Question

There are different methods to account for carbon emissions such as IFRIC 3 Approach, Net Liability Approach and Government Grant Approach. Explain in detail how each of those accounting methods will impact the financial statement and financial performance of a company. (i.e. assets, liabilities , equity, income and expenses ).

Answer 1

IFRIC 3 Approach (Emission Rights issued)

In order to increase the impact of scheme of enlargement in the light of Kyoto agreement, various government and others encourage to reduced the impact of greenhouse gas emission.

The interpretation stared as:

-right (allowance) are tangible assets that should be recognized in the financial statement in accordance with the IAS 38 intangible assets.

-as those who participate in the programmed for produce emission, it recognizes the provision for its duties to deliver the allowance in accordance with the IAS 37 provisions, contingent liability and also contingent assets.

this provision is basically measured at the market value of the allowance which is needed to settle

-when allowance are issued to the participants by the government or any government agency for less than the fair value, the difference between the amount paid and the their fair value is a government grants that amount is taken as and accounted for in accordance with the IAS 20.

IN JUNE 2005, the IFRIC issues are on the discussion of a proposed amendments to IAS 38 intangible assets that creates an additional category of the intangible assets at their fair value and a proposal form EFRAG is issued how hedge account accounting is used the resolved the concept to mismatch the situation created bt IFRIC 3.

Net Liability Approach

Under the Net Liability Approach ,emissions permits granted that are recorded at their nominal value that is nil ,if the granted for nil consideration and entity also recognized a liability once the actual emission exceed the permit granted as per the provision.

The purpose of the empirically analysis was to analyze the accounting treatment and disclosure related to emission right in financial statement of the company

No assets are deferred income is recognized when the allowances are initially received as the grant is recognized at nominal value in accordance with the alternate accounting treatment as per IAS 20 ,It is to be considered that nominal amount being zero in this case .

Allowances granted to the entity of two set any liability arising as a result of carbon emission, So as long as entity hold sufficient allowance to meet its emission obligation no entries are required

If it is observed that entity has no allowance or there is shortfalls in allowance to meet its obligation relates to emission , provision is made for the best estimate regarding cost too be incurred to meet its emission obligation that is cash cost of the allowance required to cover the short fall at the prevailing market price on the balance sheet date.

Government Grant Approach

Any sale will require a careful evaluation to determine if sufficient permit are held to match the emission made ,that is selling too many permit can negatively impact the additional cost even if the entity intends to purchase permit in future to cover the emission liability .

Valuation of permit and liabilities is treated as part of a business combination regardless of the accounting approach opted for emission permit granted. This permit will be accounted for as purchase permit and should be recognized at fare value and similarly a liability will need to be recognized but it is only for the actually emission made.

It si to be identify of which entity is responsible for ownership of the emission permit .

Accounting for forward contract to purchase or sell emission permit such contract are treated as derivative instrument and to be recognized and measured at fair value .

Certified emission reduction ,(CERs) meet the definition of the government grant and fall within the scope of IAS 20.