Accounting for Emission Allowances

This assignment delves into the complexities of accounting for emission allowances. It examines whether these allowances should be treated as intangible assets and discusses their initial and subsequent measurement at fair value. The text emphasizes the importance of consistent measurement and addresses the challenges posed by income volatility due to variations in emission allowance values.

Running head: EMISSION ALLOWANCES 1
Emission Allowance
Student’s Name
Institution
Date

EMISSION ALLOWANCES 2
Introduction
Absence of acceptable accounting rules to be used in measurement of the emission
has not at any point hindered extension of the market (Paul & Burks, 2010). Such absence is
mainly as a result of different applications as well as the ambiguous natures of the emission
allowances. Emission allowance is basically very significant for implementation of Emission
Trading Scheme. This is usually the market-based scheme which is developed with an aim to
control any carbon emission and to accomplish environmental objectives which Europe is
committed to achieve under Kyoto Protocol. The While accounting for emission assets one is
required to ensure whether these emission allowances are purchased or granted and ensure
that they meet all the description of assets (Fornaro, Winkelman & Glodstein, 2009). This is
achieved by examining their nature and then making decision as to whether they were non-
financial instruments and intangible assets. With these considerations, the paper aims to
present a discussion of how emission allowance is treated and its impact on financial
statements.
Nature of Emission Allowances
Emissions are usually treated with high esteem in management conversions. For
example, overall rule is aimed advancing or promoting objectives of title four which is
mostly apprehensive with clear air alterations of the year 1990 (Mookdee, 2013). In this case,
costing emissions allowances in coordination sales, where public utility level is in line with
directive then providing retrieval of all the variable expenses on increasing level, then such
commission would have a tendency of allowing retrieval of recognized incremental expenses
of emissions pertaining to management saless. Nonetheless, in case the level of management
is not in line with increasing expenses, public utility should give suggestions of different
costing technique (Ragan & Stagliano, 2011).

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Following Paul and Burks (2010) definition, it is clear that all the emission
allowances act as intangible assets since they entails those possessions under organizations’
regulations from which a financial benefit is projected in an organization. In another
proposal; that is, the MiFID, emission allowances is usually categorized as financial
instruments. Though future Directive might try to shield the carbon markets by the monetary
or fiscal market regulations, these emissions are not necessarily treated as financial
instruments since as European Commission viewed that emission allowances are classified
depending on all criteria that are set by the accounting standards only.
Furthermore, emission allowances re not financial instruments since they do not at
any point meet definition of the financial instruments, since such emissions are neither
treated as equity nor as contracts instruments bringing about emergence of the contractual
rights of receiving cash or any other fiscal assets (Mookdee, 2013). Furthermore, emissions
are neither treated as derivatives, as they fails to recognize any primary or original
investment which is lesser than it would be needed for the extra categories of the agreements
which could be anticipated to have same responses to the variations in the market aspects,
and are not established at upcoming date and fails to vary in line with the variations in the
other variables. Basically, emission allowances are regarded as intangible assets or as
inventories.
How Emission Allowances Could Be Measured Originally and Afterward
The measurement of emission allowances should be done consistently and that it
should be measured initially and subsequently at its fair value (Paul & Burks, 2010). To be
more specific, emission allowances should be originally and subsequently be measured at
their fair value. Based on the guidelines provided in FERC which are the only accounting
guideline un US that addresses emission allowances, organizations are required to account
for or measure emission allowances in a way similar to those requirements put forward by the

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FERC regulations. Furthermore, according to the FERC emission allowances are required to
be recognized on historical cost bases and to be expenses as they are consumed on the
weighted-average cost basis (Souchie, 2012).
Basically, as emission allowances are considered as intangible assets, the IFRIC
recommend then to be treated in line with requirements of the IAS 38, under which preparer
of the financial statement is required to adopt one alternative for the subsequent
measurements of the intangible assets; that is the revaluation method or the cost method.
Under the cost technique, emission allowances are to be subsequently measures at cost less
the impairment and amortization costs (Paul & Burks, 2010). On the other hand, since
revaluation method could only be adopted whenever the intangible assets are traded in active
market, the IFRIC recommend that under such circumstances, the emission allowances
should have to be measured at the fair value with the gains being recognized under the equity
as the revaluation surplus as well as upsurge in revaluation excess being encompassed in
comprehensive income statements as items of the other inclusive income.
Further, under the IAS 38, emissions are to be apprehended for total sale in an
ordinary course of any business and are to be treated as inventory as required by AIS 2
inventories (Fornaro, Winkelman & Glodstein, 2009). This means that in case emission
allowances were issued at lesser value than the it fair value, the bulk of the emission
allowances has to be allocated free of any charges and these emission allowances are to be
originally measured at a fair value with any difference that is recorded in between their fair
value and any amount paid being recognized as the government grants and being recognized
under the AIS 20: Disclosure of the Government Assistance (Ragan & Stagliano, 2011).
These granted allowances will be categorized as either deferred incomes in an organization’s
statement of financial position or they should be afterward unconfined to the income or

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revenue on the methodical basis over its agreement time for which all the emission
allowances are to be issued.
Despite these, the IAS 20 permits different organizations to select accounting policies
where emission allowances could be recognized at the nominal amount; that is, at zero value.
In addition, emission allowances liability suggest that all obligations should be delivered
equal to the actual emission to scheme administrator and should be treated as provisions
within AIS 37. In addition, under the AISB 137, emission allowances liabilities are to be
initially measured or accounted for at best approximation every period the expenditures
needed to settle present obligation is made (Fornaro, Winkelman & Glodstein, 2009). This
would be mainly at market value or fair value of allowances needed to recompense all the
emission made all through the year as well as payable to the scheme managers by end of
fourth month of every year.
When emission allowance are received from a given government for free, they are
usually recognizes at nil since they are granted at fair value or at no cost with difference
between fair value and acquisition costs being acknowledged as the government grants or
deferred incomes on the side of liability in an organization’s balance sheet (Mookdee, 2013).
On the other hand, whenever emission allowances are purchase in a given markets, they are
usually acknowledged at the cost. Liabilities for emissions are usually acknowledged on
undeviating basis though the most exercise is recognizing them as the emission take place.
Instead of measuring these liabilities at their fair value, organizations are said to measure
obligation to given amount of allowances at the resounding total of the allowances with
stability at the market value.
A journal entry for emission allowances while amortizing government grants on the
systematic basis is as follows;
Debit: Government grant; that is, deferred income

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Credit: income statement
This is recognized as income share or quota of government grants which counterparts
expenses of the emission within a given period.
On the other hand, while receiving allocation of emission from government free of
charge;
Debit: Emission allowances; that is, intangible assets
Credit: the government grant; that is, the deferred income
While surrendering allowances to a given government in covering emissions;
Debit: emission costs
Credit: the obligation to surrender the emission allowances.
In case, a re-measure of the related emission to the current event;
Debit; the obligations to surrendering the allowances
Credit: the emission allowances; that is, intangible assets
Credit: income statement
This help in recording surrender of the allowances.
In another scenario; while purchasing emission from third parties,
Debit: emission allowances
Credit: cash
On the other hand, while selling allowances to the third party
Debit: cash and
Credit: Emission allowances
While surrendering allowances to a given government not to cover any emission
Debit: Income statement
Credit: Emission allowances; that is, intangible assets
Further, while purchasing allowances from the government auction

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Debit: Emission allowances; that is, intangible assets
Credit: Cash
In addition, while reversing previous retirement deduction;
Debit: The emission allowances
Credit: The obligation to surrender the allowances
Consequences of the Emission Allowances on Financial Statements
Emission allowances are usually proved as very controversial due to the unjustified
volatility which it is said to create in an organization financial statement especially in income
statement. Given that different measurement criteria are applied for the held liabilities and
assets that might arise from gases emitted by an organization, there is a probable artificial
mismatch of the amount which is reflected in the plant income statement (Paul & Burks,
2010). In essence, with the fact that emission allowances are measured at either revaluation
or cost method, if these emission allowances are measured at their fair value through
revaluation model, there is always a mismatch in recognition and measurement of variations
in liabilities and assets since variation in value of emission allowances above the required
costs would be initially recognized in the equity statement while variation in liabilities were
are to be recognized in the balance sheet (Mookdee, 2013).
On the other hand, in case emission allowances are accounted or measured using cost
method, there would be a mismatch since AIS 37 usually necessitates an organization’s
liability for obligation in delivering allowances to be usually measured at a fair value. Such
mismatch were the key reasons for EFRAG decision of issuing some negative authorization
advice in regard to this interpretation. This resulted to withdrawal of this interpretation by
IASB by June 2005 (Fornaro, Winkelman & Glodstein, 2009). Furthermore, emission
allowances are said to result in income volatility which cannot be at any point be justified on

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an economic ground. This could be explained when emission made by an organization
exceed quantity of the emission allowances recognized as the assets.
Conclusion
In conclusion, while accounting for emission assets one is required to ensure whether
these emission allowances are purchased or granted and ensure that they meet all the
description of assets. This should include examining their nature and then making decision as
to whether they were non-financial instruments and intangible assets. Furthermore, it can be
concluded that emissions are the intangible assets since they are those resources under
organizations’ regulation from which a financial benefit is projected to flow to an
organization. Further, it can be concluded that measurement of emission allowances should
be done consistently and that it should be measured initially and subsequently at its fair value.
To be more specific, it can be concluded that emission allowances should be originally and
subsequently be measured at their fair value. This is based on the guidelines provided in
FERC which require organizations to account for or measure emission allowances in a way
similar to those requirements put forward by the FERC regulations. In addition, emission
allowances are to be recognized on historical cost bases and to be expenses as they are
consumed on the weighted-average cost basis. Furthermore, it can be concluded that under
intangible assets are to be apprehended for net sale in normal course of any business and are
to be treated as inventory meaning that in case emissions were issued at lesser value than the
it fair value, the bulk of the emission allowances has to be allocated free of any charges and
these emission allowances are to be originally measured at the fair value with any difference
that is recorded between their fair value and that quantity paid being identified as the
government grant and being accounted for. It can also be concluded that emission allowances
bring unjustified volatility in an organization financial statement especially in income
statement. Furthermore, given emission allowances are measured at their fair value through

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revaluation model, it can be concluded that there is always a mismatch in recognition and
measurement of variations in liabilities and assets since variation in value of emission
allowances above the required costs would be initially recognized in the equity statement
while variation in liabilities were are to be recognized in the balance sheet.

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References
Fornaro, J. M., Winkelman, K. A., & Glodstein, D. (2009). Accounting for emissions.
Journal of Accountancy, 208(1), 40.
Mookdee, T. (2013). Accounting for carbon emission trading: an Australian perspective.
Paul, A., & Burks, E. (2010). Preparing for international financial reporting standards.
Journal of Finance and Accountancy, 4, 1.
Ragan, J. M., & Stagliano, A. J. (2011). Cap and Trade Allowance Accounting: A
Divergence Between Theory and Practice. Journal of Business & Economics
Research (JBER), 5(11).
Souchie, L. E. (2012). Accounting for Emissions Trading: How Allowances Appear on
Financial Statements Could Influence the Effectiveness of Programs to Curb
Pollution. BC Envtl. Aff. L. Rev., 39, 475.