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In October 2002, the CICA and the International Emissions Trading Association (IETA) sponsored a meeting of representatives from industry, accounting standards bodies, accounting firms and other interested parties to consider accounting for greenhouse gas (GHG) emissions and related credits and transactions. A copy of the proceedings document can be obtained from J. Paul-Emile Roy, CA (research.studies@cica.ca).
Proceedings of Accounting for Greenhouse Gas Emissions Meeting
October 15, 2002 EXECUTIVE SUMMARY In 1997, 38 industrialized countries agreed to a legally binding agreement to reduce their emissions of greenhouse gases (GHGs). Under the agreement, Canada committed to reducing its emissions to 6% below 1990 levels during the period 2008 to 2012. While Canada has not yet ratified this agreement, called the Kyoto Protocol, it is expected to and, in so doing, will assume a significant challenge and cost. An important feature of the Kyoto Protocol is that it establishes emission reduction trading as a mechanism to achieve emission reduction targets. Some countries, such as the United Kingdom, have established GHG emission trading schemes in anticipation of the compliance years 2008-2012. The European Union will have its trading system operational by 2005. The United States has not agreed to ratify the Kyoto Protocol. While Canada has not yet established a trading system, some Canadian companies have been trading in anticipation of expected Canadian legislation. Different trading systems have different rules to address questions such as: Will historic emissions be grandfathered? Will emission allowances be auctioned? How will allowances be allocated? Will allocations of allowances be bankable? Transactions under different trading rules could therefore give rise to a range of accounting and disclosure issues. To provide credibility and reliability, emissions and emission trading must be recorded and reported as accurately and completely as possible, and appropriately verified. To date, transactions have not been material in amount and there has been little or no external reporting of trading. But it is important that companies develop consistency in accounting for and reporting like transactions and have access to appropriate authoritative guidance to do so. A meeting sponsored by the International Emissions Trading Association (IETA) and the Canadian Institute of Chartered Accountants (CICA) was held on October 15, 2002, to consider issues relating to accounting for GHG emissions. Participants in the meeting included representatives from industry (11), accounting standards bodies (5), accounting firms (6), and other areas (5). The participants raised a number of issues related to accounting for transactions under a cap and trade emissions trading scheme, including: - Is there and will there be sufficient participants and an active market for emission reduction trading?
- As the accounting treatment used may, to a large degree, depend on the legislation enacted, and as legislation has not yet been enacted in Canada, could companies be at risk of misleading people in recording, or not recording, assets and/or liabilities?
- What impact will changes in legislation have on the accounting for GHG emissions, and how does one incorporate regulatory risk?
- How does one consolidate transactions arising from the fragmented and differing regulatory regimes that are employed in different countries in which a company operates?
- Are there appropriate internal record keeping systems to permit an accurate and complete inventory of emissions?
- Should GHG emission reductions be recorded at market value or internal abatement cost (i.e., what it would cost a company to generate direct emission reductions in house)?
- If the government issues allowances or permits, are they an asset, and, if so, how should the asset be valued?
- Should a liability for GHG emissions be recorded and, if so, when and how should it be valued?
- Will companies be permitted to bank credits and, if so, what are the accounting consequences?
- What disclosures should be made to the capital markets at this time?
- In exchange for permits, what is the executory contract in which a company engages?
- Is there a sufficient supply of trained verifiers to review or audit GHG transactions and emission reduction credits?
To determine the appropriate accounting for an allowance that entitles a holder to emit a defined quantity of GHGs, one must consider the attributes or rights and obligations that go with it. There was a wide-ranging discussion of various considerations that would go into determining the appropriate accounting. Are the allowances or permits an asset? If so, is it an intangible asset? Is it similar to a license to operate within certain parameters? Is it an economic incentive to reduce emissions? Is it a derivative for some companies? By definition, it does not seem to be a financial instrument. Would hedge accounting help? If there is an asset, how should it be valued - at historical cost or market value? What is the nature of a company's obligation and when does it arise? With respect to disclosure presentation, netting of assets and liabilities is not normally appropriate, but the facts and circumstances of the legislation and the attributes of the allowances or reduction credits would determine the presentation. Path Forward Company participants indicated that there is an urgent need for accounting guidance. For accounting standard setters, it would be constructive to break out the most relevant accounting issues and narrow the discussion appropriately. It would be helpful to capture and summarize the practices that are being followed currently and determine the nature, significance and extent of the accounting issues. This would enable items to be addressed in a measured, step-by-step approach. Possibly, different parties might assume responsibility for specific items, thereby dividing the workload and facilitating the process. The path forward may take the form of incremental steps, such as the issuance of partial interpretations. Those responsible for convening the meeting agreed to consider this matter further. Participants agreed that it would be helpful to produce this Proceedings Document so that it could be distributed to interested parties, including the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB), as a contribution to its deliberations on the issues and its development of interpretive guidance.
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