Emissions Trading Schemes
Last updated on December 6, 2010. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
The objective of this joint project is to provide comprehensive guidance on the accounting issues that arise related to emissions trading schemes, including asset recognition, measurement and impairment, liability recognition and measurement, timing of profit and loss recognition, accounting for vintage year swaps, presentation, and disclosure.
Decisions Reached at Last Meeting (November 18, 2010)
See minutes below.
*Summary of Decisions Reached to Date (As of November 18, 2010)
The Board advised the staff to scope this project broadly to include all emissions trading schemes and tradable rights. Accordingly, this project is expected to cover both cap and trade and baseline and credit schemes (whether government mandated or voluntary), as well as project-based certificates and renewable energy certificates. The guidance is expected to apply to participants in a scheme and non-participants that buy and sell tradable rights. The Board also advised the staff that it need not limit itself to existing authoritative literature when developing possible accounting models.
The Boards discussed the initial accounting issues in a cap and trade scheme. Specifically, the Boards discussed whether purchased allowances and allowances allocated by the scheme administrator meet the definition of an asset and should be recognized as such in the statement of financial position. The Boards also discussed whether an obligation meeting the definition of a liability exists when an entity is allocated the allowances.
The Boards tentatively decided that purchased and allocated allowances should be recognized as assets. The Boards tentatively decided that the allocation of allowances creates an obligating event that meets the definition of a liability and should be recognized as such in the statement of financial position.
The Boards also discussed how an entity should determine the quantity of allowances that would be returned under the liability for the allocation, as well as when an entity should recognize an obligation for emissions in excess of the liability for the allocation. Some Board members supported recognizing the excess liability throughout the compliance period as an entity emits, while others supported recognizing the excess liability when the entity’s emissions exceed the liability for the allocation. The Boards asked the staff to seek feedback from stakeholders on both views. The Boards also asked the staff to seek feedback from stakeholders on both models of applying the views, the expected return model and the derecognition model.
The Boards tentatively decided that the measurement of the allocated allowances and the liability for the allocation should be consistent and that the allocated allowances and liability for the allocation should be initially and subsequently measured at fair value. The Boards also tentatively decided that purchased allowances should be initially and subsequently measured at fair value.
The IASB preferred gross presentation of the assets and liabilities on the balance sheet; however, it indicated that it would not object to a linked presentation. (A linked presentation would present the assets and liabilities gross, but the amounts would be presented together and total to a net emission asset or net emission liability.) The FASB tentatively decided that the assets and liabilities should be presented on the balance sheet using a form of linked presentation. However, the FASB also indicated that it did not believe that an entity needed to have the intention of offsetting the assets and liabilities to be able to present the items using a linked presentation.
The Boards asked the staff to perform outreach on the Boards’ tentative decisions to date and present them with feedback in the second half of 2011.
*Board/Other Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Accounting Standards Update.
|*November 18, 2010||Joint IASB and FASB Board Meeting—Recognition of a liability for Excess Emissions. Measurement of Purchased Allowances. Presentation of Allowances and Liabilities on the Balance Sheet.|
|*October 21, 2010||Joint IASB and FASB Board Meeting—Measurement of Allowances and the Liability for the Allocation. Recognition of a Liability for Excess Emissions.|
|September 15, 2010||Joint IASB and FASB Board Meeting—Recognition of Assets and Liabilities in a cap and trade scheme|
|December 15, 2009||Informational IASB Meeting—Future installments|
|November 18, 2009||Informational Joint Board Meeting—Rights and obligations in voluntary schemes|
|April 8, 2009||Board Meeting—Initial Accounting for Issued Tradeable Offsets|
|October 21, 2008||Joint IASB and FASB Board Meeting—Cap and Trade Schemes and Baseline and Credit Schemes|
|March 14, 2007||Board Meeting—Agenda Decision on Possible Amendment of ARB 43|
|February 21, 2007||Board Meeting—Agenda Decision on Emission Allowances|
Emission trading schemes to reduce greenhouse gas emissions have expanded rapidly in recent years at the state, national, and international levels. Cap and trade schemes are a common emission allowance approach. In a cap and trade scheme, a government (or government agency) typically issues tradable rights (allowances) to emit to participating entities. Participants may buy and sell allowances with others, and liquid markets have developed to facilitate this trading activity. At the end of a compliance period, participants are required to deliver allowances equal to their actual emissions, and they may be required pay a fine or suffer other penalties for emissions in excess of remitted allowances.
In a typical U.S. cap and trade scheme, each individual emissions allowance has a vintage year designation, indicating the first year an allowance may be used. Unused allowances may be carried forward to future years. Allowances with the same vintage year designation are fungible and may be remitted by any party to cover its emissions from any source. In these schemes, vintage year swaps among participants are common, as government agencies typically issue allowances for multiple years at a time. For example, a entity may expect to install equipment to reduce its emissions in 2009 but may need additional allowances in 2008 to cover a projected shortfall. That entity might exchange some of its allowances with a 2010 vintage year designation (when it expects to have reduced emissions) for allowances with a 2008 designation with another entity that has an opposite exposure.
In a baseline and credit scheme, each source participating in the scheme is assigned a specific emissions limit for a period. After the relevant period has ended, each source’s actual emissions are compared to its limit. If a source has emitted less than its limit, it receives tradable credits in the amount of the difference. Sources that are over their limit must purchase these credits and remit them to the scheme administrator to cover their excess emissions.
Many emissions trading schemes provide entities added flexibility in fulfilling part of their scheme obligation by allowing them to remit project-based certificates. A project might involve, for example, upgrading equipment at a foreign plant (outside the jurisdiction of the emissions scheme) to make it more efficient. Once a project is approved, validated, registered, and verified, certificates are issued that may be traded or remitted in lieu of standard scheme allowances.
Another type of market program gaining prominence aims to reduce greenhouse gas emissions by requiring electricity producers to remit a minimum number of renewable energy certificates (RECs) annually. The certificates are granted to entities that generate electricity from designated renewable energy sources, and they may be bought and sold. To meet the minimum requirement, an energy producer may generate RECs itself, buy them on the open market, or pay a fine for its shortfall of RECs remitted.
Brokers and other non-emitters have entered the secondary markets to buy and sell these various tradable rights. Some markets are already quite vibrant, and many believe worldwide markets for trading emission allowances and other similar rights will continue to expand rapidly.
The guidance contained in the Federal Energy Regulatory Commission’s (FERC) Uniform System of Accounts is the only accounting guidance available in the United States that explicitly addresses emissions allowances. Based on research performed, the FASB staff believes that most U.S. entities generally account for emission allowances in a manner similar to that required by FERC regulations. FERC requires entities to recognize emission allowances on a historical cost basis and to expense them as “consumed” on a weighted-average cost basis. The FASB staff is aware of diversity in practice, as some entities follow an intangible asset model for emission allowances.
In November 2003, the Emerging Issues Task Force (EITF) attempted to address the accounting for emissions allowances in Issue No. 03-14, “Participants’ Accounting for Emissions Allowances under a 'Cap and Trade' Program.” However, after one meeting, the Task Force decided to remove Issue 03-14 from its agenda. Some Task Force members observed that any consensus reached on the issue might have implications beyond cap and trade emissions trading schemes, and they did not perceive a practice issue or diversity in the accounting for emission allowances.
In December 2004, the International Financial Reporting Interpretations Committee (IFRIC) released IFRIC 3, Emission Rights, in an attempt to address how participants account for cap and trade emission trading schemes. IFRIC 3 stated that allowances are intangible assets and should be measured at fair value when received from the government. The grant of allowances is recognized in income on a systematic basis over the compliance period. At its June 2005 meeting, the International Accounting Standards Board (IASB) decided to withdraw IFRIC 3 so that, free of the IFRIC’s constraint of interpreting existing standards, it could address the underlying accounting in a more comprehensive way than originally envisaged by the IFRIC. IFRIC 3 was criticized by some constituents because of its effect on the income statement. Although IFRIC 3 was withdrawn, several IASB Board members indicated at the time that they believed it properly interpreted existing IFRS standards. At its September 2005 meeting, the IASB voted to add a project to its agenda to provide a comprehensive model for emission allowances similar to issues discussed in IFRIC 3.
After FASB Statement No. 153, Exchanges of Nonmonetary Assets, was issued in December 2004, questions arose in practice as to whether vintage year swaps should be accounted for at fair value or based on the recorded amount. On August 8, 2006, the Technical Application and Implementation Activities (TA&I) Committee approved a recommendation for the Board to add a project to its agenda to address the nature of emission allowances and clarify the accounting for vintage year swaps. The staff exposed a draft proposed FSP for external review that stated that emission allowances are not inventory. Reviewers of the draft commented that the focus of the proposed FSP was too narrow and recommended that the Board address the accounting for emission allowances comprehensively. That proposed FSP was never finalized, and on October 12, 2006, the TA&I Committee instructed the staff to prepare an agenda request for the Board to consider whether to address the accounting for emission allowances in a comprehensive manner.