Project Updates
Emission Allowances
Last Updated: March 17, 2008 (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.
Project Objective(s)
*Decisions Reached at Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
Board/Other Public Meeting Dates
Contact Information
Project Objective(s)
The objective of this project is to provide comprehensive accounting guidance for participants in emission allowance programs. The project will provide guidance on accounting for emission allowances and related liabilities.
*Decisions Reached at Last Meeting
At the February 21, 2007 Board meeting, the Board decided to add a comprehensive project on accounting for emissions allowances to its agenda.
*Summary of Decisions Reached to Date
At the February 21, 2007 Board meeting, a comprehensive project on accounting for emission allowances was added to the agenda.
At the March 14, 2007 Board meeting, the Board decided to add a short-term project to its agenda related ARB 43, Restatement and Revision of Accounting Research Bulletins, to determine whether that research bulletin should be amended to require fair value accounting for certain nonfinancial assets with readily determinable fair values that are held in trading inventory, including traded emissions allowances.
*Next Steps
The Board is expected to address the types of emission allowance schemes that should be within the scope of this project. The Board’s decision on scope is likely to affect the accounting questions the Board would address for emission allowance asset recognition, measurement and impairment, cost allocation, liability recognition, presentation, and disclosures.
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 Statement, Interpretation, or FSP.
| March 14, 2007 |
Board Meeting—Agenda Decision on Possible Amendment of ARB 43 |
| February 21, 2007 |
Board Meeting—Agenda Decision on Emission Allowances |
Background Information
Emission allowance programs to reduce greenhouse gas emissions have expanded rapidly in recent years at the state, national, and international levels. Cap and trade programs are a common emission allowance approach. In cap and trade programs, a government (or government agency) typically issues rights (allowances) to participating entities to emit a specified level of pollutants. 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 or pay a fine for their emissions in excess of allowances.
In a typical U.S. cap and trade program, each individual emission 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 programs, vintage year swaps among participants are common, as government agencies typically issue allowances for multiple years at a time. For example, a company may expect to install equipment to reduce its emissions in 2009 but may need additional allowances in 2008 to cover a projected shortfall. That company 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 company that has an opposite exposure.
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 credits (RECs) annually. The credits arise by generating 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 emission allowances. These markets are already quite vibrant, and many believe worldwide markets for trading emission allowances 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 emission allowances. Based on research performed, the FASB staff believes that most companies generally account for emission allowances in a manner similar to that required by FERC regulations. FERC requires companies 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 companies follow an intangible asset model for emission allowances. No authoritative guidance addresses the accounting for RECs.
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.” 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 emission programs, and they did not perceive a practice issue or diversity in the accounting for emission allowances.
IFRIC 3, Emission Rights, attempted 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) voted to withdraw IFRIC 3 in light of the reduced urgency for an interpretation, requests from the International Financial Reporting Interpretations Committee (IFRIC) to amend IASB standards, and concerns expressed by the European Commission. At its September 2005 meeting, the IASB decided 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 carryover basis. 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 proposed FSP 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.
Contact Information
David Elsbree
Practice Fellow
dbelsbree@fasb.org
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