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

Tharatee Mookdee,Sheila Bellamy

doi:10.18267/j.efaj.188

Abstract

With global efforts to combat climate change, accountants from participating entities worldwide need to report the economic value of carbon credits and related assets in carbon markets. However, the absence of formal accounting guidelines allows the selection of accounting practices and reporting methods based on individual judgment. Also, emitters are allowed to invest in carbon credit projects and trading. These circumstances have led to diversity in global accounting practices. As accounting is an international business language in a global business world, it is important to study emerging accounting practices for carbon emission trading. The main aim of this study is, therefore, to explore the accounting practices (asset classification, subsequent measurement and impairment testing) of carbon credit providers/traders. Sample companies from Australian mandatory and voluntary carbon markets were selected. The study was conducted using case-study methodology and in-depth interviews, supported by archival and secondary data. It was found that the preferred asset classification of carbon credits varies among case-site participants, according to specific market requirements and economic uncertainty. Valuation methods differ across sites due to internal operations and economic factors. Impairment testing requires reference price indices determined by the nature of assets and professionals.

Highlights

The emerging consensus – as seen in the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol to tackle global climate change and the emergence of carbon markets – have triggered accounting and reporting implications (Raiborn and Massoud (2010, p.109)
The findings reveal that: There is considerable diversity in accounting practices for EU emissions trading schemes (ETS) emissions allowances; Most companies are not following International Financial Reporting Interpretation Committee (IFRIC) 3; Some elements of IFRIC 3 appear to have influenced accounting practices adopted, with 11 of the 26 companies treating emissions allowances as intangible assets; A third of these assets are mostly assigned a nil value in company accounts, reflecting the
Underlying Reason of Forest Carbon Credit Providers to address Research Question 2: Accountant interviewees from Company M, H and V were asked about the following topics: 4.2.1 The qualitative characteristics of accounting information for carbon emission trading: M’s Carbon credits were accounted for as part of inventory and carbon sinks were accounted for as non-current biological assets

Summary

Introduction

The emerging consensus – as seen in the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol to tackle global climate change and the emergence of carbon markets – have triggered accounting and reporting implications (Raiborn and Massoud (2010, p.109). Given the absence of formal guidelines for carbon emissions trading worldwide, market participants are allowed to select accounting and reporting practices based on individual judgment. – Bellamy, S.: Asset Classification, Subsequent Measurement and Impairment Testing for Carbon Emission Trading. As Accounting is an international business language in global business community, accounting people are, sharing the same burden in emerging carbon markets. The need to clearly and unambiguously communicate relevant financial information to users becomes necessary, and a clear understanding of emerging accounting practices for carbon emissions trading schemes (ETS) is important

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Results

Conclusion