The EU Emissions Trading System under IFRS – Towards a ‘True and Fair View’

Abstract

This research paper seeks to contribute to the latest discussions on the financial reporting for emissions trading schemes. It analyses the International Financial Reporting Standards' (IFRS) accounting policies for emissions allowances, liabilities and carbon hedging instruments which are currently applied by the majority of participants in the European Union Emissions Trading System (EU ETS). The paper introduces assessment criteria for the evaluation of different accounting approaches and argues that the current rules under IFRS are not fully appropriate. A future accounting standard on emission trading schemes should largely follow the recent tentative decisions reached by the International Accounting Standards Board and Financial Accounting Standards Board. However, a different solution is advocated for the subsequent measurement of emission allowances held for compliance and the credit-side entry for freely allocated allowances. Only such an adjusted approach would capture the particular nature and purpose of cap and trade emissions trading schemes like the EU ETS and hence result in financial information which is useful to management and investors alike.

Notes

See however SEC (2012), which adopts a rather sceptical view on the progress of the convergence project.

Established by Directive 2003/87/EC, OJ L 275, 25.10.2003, p. 32.

Directive 2009/29/EC, OJ L 140, 05.06.2009, pp. 63–87, Annex 1, no. 6.

Regulation (EC) No 1606/2002, OJ L 243, 11.09.2002, p. 1; Regulation (EC) No 1725/2003, OJ L 261, 13.10.2003, p. 1; Regulation (EC) 1126/2008, OJ L 320, 29.11.2008, p. 1.

Cf. IAS 1.7.

Cf. IAS 38.8.

Cf. IAS 38.24.

Cf. IAS 38.44.

Cf. IAS 38.74.

Cf. IAS 36.6.

Cf. IAS 36.65.

Cf. IAS 38.75.

Cf. IAS 37.36.

Cf. IAS 39.9.

Cf. IAS 39.5.

This is true under a cost of settlement approach.

Cf. IAS 39.95.

Cf. IFRIC BC.14.

As under IAS 16.30 et seq. and different from IAS 40.30 where revaluation gains are shown in profit or loss.

Cf. IFRS 9.4.2. At the time of the preparation of this study, IFRS 9 has not yet been endorsed by the EU. Therefore, EU listed companies will continue to apply the provisions of IAS 39.45–46 and most likely not early apply IFRS 9 (mandatory effective date 1 January 2015).