trade’ scheme. IFRIC3 emphasizes some key recommendations, it states CER are intangible assets regardless of whether they are provided for free cost by government or purchased. Furthermore, it stresses CEA should be accounted for in conformity to IAS 38 subsequent to initial recognition, and according to IAS 37 emissions and provisions for relevant liabilities should be recorded ar market value. It also indicates the allowances issued by government is lower than fair value (FV), then the different price paid is a government grant. After that, the grant will recorded as a deferred income in the balance sheet then there is a subsequent and systematic basis in income, and the changes in revalued allowances would be recognized in equity but the movements of emission provision recognized in income statement (KPMG, 2008). Moreover, KPMG propose other important issues, for instance, intangible asset received as a government grant should be measured ar nominal value or FV, emissions occur as an expense in the income statement can be recognised as a provision to ascertain the measurement at the best estimate of expenditure that is required to settle the obligation.
Nature of emission allowances
There takes four opinions in considerations regarding the nature of the emission allowances. Firstly, under Statement of Financial Accounting Standard (SFAS 140) emissions allowances are defined as intangible assets as they are lack of physical substance and they cannot meet the requirements of financial assets. Second, some proponents…