Question

1, Explain how a measurement mismatch, or inconsistency, can arise between assets and liabilities recognised reported in the balance sheet under the cost model within IFRIC 3

2. Explain how a mismatch can arise in the location, or classification, of gains and losses arising from the measurement or revaluation of emission allowances and liabilities to deliver allowances.

3. How might the suggested accounting treatments be modified to avoid these mismatches? Apply some creative thinking here.

Answer 1

1, Explain how a measurement mismatch, or inconsistency, can arise between assets and liabilities recognised reported in the balance sheet under the cost model within IFRIC 3

Solution :-

If the emission allowance (asset) is not revalued,a mismatch can occur because treatment of assets don't line up with the treatment of liabilities.under IFRIC 3 the measurement of emission allowance purchased at fair value could be less than the fair value of emission produced.using example from the lecture 100 MT OF CO2 of emissions allowance purchased with the intension to off-set the production of the 100MT of CO2.However the cost of asset being $30 per metric ton is $6 less than the fair value of $36 per tonne of emissions.Therefore there is a $600 mismatch on the balance sheet despite having the right amount of emission allowance.

2.Explain how a mismatch can arise in the location, or classification, of gains and losses arising from the measurement or revaluation of emission allowances and liabilities to deliver allowances.

Solution :-

Mismatches can raise with the classification of the revaluation of emissions allowance where movement in liability is shown through the profit and loss ,whereas revaluation of the asset is shown through other comprehensive income.This results in the offset of the expenses not being showed against the expenses but rather than oci.

3. How might the suggested accounting treatments be modified to avoid these mismatches? Apply some creative thinking here.

Solution :-

Potentially the easiest way to ensure that these mismatches do not occur is through the historical cost approach .If the emission allowance are given in business at no cost and the business the incurr the cost as an expenses then there is no match and the income received and the expenses are matched both in the profit and loss account.