Carbon Emissions Accounting: Current Practices and Financial Impact

This report provides a comprehensive overview of carbon emissions accounting, focusing on the nature of emission allowances within the European Emission Trading Scheme (EU ETS) and their legal and accounting characteristics. It delves into the relevant accounting standards, including IAS 2, IAS 20, IAS 37, IAS 38, and IAS 39, and discusses how carbon emissions are accounted for under both US GAAP and IFRS. The report examines the measurement of emission credits and allowances, highlighting the intangible asset model and the inventory model, detailing their respective accounting treatments, and the impact on financial statements. It also addresses the current accounting practices in the United States, the recognition of liabilities and gains, and the application of derivative accounting to emission credits. The analysis covers the effect of emission credits on financial statements, including reporting allowances as inventory or intangible assets, and the recognition of costs and liabilities. The report emphasizes the importance of understanding these accounting methods for effective financial reporting and compliance.

CARBON EMISSIONS ACCOUNTING 1
CARBON EMISSIONS
ACCOUNTING

CARBON EMISSIONS ACCOUNTING 2
Nature of emission allowances:
Mainly the legal nature of the allowances for the emissions have been issued and also are
traded under the rules of the European emission Trading Scheme (EU ETS). This is though
has not been harmonised at the level of the EU.
The definition of the term allowances has been done under the Article 3(a) of the ETS
Directive wherein it has been prescribed that only one tonne of carbon dioxide shall be
emitted during any period. This would be valid in order to meet the requirements that have
been laid done under the ETS Directive. This would also be transferrable as per the
provisions of the ETC Directive. The notification issued in this regard reports on the
functioning of the carbon market of Europe. This accompanies the report on the
documentation which forms the part of the council. There has been a climate action progress
report that includes the functioning of the carbon market f Europe and also the report which
lays down its view of the Directive 2009/31/EC. This has been done on the geological storage
of the carbon dioxide as on the date of November 18, 2015. This describes the emission
allowances as the following:
 Financial instruments
 Intangible assets
 Property rights
 State property
 Commodities (Emissions, 2017).
Accounting nature:
As per the IASB rules, wherein the accounting standards fail to apply on the company, then
the disclosure has to be made as per the IAS 8 Accounting Policies, Changes in accounting

CARBON EMISSIONS ACCOUNTING 3
Estimates and Errors. This requires in the fact that the management must use their judgment
when it comes to the development and the application of the policy of accounting which
result in the information which is relevant and also reliable. This has to be done in
consultation with the auditors of the firm. The following are the accounting standards as per
which the accounting would take place:
 International Accounting Standard (IAS) 2 Inventories;
 IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance;
 IAS 37 Provisions, Contingent Liabilities and Contingent Assets;
 IAS 38 Intangible Assets; and
 IAS 39 Financial Instruments: Recognition and Measurement.
The carbon emissions are taken into account in accounts as per the Commodities, for
trading purposes etc.
Measurement:
Under the system, the producers of the electric power were given or also they had acquired in
the credits with regard to the free credits which covers up the SO2 and also the NOx
emissions but there is as such no accounting standard under the US GAAP which would
throw some light on the financial accounting for the programs of emissions. The FASB has
joined hands with the International Accounting standards Board or the IASB that would
address in the scheme of the carbon emissions for the purposes of accounting. There are some
more regulations that relates with the emissions that have been produced by the largest
sources of the nation. The EPA has been making it compulsory for the companies to report
the GHG levels (Hindu business line, 2017). There are many of the companies that would
account for the cap and trade activities which are connected with the program when there are

CARBON EMISSIONS ACCOUNTING 4
as such no specific authoritative guidance on the procedure. There are many of the companies
that are duty bound to report the impact of the change in the climate and the regulations of the
GHG emissions in their financial statements on Form 10 K. it is of an utmost importance that
the companies have the management strategy for carbon since those activities would help
them in complying and accounting for these stated activities but also the company will be
allowed to take the advantage of all of the credits and offset the same through the way of
strategic acquisition (ACCA global, 2017).
Current accounting practices:
There are many of the companies that have been operating in the United States and these
companies mostly belongs to the power and the utilities industry. These have been acquired
for the purposes of participating in the EPA, RGGI and other such programs related with such
carbon emissions and these have been associated since a long number of years. There are
many of the programs that have a cap and trade model as well. Since there is an absence of a
set standard in the US GAAP or in the (IFRS) which takes into account the emission credits,
renewable energy, emission offsets or such similar allowances, hence different practices are
being followed in this respect. Hence, there is an urgent need of providing a framework for
the purposes of accounting for the climatic changes, the one that could be applied to all of the
industries without any issue. The FASB and the IASB have joined in hands so as to work for
the emissions trading schemes since the year 2007 (PBR, 2017).
Current accounting for emissions credits or allowances:

CARBON EMISSIONS ACCOUNTING 5
The companies that have been following the US GAAP today participate in the programs that
are related with the carbon emissions follow one of the two different accounting practices.
The first being the intangible asset model and the other being an inventory model.
Accounting of emission allowances:
Accounting under the intangible asset model:
Under this method, the companies measure the emission credits or the allowances that have
bene issued to then and the same have been acquired by them in the open market and values
them at cost. Hence, as and when the company issues the emissions credits or the allowances,
then it would have the nominal cost of 0. Also, there are many of the emission credits or the
allowances that have been purchased will have some cost associated with the same. When
commonly applied, under the model of the intangible asset accounting, it is also possible for
the company to indicate the emissions credit or the allowance that have been issued at their
fair value when the same have been received (Wordpress, 2017). On the basis of these
disclosures, the companies would not amortize the emissions credits since the economic
benefit of the same does not diminish till the time the same are consumed by the company.
Also, the costs of the credits would not be charged till the time the same are sold or have been
used. These emission credits or the allowances are subject to the accounting standard on
impairment. These are considered to be indefinite and would live as an intangible asset and
the same will be reported under the model of impairment or for the impairment model of the
fixed assets for the intangible assets that have certain life. This is in line with the amount that
the company would amortise in the credit of the emissions. These are the credits of the
emissions that would be considered to be of long term in nature and also would amortise the
credit of the emissions. These emission credits are termed as being long term in nature in the
balance sheet and the cash inflows and the cash outflows are connected with the emission

CARBON EMISSIONS ACCOUNTING 6
credits which are further classified as the investment activities in the statement of cash flows
of the financial statements of the company.
Accounting under the inventory model:
Under this model, the emission credits are measured at the weighted average costs. Each of
the emission credit as have been issued by the EPA or other such regulatory body would have
a 0 cost basis while when the same are purchased, then the emission credit’s would be valued
at the purchase price. The credits of the emission are valued using the weighted average cost
of the emission credits would be used for each one of the periods which is then to the fuel
costs or to the cost of sales. These credits are valued at the lower of cost of the market
approach to the impairment under the model of inventory accounting. These emission credits
are reported as inventory in the statement of financial position. The cash inflows and the
outflows as are connected with the emission credits are classified as the operating activities in
the statement of cash flows. The companies that trade in the emission credits would follow
this model. In case the company trades in the emission credits which is within the scope of
industry guidance for the broker dealer. These are considered to be the emission credits that
are held for sale ta their fair values at each of the reporting date (desai, 2017).
Accounting with liability and gain recognition:
Under both of the above stated models, the practice if that the obligation is recorded for the
purposes of delivering in the emission credits to the regulatory agency till the time actual
level of the emissions for any given period exceeds the credits that have been held in the
balance sheet. The gain which is recorded or is recognised in the period in which the
emission credits have been sold. But there is still a practise wherein there is a recognition of

CARBON EMISSIONS ACCOUNTING 7
the gain since there are many of the companies that have adopted the stated accounting
policy. This further requires in the deferral of the gain in the case the emission credits have
been granted for the future vintage year but then are sold within the current year. In such a
case, the gain may not be termed a being realizable since the company is not bale to cover its
emission in the future vintage and this is mainly due to the sale of the emission credit’s that
were granted for the purposes of covering the future vintage year emissions.
Derivative accounting:
It is a common practise for these companies to enter into the future contracts, swaps and the
options that pertain to the emission credits. These are the arrangements that meets in the
definition of the derivative under the US GAAP. There are many of the forward contracts that
could be delivered physically wherein the net settlement would not take place and the same
will not be exposed to the normal amount of the purchases of the exemption of the normal
sales. These are the products that would settle in financially and are required to be accounted
at their fair values. Since these markets still continues to expand, more number of contracts
that could be covered within the stated scope would some under the definition of a derivative
(EY, 2017).
Effect on the financial statements:
The following are the impact of the emission credits on the financial statements:
 The allowances of emissions are reported as inventory
 The allowances for emissions are reported as the intangible assets
 The amount of the allowance are recorded at nil cost when the same have been
received from the government since they are free. The difference between the cost and

CARBON EMISSIONS ACCOUNTING 8
the fair value would be recognised on the liability side of the balance sheet
(Eureletrci, 2017).
 The amount of the allowance are recognised at cost when the same are purchased by
the company
 The amount of the allowances would be treated as an intangible asset when the same
is being treated on the cost revaluation model. In case, the revaluation model is
chosen, then the variations that arise in the fair value of the asset would be recognised
in equity. But in case, the cost model is chosen, then the asset would be depreciated
and this is mainly due to the reason that the same would go on to reduce its value by
its use in the process of production.
 Further, the liability for the emission would be recognised on some linear basis but
the most recent practices for the recognition of the liability would occur.
 Instead of being measuring this liability at its fair value, the guidance provides that
the allowances shall be carried forward at its market value.
 The purchases of the forward of the allowances would be termed as being the
derivatives due to the use of the exemption. When this has been applied, then the
forward contract would entail the buying of the allowances of the emissions and the
same would be treated as the financial instruments which would then be measured at a
fair value. This would be considered as being a part of the fully performed contract
and its recognition in accounting would be postponed till the time the physical
delivery of the same takes place.
 If these allowances are held for the trading purposes, then the holding or the purchase
of the allowances are not connected with the emissions, then the same would be
measured at their fair value and also the variations in the fair value would be charged
to the income (Law digital comms, 2017).

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The following are the journal entries of the same:
Cost model Asset Recognition Revenue Recognition
Stage Dr Cr Dr Cr
Receipt of free
allowance Intangible asset
Government
grant
(deferred
income)
Purchase of
allowance Intangible asset
Cash/
Accounts
Payable
Allowance used
(emit emissions)
Governme
nt grant
(deferred
income) Income
Used allowance
delivered(surrendere
d)
Intangible
asset
Loss (Diff
between
Allowance
& Liability
to deliver)
Profit
(Diff
between
Allowanc
e &

CARBON EMISSIONS ACCOUNTING 10
Liability
to
deliver)
Liability Recognition
Dr Cr Dr Cr
Allowance used
(emit emissions)
Liability to
deliver
allowances
Emissions
expense
Used allowance
delivered(surrendere
d)
Liability to
deliver
allowances
Revenue
Recognition
Asset
Recognition
Dr Cr
Revaluation
(Upward) Intangible asset
Revaluation Intangible

CARBON EMISSIONS ACCOUNTING 11
(Downward) asset
Use of Revalued
amount
Intangible
asset
Equity
Recognition
Revaluation
(Upward)
Equity
(revaluation
surplus)
Revaluation
(Downward)
Equity
(revaluation
surplus)
Use of Revalued
amount
Equity
(revaluation
surplus)
References:
A study on accounting Aspects of carbon credits. (2017). Fincirc Dossier. Retrieved 7
September 2017, from https://fincirc.wordpress.com/2013/03/13/a-study-on-accounting-
aspects-of-carbon-credits/

CARBON EMISSIONS ACCOUNTING 12
Accounting for Carbon. (2017). www.accaglobal.com. Retrieved 7 September 2017, from
http://www.accaglobal.com/content/dam/acca/global/PDF-technical/climate-change/rr-
122-001.pdf
Accounting for carbon credits. (2017). The Hindu Business Line. Retrieved 7 September
2017, from http://www.thehindubusinessline.com/todays-paper/tp-opinion/accounting-
for-carbon-credits/article1057460.ece
Accounting guidance for emissions programs. (2017). Ey.com. Retrieved 7 September 2017,
from http://www.ey.com/us/en/industries/oil---gas/carbon-market-readiness---4---
accounting-guidance-for-emissions-programs
Carbon accounting – Effects on financial reporting. (2017). www.eurelectric.org. Retrieved 7
September 2017, from
http://www.eurelectric.org/media/71686/carbon_accounting_effects_-_final-2013-540-
0001-01-e.pdf
Carbon Credit Accounting. (2017). www.pbr.co.in. Retrieved 7 September 2017, from
http://www.pbr.co.in/September2015/15.pdf
Accounting for Emissions Trading: How Allowances Appear on Financial Statements Could
Influence the Effectiveness of Programs to Curb Pollution.
(2017). Lawdigitalcommons.bc.edu. Retrieved 9 September 2017, from
http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=2084&context=ealr
Legal nature of emission allowances. (2017). Emissions-euets.com. Retrieved 7 September
2017, from https://www.emissions-euets.com/carbon-market-glossary/968-legal-nature-
of-emission-allowances