Accounting Aspects of Emission Allowances in the EU ETS

This paper provides an in-depth analysis of the accounting perspectives of emission allowances within the European Union Emissions Trading Scheme (EU ETS), focusing on the application of International Financial Reporting Standards (IFRS). The study examines the recognition, capitalization, classification, measurement, and derecognition of emission allowances, as well as the treatment of fees and penalties. The paper highlights how various accounting treatments can significantly impact a company's profit or loss and equity, emphasizing the need for comprehensive accounting guidance to aid financial statement users in making informed economic decisions. The report delves into the EU ETS, discusses the recognition of emission allowances as intangible assets or non-current assets held for sale, and explores different measurement models, including cost and revaluation. It also addresses the issues of amortization, impairment, and fair value determination. Furthermore, the paper examines the derecognition of allowances through transfer or cancellation and offers alternative accounting interpretations. An illustrative example is also included to clarify the practical implications of the discussed accounting treatments, providing a valuable resource for understanding the financial reporting of emission allowances.

Accounting Aspects of Emissions Trading
Abstract
This paper is one of the first attempts to analyze the accounting perspectives of emission allowances
introduced by the European Union Emissions Trading Scheme, operating since January 1, 2005. Entities
subjected to the trading system face the growing challenge of calculating and reducing greenhouse gas
emissions; emission allowances are recognized into their books.
This study first introduces the European Union Emissions Trading Scheme. In the frame of the accounting
rules of International Financial Reporting Standards (IFRS), the authors look at the recognition,
capitalization and classification of emission allowances, their measurement, derecognition and also at fees
and penalties as administrative burden related to the trading system. The paper finds that the various
acceptable accounting treatments may affect the entity's profit or loss and equity quite differently.
Therefore a comprehensive accounting guidance is desirable for CO2 emission allowances that helps
readers of financial statements make better-informed economic decisions.
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Table of contents
Introduction..................................................................................................................................3
1. The European Union Emissions Trading Scheme...........................................................4
2. Interpretation of accounting on emission allowances....................................................5
3. Recognition into the balance sheet......................................................................................6
4. Capitalization...........................................................................................................................7
5. Measurement............................................................................................................................8
5.1. Emission allowances recognized as intangible assets...........................................................8
5.1.1. Cost model or revaluation model......................................................................................................8
5.1.2. Amortisation.........................................................................................................................................8
5.1.3. Impairment............................................................................................................................................8
5.2. Emission allowances recognized as non-current assets held for sale .................................9
5.3. Fair value of emission allowances..........................................................................................10
6. Provision..................................................................................................................................10
7. Derecognition.........................................................................................................................10
7.1. Transfer.......................................................................................................................................10
7.2. Cancellation................................................................................................................................11
8. Alternative accounting interpretation on emission allowances.................................11
9. Fees and penalties.................................................................................................................12
10. An illustrative example......................................................................................................12
Summary......................................................................................................................................14
List of references.......................................................................................................................15
List of tables
Table 1. Alternative accounting treatments for emission allowances.........................................................11
List of figures
Figure 1. A simplified model for the operation of allowance trading..........................................................4
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Introduction
This paper calls attention to the area of environmental protection where it is not the environmental experts
and green NGOs that make efforts to achieve results most of all. The emissions trading system relating to
greenhouse gases offers the promise of additional revenue to businesses, this article addresses managers
and operators covered by the regulation of the EU ETS. This paper focuses on the accounting aspects of
emission allowances and their book keeping rather than discussing related theories. This study presents
evidence that it is worth analysing emission allowances as assets from an accounting perspective as they
are recognized in the financial statements of companies.
The CO2 allowance system entered into force in the European Union on January 1, 2005. The revision of
National Allocation Plans establishing the conditions of the operation was completed by the middle of
2006. The system has finished its first, trial phase with the end of 2007. Events of the last three years were
the establishment of the conditions and details of introduction, operation and sustainable operation, market
creation, and the foundation of its technical and technological basis. It can be stated that this area requires
a shift in attitudes and is sensitive to economic factors.
The system is quite revolutionary and not just because of the exact level of emission reduction achieved.
Similar incentive systems have already been present both in Europe and around the world (e.g., eco-taxes,
environmental burden fees, environmental pollution fines). However, no such system has been present to
encourage participants within a public stock exchange framework, allowing for an almost full enforcement
of market mechanisms, at the same time, attracting capital investors to this area.
As a result of the Directive on CO2 emissions trading of the European Union the emissions of CO2 have
become a new factor in the production costs of companies covered. CO2 emission allowances are intended
to become scarcities, similar to capital, labour force, land or other natural resources. Scarcity creates
value, that is, allowances for carbon emissions become material rights of business value, its ownership
bear benefits.
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1. The European Union Emissions Trading Scheme
The European Union established the Emissions Trading Scheme (EU ETS) for the reduction of CO 2
emissions by 8% under 1990 levels by 2012 (Directive 2003/87/EC). The system is the first transnational
emissions trading scheme in the world, covering 27 countries. Since 2005 installations in the covered
sectors – combustion installations exceeding 20 MW producing heat and electricity, oil refineries, coking
plants, steel and iron production, cement, lime, glass, bricks and tile production, and paper and pulp
industry plants – face the global pressure to reduce CO2 emissions. The EU ETS covers over 12,000
installations in about 4,500 companies representing around 45% of the EU’s total CO2 emissions or about
30% of its overall greenhouse gas emissions. The trial period of 2005-2007 is followed by the first
commitment period between 2008 and 2012.
The essence of the system is that participating companies are allocated a fixed number of allowances (EU
Allowances, EUA) according to National Allocation Plans stipulated by governments and approved by the
European Commission. Each allowance represents an authorization to emit one tons of CO2. The number
of allowances is capped at EU level in order to reduce emissions to the desired level, and sources are
required to meet stringent, comprehensive emission monitoring requirements. Allowances are subject to
sale and the seller receives money for their transfer. The system allows companies to trade their surplus
allowances above their actual emissions freely on the market.
An efficiency argument for this system is market creation. It provides an opportunity for competition and
thus for the improvement of efficiency. Due to trading, each company optimizes its management
separately and thus no dead weight arises for command and control regulation. When conditions are met,
emissions reduce and the polluter pays principle is enforced. It is of global benefit that during the
introduction of the emissions trading the total emissions shall not increase while the seller and the buyer
are encouraged to generate revenue and to save costs and thus to emit less. (Hajdú 2005)
Figure 1. A simplified model for the operation of allowance trading
Source: NEC, 2006
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2. Interpretation of accounting on emission allowances
Market-based programs, like CO2 allowance trading systems, “raise a plethora of new accounting, tax and
liability issues with little in the way of precedent." (Hopp 1994:487) “The issues for accountants are how
to account for the emission rights received, any surplus or shortfall of rights at the balance sheet date and
how to measure the expense associated with CO2 emissions.” (Riley 2007:48)
From 2005 many companies in the EU are required to report their financial performance according to
International Financial Reporting Standards (IFRS). This paper focuses on the accounting principals of
IFRS. However it should be noted that in the US, the Emerging Issues Task Force (EITF) also attempted
to summarise the related accounting issues in Participants’ Accounting for Emissions Allowances under a
“Cap and Trade” Program. This regulation is beyond the scope of this paper.
The International Accounting Standards Board’s (IASB) International Financial Reporting Interpretations
Committee (IFRIC) has decided to standardise the accounting for emission rights and has issued its
interpretation how to account for emission allowances. IFRIC 3 Emission Rights was published by IFRIC
on 2 December 2004. The objective was to provide guidance on accounting for a cap and trade emission
right scheme that is operational. It would have become effective for annual periods beginning on or after 1
March 2005.
Several organisations submitted comments on IFRIC 3 Emission Rights. For example the concerns of the
European Financial Reporting Advisory Group (EFRAG) were the followings: “applying IFRIC 3 will not
always result in economic reality being reflected and relevant information being provided. That is because
the accounting required by IFRIC is constrained by the existing standards. ... This creates a measurement
mismatch [whereby some items are measured at cost (IAS 38 and IAS 20) and others at fair value (IAS
37)] and a reporting mismatch [whereby some gains and losses are reported in profit or loss (IAS 37 and
IAS 20) and others in equity (IAS 38)]. These accounting mismatches are all the more critical because of
the fact that there is an economic interdependency between the assets and liability involved in the
scheme.” (EFRAG 2005) That was why EFRAG recommended that IFRIC 3 should not be endorsed for
use in the EU. According to the opinion of EFRAG “the disadvantages that would arise from endorsing
the interpretation outweigh the advantages of guidance on the accounting on the emission right schemes.”
(EFRAG 2005)
After a long and vigorous debate, during which several alternative treatments were proposed, the IASB
withdrew IFRIC 3 at its meeting in June 2005. The reasons were the unsatisfactory measurement of the
interpretation, the reporting mismatches and reduced urgency for an accounting guidance on emission
allowances. IFRIC is now reconsidering IFRIC 3 Emission Rights to improve the accounting quality of the
financial information resulting from the interpretation and it is studying whether and how IFRIC 3 might
be appropriate to amend existing standards to reduce or eliminate some of the mismatches.
“But the issues associated with emission rights accounting, as with CO2 emissions, have not disappeared
as easily as IFRIC 3. So, in this post-IFRIC 3 vacuum, how should entities that participate in an emissions
trading scheme account for the rights?” (Riley 2007:48) So thus a guidance should be revealed how to
apply existing International Accounting Standards to cap and trade emission rights schemes. An emission
allowance reported in financial statements and accounts is considered as a special case of the following
accounting standards:
IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
IAS 36 – Impairment of Assets
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
IAS 38 – Intangible Assets
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.
This paper provides an accounting guidance according to the above mentioned accounting standards.
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3. Recognition into the balance sheet
An emission allowance scheme gives rise to:
(a) an asset for allowances held;
(b) a government grant;
(c) a liability for the obligation to deliver allowances equal to emissions that have been made.
On one hand an emission allowance meets the definition of an asset in the Framework for the Preparation
and Presentation of Financial Statements. Assets are resources controlled by the entity as a result of past
events and from which future economic benefits are expected to flow to the entity. An entity controls an
asset in case it is capable of gaining the earnings deriving of the asset or restricting others in it. Future
economic benefits may arise from cost savings realized by the asset or direct increase in incomes or from
any economic events related to the use of the asset. On the other hand once emissions have occurred, the
entity has the liability to deliver allowances equal to emissions that have been made.
“A comparison of the characteristics of ecological resources and of traditional intangible resources shows
points of similarity that may cause an equivalent treatment in the annual accounts.” (Edeltraud 2006:235)
Accordingly emission allowances are to be considered as intangible assets. The recognition of an item as
an intangible asset requires an entity to demonstrate that the item meets:
(a) the definition of an intangible asset; and
(b) the recognition criteria.
An emission allowance meets the definition of an intangible asset, namely it is an identifiable non-
monetary asset without physical substance. An asset meets the identifiability criterion in the definition of
an intangible asset when it:
(a) is separable, i.e. is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, asset or
liability; or
(b) arises from contractual or other legal rights, regardless of whether those rights are transferable
or separable from the entity or from other rights and obligations.
An intangible asset shall be recognized if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and
(b) the cost of the asset can be measured reliably.
Emission allowances are basic rights, which permanently serve the operation of the entity. The emission
permit and the pollution rights obtained are fundamental requirements for the continued operation of the
entity. Operation of enterprises under Directive 2003/87/EC requires a greenhouse gas emission permit:
“Member States shall ensure that, from 1 January 2005, no installation undertakes any activity listed in
Annex I resulting in emissions specified in relation to that activity unless its operator holds a permit issued
by a competent authority in accordance with Articles 5 and 6” (Article 4). Emission allowances to be
allocated in the given calendar year shall be allocated by February 28 of each trading year. Entities are
obliged to deliver allowances corresponding to their emissions by April 30 of the following year at the
latest. These are then deleted from the Transaction Log.
Entities are free to buy and sell allowances. Thus an entity has three options:
1. it can emit equal to its initial allocation;
2. it can emit less than its initial allocation, and sell or bank excess allowances;
3. it can emit more than its initial allocation, in which case it must buy additional allowances for
the excess emissions or borrow from next year’s allocation or pay a penalty.
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An entity can also sell some or even all of its allowances in the expectation of later buying allowances
equal to actual emissions.
Entities generally have two opportunities with regards to the recognition of emission allowances. If the
allowance is expected to be settled more than 12 months after the balance sheet date, it shall be recognized
as an intangible asset under IAS 38 Intangible Assets among the non-current assets. In a given trading
period the allowance not used in the current year can be transferred to the following year. If the allowance
is expected to hold primarily for trading, it shall be recognized as non-current asset held for sale under
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
An entity shall classify the emission allowance as non-current asset held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use. For this to be
the case, the asset must be available for immediate sale in its present condition subject only to terms that
are usual and customary for sales of such assets and its sale must be highly probable. For the sale to be
highly probable, the appropriate level of management must be committed to a plan to sell the asset, and an
active programme to locate a buyer and complete the plan must have been initiated. Further, the asset must
be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition,
the sale should be expected to qualify for recognition as a completed sale within one year from the date of
classification.
The three options of an entity are linked to the following accounting recognition:
1. emission allowances shall be recognized as intangible assets;
2. emission allowances shall be recognized partly as intangible assets and partly as non-current
assets held for sale;
3. emission allowances shall be recognized as non-current assets held for sale.
4. Capitalization
On initial recognition an intangible asset shall be measured at fair value or at cost. Capitalization of
emission allowances has two major types: allocation by government and purchase.
(a) Allocation by government
According to the Directive 2003/87/EC Member States shall allocate at least 90 % of the allowances
free of charge for the five-year period beginning 1 January 2008. Allowances that are allocated free of
charge or for less than fair value by the government shall be measured initially at their fair value. Fair
value is the amount for which the allowance could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. In these cases the difference between the amount paid and fair
value is a government grant that shall be accounted under IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance. In accordance to IAS 20 such a grant should be measured
at fair or nominal value. “The IFRIC agreed that the estimation at nominal value should not be
permitted for emission rights, since this would not enable the equal treatment of allowances allocated
free of charge and sold allowances.” (Edeltraud 2006:232) Accordingly, the grant is initially
recognized as deferred income in the balance sheet and subsequently recognized as income on a
systematic basis over the compliance period for which the allowances were allocated.
(b) Purchase
In case an entity has fewer permits than the emissions it generates, it should either finance an anti-
pollution investment or purchase allowances at OTC markets, auctions or at the stock exchange.
Allowances purchased shall be measured initially at cost. The cost of a separately acquired intangible
asset comprises its purchase price and any directly attributable cost of preparing the asset for its
intended use.
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Date of recognition is the day on which the Member State credits the emission allowances in the
Transaction Log for the entity and, in other cases, the day of the contractual performance.
5. Measurement
5.1. Emission allowances recognized as intangible assets
5.1.1. Cost model or revaluation model
If emission allowances are recognized as intangible assets, an entity shall choose either the cost model or
the revaluation model as its accounting policy. If an emission allowance is accounted for using the
revaluation model, all the others shall also be accounted for using the same model.
Cost model: After initial recognition, an emission allowance shall be carried at its cost less any
accumulated impairment losses.
Revaluation model: After initial recognition, an emission allowance shall be carried at a revalued amount,
being its fair value at the date of the revaluation less any subsequent accumulated impairment losses. Fair
value shall be determined by reference to an active market. Revaluations shall be made with such
regularity that at the balance sheet date the carrying amount of the asset does not differ materially from its
fair value. An active market is a market in which all the following conditions exist:
(a) the items traded in the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time; and
(c) prices are available to the public.
If an allowance’s carrying amount is increased as a result of a revaluation, the increase shall be credited
directly to equity under the heading of revaluation surplus. However, the increase shall be recognized in
profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in
profit or loss. If an allowance’s carrying amount is decreased as a result of a revaluation, the decrease shall
be recognized in profit or loss. However, the decrease shall be debited directly to equity under the heading
of revaluation surplus to the extent of any credit balance in the revaluation surplus in respect of that
allowance. The carrying amount modification of the revalued allowance can be accounted by gross or by
net method. The gross method reaccounts the accumulated amortisation proportionally to the change in
gross value and both the gross value and the accumulated amortisation are modified by this ratio. The net
method carries the accumulated amortisation and the gross value together. So thus the net value is
modified to the revalued amount. Considering that emission allowances shall not be amortised, the net
method shall be regarded as adaptable method.
5.1.2. Amortisation
Amortisation is difficult to interpret for emission allowances. The expected usage of emission allowances
is not followed by physical consumption or moral obsolescence. Allowances allocated and not used in the
first year of the trading period can be transferred to the following years and considered as a performance
in the given year.
5.1.3. Impairment
The objective of impairment is to ensure that an entity’s assets are carried at no more than their
recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds
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the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as
impaired and the entity shall recognise an impairment loss. An entity shall assess at each reporting date
whether there is any indication that an allowance may be impaired.
External sources of information are, for example, decline in the market value, significant changes that
have an adverse effect on the entity, increases in market interest rates, and so on. Internal sources of
information are, for example, significant changes in the extent to which or the manner in which the
allowances are used or are expected to be used, and evidence from internal reporting indicating an
allowance is performing worse then expected. If any such indication exists, the entity shall estimate the
recoverable amount of the allowance.
The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Fair
value less costs to sell is the amount obtainable from the sale of an allowance in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal. Value in use is the present
value of the future cash flows expected to be derived from an allowance. The following elements shall be
reflected in the calculation of an allowance’s value in use:
(a) an estimate of the future cash flows the entity expects to derive from the allowance;
(b) expectations about possible variations in the amount or timing of those future cash flows;
(c) the time value of money, represented by the current market risk-free rate of interest;
(d) the price for bearing the uncertainty inherent in the allowance; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash
flows the entity expects to derive from the allowance.
If the recoverable amount of the allowance accounted for using the cost model is less than its carrying
amount, the carrying amount of the allowance shall be reduced to its recoverable amount. That reduction
is an impairment loss. An impairment loss shall be recognized in profit or loss. An impairment loss
recognized in prior periods for an allowance shall be reversed if there has been a change in the estimates
used to determine the allowance’s recoverable amount since the last impairment loss was recognized. The
increased carrying amount of the allowance attributable to a reversal of the impairment loss shall not
exceed the initial carrying amount of the allowance. A reversal of an impairment loss shall be recognized
in profit or loss.
If the allowance is accounted for using the revaluation model any impairment loss shall be treated as a
decrease in the equity under the heading of revaluation surplus to the extent of any credit balance in the
revaluation surplus in respect of that allowance. The remaining amount of decrease shall be recognized in
profit or loss. Any reversal of an impairment loss shall be treated as an increase in the equity under the
heading of revaluation surplus. If any impairment loss was accounted before, the increase shall be
recognized in profit or loss in the extent of the previous impairment loss. The remaining amount of
increase shall be recognized in the equity under the heading of revaluation surplus.
5.2. Emission allowances recognized as non-current assets held for sale
If emission allowances are recognized as non-current assets held for sale, they shall be measured at the
lower of carrying amount or fair value less costs to sell. An entity shall recognize an impairment loss for
any initial or subsequent write-down of an allowance to fair value less costs to sell. An entity shall
recognize a gain for any subsequent increase in fair value less costs to sell of an allowance, but not in
excess of the cumulative impairment loss that has been previously recognized. When the sale is expected
to occur beyond 1 year, the entity shall measure the costs to sell at their present value. Any increase in the
present value of the costs to sell shall be presented in profit or loss as a financing cost. It can happen that
the circumstances of allowances recognized as non-current assets held for sale change in such a way that
the criteria of recognition as non-current asset held for sale are not realized any more. For instance the
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entity can not or does not want to sell these allowances. In this case the entity shall reclassify the
allowances initially recognized as non-current assets held for sale. These allowances shall be measured at
the lower of the followings amounts:
(a) carrying amount modified by any impairment losses or revaluations which would have been
accounted if the allowance has not been recognized as non-current asset held for sale; or
(b) fair value less costs to sell at the date of reclassification.
The difference deriving from reclassification shall be recognized in profit or loss.
5.3. Fair value of emission allowances
As opposed to other rights of financial value, the value of emission allowances is not determined by
benefits and expected future revenue arising from their possession. In reality, it is only the relative market
supply and demand and their situation and volume that influence market prices of allowances. As a result,
the price of allowances has fallen under €1 from the original unit price of €15 to €20. In April 2006 it
became evident that Member States allocated too many allowances and thus there is surplus, and there are
only few companies in scarcity wanting to purchase them. The commitments of the Kyoto Protocol
amount to real objectives only when entities receive allowances in a quantity which corresponds to their
actual production and, what’s more, it is actually the reduction of emissions that has to be achieved on the
long term.
6. Provision
According to the Directive 2003/87/EC “Member States shall ensure that, by 30 April each year at the
latest, the entity of each installation surrenders a number of allowances equal to the total emissions from
that installation during the preceding calendar year and that these are subsequently cancelled”. (Article 12)
“At the start of the compliance period when allowances are allocated, there is no liability yet in agreement
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, since obligations can only arise
from past events.” (Edeltraud 2006:232) Once emissions are made, a liability is recognized for the
obligation to deliver allowances equal to emissions that have been made. This liability shall be accounted
as provision. The liability is settled by delivering allowances, incurring a penalty or a combination of both.
The liability shall be measured at the best estimate of the expenditure required to settle the present
obligation at the balance sheet date. This will normally be the present market price of the number of
allowances required to cover emissions made up to the balance sheet date. However, if the entity’s best
estimate is that some or all of the obligation will be settled by incurring a cash penalty, it shall measure
that part of its obligation at the cost of the penalty rather than at the market price of the relevant number of
allowances. At the balance sheet date or at interim reporting date the liability to return allowances is
recognized as an expense in the income statement. When the entity delivers emission allowances equal to
emissions that have been made in the previous year, the allowances shall be derecognized over against the
liability to return allowances. The remaining amount of the provision shall be derecognized as income.
7. Derecognition
7.1. Transfer
Emission allowances are subject to free trading. “Member States shall ensure that allowances can be
transferred between:
(a) persons within the Community;
(b) persons within the Community and persons in third countries, where such allowances are
recognized in accordance with the procedure referred to in Article 25 without restrictions other
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than those contained in, or adopted pursuant to, this Directive.” (Article 12 of Directive
2003/87/EC)
The national regulation may specify some restrictions on transfer as penalty. The Hungarian Act on the
trading of emission allowances of greenhouse gases orders for example the following: “Without regard to
the payment of penalties when the entity partly or completely fails to comply with its reporting and
auditing obligations and with its obligation to surrender emission allowances by the deadline, it shall not
be entitled to sell emission allowances until the submission of its properly audited report.”
Gains or losses arising from the transfer of an emission allowance shall be determined as the difference
between the net sale proceeds and the carrying amount of the allowance. It shall be recognized as income
or expense in profit or loss in the period in which the transfer occurs. The consideration receivable on
transfer of an emission allowance is recognized initially at fair value. If payment for an allowance is
deferred, the consideration received is recognized initially at the cash price equivalent. The difference
between the nominal amount of the consideration and the cash price equivalent is recognized as interest
revenue.
7.2. Cancellation
Member States shall cancel emission allowances:
(a) any time under the declaration of an entity submitted to the keeper of the Transaction Log;
(b) every year after delivering allowances equal to emissions that have been made;
(c) four months after the beginning of each subsequent five-year period those allowances which are
no longer valid and have not been surrendered and cancelled.
It is worth mentioning that Member States are allowed to issue allowances to entities for the current period
to replace any allowances held by them which are cancelled in accordance with point (c).
8. Alternative accounting interpretation on emission allowances
The above described accounting treatment of emission allowances follows the main principles of IFRIC 3
Emission Rights. However, the entity is allowed to choose other accounting treatment in the frame of
IFRS. (see Table 1.) It is a challenge for companies to decide which method is appropriate and acceptable.
Table 1. Alternative accounting treatments for emission allowances
ALTERNATIVE I. ALTERNATIVE II. ALTERNATIVE III.
Adaptation of IFRIC
3 in its entirety.
Recognition as intangible asset initially
at fair value, together with a government
grant in line with IFRIC 3, but
recognition a provision on the following
basis:
No recognition of an asset or deferred
income (if IAS 20’s accounting policy
choice of recognising the grant at
nominal amount is applied).
▪ to the extent that the entity holds a
sufficient number of allowances, the
provision should be recognised based
on the carrying value of those
allowances;
In case of shortfall in allowances, a
provision should be made for the best
estimate of the cost to be incurred to
meet the emission obligation, i.e. at the
present market price.
▪ to the extent that the entity does not
hold a sufficient number of allowances,
the provision should be recognised
based on the market value of emission
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ALTERNATIVE I. ALTERNATIVE II. ALTERNATIVE III.
rights required to cover the shortfall;
▪ to the extent of the penalty that will be
incurred.
Source: Deloitte, 2008
9. Fees and penalties
Entities are obliged to pay fees as determined by national regulations for the operation of the system of
emission allowances. The Hungarian regulation orders the following fees.
(a) An entity is obliged to pay an annual supervisory fee as of the effective date of its emission
permit. The environmental authority shall spend the amount generated from the supervisory
fees on its activities relating to the operation of the emissions trading system.
(b) An administration service provision fee shall be paid for the permit procedure of greenhouse gas
emissions and for the entry into the National Registry of Auditors and the European Community
Registry of Auditors.
(c) An account management fee shall be paid for the publicly authenticated registering and
managing of emission allowances (Transaction Log).
Entities are obliged to pay penalty in case of non-compliance with statutory obligations.
(a) At the end of the compliance period an entity is required to deliver allowances equal to its
actual emissions. If an entity does not deliver sufficient allowances, it will incur a penalty. The
penalty may take a variety of forms, including a cash payment, reductions in the allowances
allocated to the entity for subsequent periods and restrictions on its operations. The Directive
2003/87/EC specifies an excess emissions penalty which shall be EUR 100 for each ton of
carbon dioxide equivalent emitted for which the entity has not surrendered allowances. Payment
of the excess emissions penalty does not release the entity from the obligation to surrender an
amount of allowances equal to those excess emissions when surrendering allowances in relation
to the following calendar year.
(b) If an entity fails to perform monitoring and reporting on greenhouse gas emissions in
compliance with the regulation or the content of the emission permit, or it operates without an
emission permit, the entity has to pay penalty.
(c) If an entity fails to comply with its reporting compliance or change notification obligations, the
entity is obliged to pay penalty.
(d) If an entity fails to comply with its obligation to pay the fee for the account by the deadline, it
has to pay interest on arrears.
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