company a received allowances representing the right to produce 10 000 tonnes of co 612375

Application of ‘net liability’ approach

Company A received allowances representing the right to produce 10,000 tonnes of CO₂ for the year to 31 December 2013. The expected emissions for the full year are 12,000 tonnes of CO₂. At the end of the third quarter, it has emitted 9,000 tonnes of CO₂. The market price of the allowances at the end of the each quarter is €10/tonne, €12/tonne, €14/tonne and €16/tonne respectively.

Under the ‘net liability’ approach, the provision at the end of the first, second and third quarters would be nil, because the company has not yet exceeded its emissions target. Only in the fourth quarter is a provision recognised, for the excess tonnage emitted, at 2,000 tonnes × €16/tonne = €32,000.

In the above example, the company cannot anticipate the future shortfall of 2,000 tonnes before the fourth quarter by accreting the provision over the year, nor can it recognise on day one the full provision for the 2,000 tonnes expected shortfall. This is because there is no past obligating event to be recognised until the emissions target has actually been exceeded.

Some schemes operate over a period of more than one year, such that the entity is unconditionally entitled to receive allowances for, say, a 3-year period, and it is possible to carry-over unused emission rights from one year to the next. In our view, these circumstances would justify application of the net liability approach for the entire period concerned, not just the reporting period for which emission rights have been transferred to the entity physically. Accordingly, when applying the net liability approach, an entity may choose an accounting policy that measures deficits on the basis of:

• an annual allocation of emission rights, or
• an allocation that covers the entire first period of the scheme (e.g. 3 years) provided that the entity is unconditionally entitled to all the allowances for the first period concerned.

For such schemes, the entity must apply the chosen method consistently at every reporting date. If the entity chooses the annual allocation basis, a deficit is measured on that basis and there can be no carrying over of rights from one year to the next or back to the previous year.