In the light of the Kyoto agreement, several governments have, or are in the process of developing, schemes to encourage reductions in greenhouse gas emissions. The project focuses on the accounting to be adopted by participants in a cap and trade scheme, although its requirements also apply to other schemes that share one or more of the features of a cap and trade scheme.
Typically in cap and trade schemes, a government (or government agency) allocates participating entities rights (allowances) to emit a specified level of pollutant. (The government may allocate the allowances free of charge or the participant may be required to pay for them). Participants in the scheme are able to buy and sell allowances and therefore, in many schemes, there is a liquid market for the allowances. At the end of a specified period, participants are required to deliver allowances equal to their actual emissions or incur a penalty.
In May 2003, Draft Interpretation D1 Emission Rights was issued. Comments were requested by 14 July 2003.
The main proposals in draft Interpretation D1 were:
- Rights (allowances) to emit pollutant are intangible assets that should be recognised in the financial statements in accordance with IAS 38 Intangible Assets.
- When allowances are allocated to a participant by government (or government agency) for less than their fair value, the difference between the amount paid (if any) and their fair value is a government grant that is accounted for under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
- As a participant emits pollutant, it recognises a provision for its obligation to deliver allowances or pay a penalty in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. This provision is normally measured at the market value of the allowances needed to settle it.
EFRAG issued a negative endorsement advice and the interpretation was subsequently withdrawn by the IASB.