Accounting for
Emission Rights
Introduction
Accounting for greenhouse gas emissions remains a challenge, and market participants continue to wait for clear guidance from accounting standards setters. Formative efforts on the part of those standards setters have proven unsuccessful. The International Financial Reporting
Interpretations Committee (“IFRIC”) initially took on this task, and issued
IFRIC 3, Emission Rights. Unfortunately, considerable pressure from both the business community and European politicians, who objected to the financial statement consequences of applying that interpretation, led to its withdrawal by the International Accounting Standards Board (“IASB”) within a year of its issuance. In the US, the Emerging Issues Task Force
(“EITF”) also attempted to address the related accounting issues in
EITF Issue 03-14, Participants’ Accounting for Emissions Allowances under a “Cap and Trade” Program. However, it was never finalized, and ultimately removed from the EITF’s agenda. More recently, organizations have been advised of informal views from both the Financial Accounting
Standards Board (“FASB”) and the Securities and Exchange Commission
(“SEC”) on the appropriate accounting for emissions allowances held, especially since EITF 03-14 was tabled.
As a consequence, many companies remain confused about the appropriate accounting treatments under both International Financial
Reporting Standards (“IFRS”) and generally accepted accounting principles in the United States (“US GAAP”). This article considers the story to date, current developments in accounting for emissions in both markets, and the respective accounting consequences.
The Story To-Date and the Most Recent Developments
It is important to understand some of the history to emissions trading and the resulting variety of market structures in
