The ‘Cost’ of Climate Change: How Carbon Emissions Allowances are Accounted for Amongst European Union Companies

Abstract

Following the withdrawal of IFRIC 3: Emissions Rights in 2005, European Union (EU) companies participating in an EmissionsTrading Scheme (ETS) do not have definitive guidelines as to how to account for carbon emissions allowances. Using a content analysis methodology, this study examines the disclosed accounting policies of companies participating in the EU ETS, and reveals how, in the absence of clear guidance, they account for their carbon emissions allowances. As the accounting method adopted will impact upon a company's financial statements, these findings are of interest to accounting standards setters, investors, financial reporting preparers, auditors, and researchers.

Asset Classification, Subsequent Measurement and Impairment Testing for Carbon Emission Trading

“…Liable entities in Australia under GGAS can hold created carbon credits and purchased carbon credits either for sale or for surrendering. However, similarly to the survey result, Warwick and Ng (2012), KPMG's recommendations support the idea that liable entities should recognize assets in correspondence with provision or liability (KPMG, 2012). In addition, there is no created emissions allowance under the European Emission Trading Scheme.…”

“…Also, this study examined secondary data and there were no underlying reasons for these accounting practices. The other survey conducted in Europe was carried out by Warwick and Ng (2012). Warwick and Ng (2012) surveyed accounting practices from 47 liable emitters according to EU ETS.…”

“…The other survey conducted in Europe was carried out by Warwick and Ng (2012). Warwick and Ng (2012) surveyed accounting practices from 47 liable emitters according to EU ETS. The key issues are as follows: The most common initial recognition for granted allowances is intangible asset (55.3%) while more than one-third of the sample companies did not disclose their practices; The most common applicable value for granted allowances are nil value (38.3%), fair value (21.3%) and nominal value (6.4%); The most common initial recognition of purchased allowances is not prevailing explicitly but the most common valuation is at cost; 80.8% did not disclose subsequent measurement of both granted and purchased allowances; The most common recognition of obligation is provision/liability (78.7%) and expense (4.3%).…”

Analysis of Carbon Emission Accounting Practices of Leading Carbon Emitting European Union Companies

“…Later, the Cap is transformed into carbon credits, which are also called 'European Union Allowances' (EUAs) which businesses are obliged to attain to cover their yearly carbon emissions from their installation and fitting activities. EU government officials apportion a predetermined amount of carbon credits at no cost to the companies (Warwick and Ng, 2012). The statutory authorities have allocated almost 95% of carbon emission rights to the companies for free so far (ACCA, 2009).…”

“…Carbon Emission Trading Schemes have emerged as one of the highly common system in the carbon market internationally, which offers various multifaceted accounting concerns (Warwick and Ng, 2012).…”