Corporate Accounting Report: Emission Allowance, Financial Statements

This report provides an in-depth analysis of emission allowances within the context of corporate accounting, specifically addressing the European Union Emission Trading Scheme (EU ETS). It begins by defining the nature of emission allowances and their legal implications, followed by a detailed examination of initial and subsequent measurement methods, including the use of fair value and relevant journal entries. The report then explores the consequences of emission allowances on financial statements, focusing on their impact on the balance sheet, income statement, and cash flow statement, and how these are affected by different accounting models. The discussion covers the accounting treatment of emission allowances as intangible assets, the impact on expenses and income, and the classification of cash flows. The report concludes by summarizing the key aspects of emission allowance accounting and its implications for financial reporting.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Authors Note
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Table of Contents
Introduction:...............................................................................................................................2
Nature of the Emission Allowance:...........................................................................................2
Initial and subsequent measurement of Emission Allowance:...................................................3
Consequences of Emission Allowance on Financial Statement:...............................................5
Conclusion:................................................................................................................................7
Reference List:...........................................................................................................................9

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Introduction:
The present study is concerned with the in depth discussion relating to the nature of
emission stated by the European Union ETS. The current study is also based on the
determination of the method involved in the measuring the initial and the subsequent level
together with the help of the appropriate journal entries. In addition to this, the report will be
placing emphasis on the consequences that arises from the inclusion of emission allowance
on the financial statement namely, balance sheet, income statement and cash flow statement.
Nature of the Emission Allowance:
The lawful nature concerning the emission allowance is issued and traded within the
guidelines of the European Union Emission Trading Scheme and it is not defined or
consistent at the European level. As defined under the Emission Trading Scheme Directive
Article 3 (a) provides the definition of the emission allowance. It further defines the right to
emit with one tonne of CO2 under the article 3 (a) of the Emission Trading Scheme Directive
(Zhang et al., 2015). This is will be considered to be valid for the purpose of complying with
the requirements stated under the Emission Trading Scheme Directive and it will be treated as
manageable in agreement with the provision that has been stated under the Emission Trading
Scheme Directive (Zakeri et al., 2015). The nature concerning the emission allowance will be
treated to be relevant under the issues that has been stated below;
a. At the time of determining the law that manages the creation, transfer and cessation of
the emission allowances,
b. Whether there is any kind of security that can be developed over the emission
allowance
c. Management of emission allowance relating to accounting and tax purpose
d. Management of emission allowance at the time of bankruptcy of the listed holder

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To take into the considerations relating to the oversight of the carbon market it is vital
to determine the legality nature of the individual entity, which is being traded in the market.
There are large number of legalised administrations, which is traded in the market (Chao,
2014). A large number of lawful regimes is found to be involved in the regulations of the
emission allowance, which brings forward the number of legal questions relating to law of
property, law relating to financial service or law relating to contracts and accounting
standard. An entity can break into the all-encompassing markets which usually consists of the
distributions of the allowance from the accountable agency or any institutions relating to the
parties which is under the obligations of complying with the emission trading system.
The secondary market on the other hand consist of purchase and sale of allowance
together with numerous contracts for future sales of allowance (Goulder & Schein, 2013).
Emission allowance under the market for trading have resemblances with commodities and
monetary market that possess unlikely feature in either of the market. The oversight relating
to any form of carbon market is largely reliant on the current institutional infrastructure with
jurisdiction have role to play in adopting the correct approach to the market oversight (Dong
et al., 2016). The characteristics that have been defined in article 40 of registry principles
defines an allowance to be dematerialized tool that is tradable in the market.
Initial and subsequent measurement of Emission Allowance:
Tentatively the board has come up to the decision of measuring the emission
allowance. The board has specifically stated in its decision that there must be consistent in the
liability of the emission allowance together with the allocation of the liability must be
executed initially and subsequently under the terms of fair value (Zhang & Xu, 2013).
Tentatively the board has undertook the decision relating to the purchase allowance, which
should be measured under the terms of fair value both initially and subsequently.

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A preference has been introduced by the IASB that describes the gross presentation
should be made relating to the assets and liabilities on the balance sheet (Du et al., 2013).
Additionally, in accordance with the linked presentations, the assets and liabilities should be
presented under the gross value but the value should be obtainable with the total amount of
net emission or the emission liability. Tentatively the FASB has bought forward an assertion
by stating that the asset and liabilities should be stated in the balance sheet by using the
linked presentation (Agee et al., 2014). The FASB additionally bought forward that in no
circumstances it believes that any commercial entity will be obligatory required to possess
the intent of setting off the asset and liabilities to present the items through using linked
presentation.
As evident from the discussion, the board has defined that the measurement
concerning the emission allowance assets and liabilities should be in accordance with the
scheme of cap and trade. Tentatively the board has made the decision that the allocation of
emission allowance liability should be consistent (Bang et al., 2017). The board members has
lend their backing for the model that helps in the measurement of the allocated allowance
along with the liability associated with allocation must be measured in terms of the fair value.
The board discussion has stated that the business unit should determine the level of
emission allowance, which the unit will be returning under the liability associated with the
allocation at the time when the business unit is required to identify the obligations associated
to emission (Rabe, 2016). A support has been lend by the board relating to the adoption of
approach which determines the quantity of the emission allowance to be returned in respect
of the business unit expectations related to emission or lessening of emission.

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Consequences of Emission Allowance on Financial Statement:
Commercial unit under the intangible asset method of accounting are generally
required to measure the emission allowance, which is provided to the companies and
assimilated in the open market cost. As a consequence of this, when the companies are
provided with the emission allowance it reflects a lone nominal zero cost (Ranson & Stavins,
2016). In contrast to this, emission allowance, which is purchased, would be having an
associated cost with them. Even though it is not regarded as one of the usually implemented
practice in the intangible asset accounting framework, it is necessary for the companies to
replicate the delivered emission allowance upon receiving at the fair value. As per the
disclosure made business units generally hardly amortize the emission credits.

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The reason behind this is that their economic benefit is not diminished till it is
consumed. Consequently, no cost of credit is charged to the expenditure till they are disposed
or used. The emission credits allowance is treated as the substance of impairment under the
indefinite livid intangible asset model of the impairment or they are under the model of the
fixed asset for the purpose of determinate intangible asset till the degree the business is
amortizing the emission allowance (Schneider et al., 2017). Emission allowance are
characterized in the long term balance sheet with cash inflows and outflows related to
emissions allowance are categorized in the investment activities under the cash flow
statement.
The consequences relating to emission allowance is reflected in the financial
statements in the inventory model of accounting and emission credits are weighted in respect
of the average cost. The EPA issues emission credits or any sort of regulatory model having
zero cost basis. Most notably the weighted average cost of emission allowance used in every
period is charged to the fuel costs (Kaufman, 2013). Under the market, approach the emission
credits is subject to lowered cost market approach for impairment under the model of
inventory. Because of this, the emission allowance are categorized as the inventory in balance
sheet with inflow and outflow of cash is related to the emission credits that is categorized in
the operating activities in the cash flow statement. Commercial unit that trade under the
emission allowance are under the compulsion of following the inventory model.
As evident from both the models the practice of the industry states that business units
are generally not required to record the requirements of delivering the emission allowance to
the regulatory agency till it is found that actual level of emission for a given time period has
exceeded the credits which is held on the balance sheet (Harris, 2016). Consequently, the
gain is characteristically recognized during the given period in which the emission credits are
disposed off. This kind of practice generally differs from the recognition of gain as numerous

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such companies have undertaken the accounting policies that needs the deferral of gain if the
emission credits is granted in the upcoming years but it is disposed in the current year.
Concerning the income statement there are primary two forms of significances of
emission that is noticed. Initially it arises due to the usage of several diverse attributes for the
correct asset and the liabilities under the IFRIC3 model. It arises because of the use of the
IAS 38 model of cost for accounting the emission allowance asset along with the result
originating from the mismatch amid the dimension of liability and it is measured again to
ascertain the market value together with the changes in the net income by measuring the asset
at cost (Schwager & Etzkorn, 2017). Conversely if the commercial unit uses the method of
revaluation in respect of the IAS 38, it is under the obligation of displaying the changes under
the fair value of the allowance asset in the income statement together with changes that has
occurred in the fair value of the liability in the net income.
The second effect that originates in the income statement is the outline of expenses
which is identified in the income statement. The approach of the IFRIC 3 states that present
period of expense is equal to the amount of fair value emission which is generated all through
the period and recognizes the income which is equal to the amortization of the government
grant associated with the allowance. Implementing the net approach will lead the liability to
be reflected in the balance sheet and expenses is recorded in the income statement provided
that the actual level of emission has surpassed the whole amount of allowance allotted to the
unit on free price by the administration.
Conclusion:
The above stated report can be concluded by stating that an explanation to the nature
of the emission has been discussed in this report. Additionally, the report has discussed on the
emission relating to the method of emission of the allowance at the time of measurement

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during the initial and the subsequent level by citing the examples of appropriate journal
entries. The report has in detailed discussed the consequences of emission allowance on the
financial statements. The discussion of consequences has placed emphasis on the key areas of
balance sheet, income statement and cash flow statement.

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