International Financial Reporting Standards
Pollutant Pricing Mechanisms and Rate-regulated activities Cartegena, Columbia November 2015
Darrel Scott IASB Board Member The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
Š IFRS Foundation. 30 Cannon Street | London EC4M
Agenda • Introduction • Conceptual Framework elements • Pollutant Pricing Mechanisms – Project background – Cap-and-trade emissions trading schemes – Accounting issues
• Rate Regulation – Project background and update – Defined rate regulation – Accounting issues
Assets and Liabilities
Rate Regulation and ETS activities • • • •
Governments restrict or regulate specified activities Variety of mechanisms used to achieve similar objectives Mechanisms may create rights and obligations Applying the IASB’s Conceptual Framework – – – – – –
Do the rights and obligations create assets/liabilities? If so, should they be recognised? What is the nature of those assets/liabilities? When should they be recognised? How should they be measured? Should they be accounted for separately or in combination with related items?
Conceptual Framework • In May 2015, the IASB published proposals to revise the Conceptual Framework • Project objectives: To improve financial reporting by providing a more complete, clearer and updated Conceptual Framework that can be used by: – the IASB when it develops International Financial Reporting Standards (IFRS); and – others to help them understand and apply IFRS.
Comment deadline: 25 November 2015
Conceptual Framework Elements
• Elements are the basic building blocks from which financial statements are constructed Statement of financial position Assets
Liabilities
Equity
Statement(s) of financial performance Income
Expenses
Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events
Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities
• An economic resource is a right that has the potential to produce economic benefits. • A present obligation is an obligation to transfer economic resources that: – the entity has no practical ability to avoid; and – has arisen from a past event (ie economic benefits already received or activities already conducted)
7 International Financial Reporting Standards
Pollutant pricing mechanisms (formerly Emission Trading Schemes)
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Where are we in the project? • Early stages – staff research: identifying the financial effects of various schemes and current accounting practices – wide variety of accounting methods used in financial statements – IASB aims to issue a Discussion paper for comment
• Previous project (2005-2010) – Began after the issue (2004) and withdrawal (2005) of IFRIC 3 Emission Rights – IASB made some tentative decisions about cap-and-trade issues but these will be revisited
Purpose of this session • Generate discussion • Gather your views—the IASB has not been asked to make any decisions yet, we are researching the issues • Consider issues about the nature of any assets and liabilities created, when they should be recognised and how they should be measured
Looking from a ‘fresh start’ perspective – so starting with a blank sheet of paper
Growth of pollutant pricing mechanisms • Climate change is a critical issue • More jurisdictions developing some form of pollutant emissions reduction policy • Emissions trading schemes is a common solution • Others include ‘carbon taxes’ or environmental regulations
Pollutant pricing mechanisms European Emissions Trading Scheme (EU ETS) Republic of Korea cap-andtrade scheme Regional Greenhouse Gas Initiative (RGGI)
AB 32 Capand-Trade (California)
World Capital Initiative (WCI)
Tokyo Emissions Trading Scheme
New Zealand Emissions Trading Scheme
Many existing & proposed schemes
US Acid Rain Program
There are many emission trading schemes in place around the world. They differ in details but have many common features. No current international guidance
Greenhouse Gas Reduction Scheme (GGAS)
Divergent accounting practices
Cap-and-trade type of schemes Common features Overall cap (emissions target)
Units of emission (eg tonnes of CO2) that may be released by emitters within commitment period
Implementation Allocation of allowances to participants up to of overall cap cap. Typically reducing instalments. Trading mechanism
Allowances are tradeable.
Remittance obligation
Allowances covering total emissions made during the compliance year
Main accounting issues • What elements should an entity recognise in its financial statements for emissions trading schemes? – Allowances – are they assets? – If so, what type of asset? (intangible, financial, inventory) – What are the obligations/liabilities in the scheme – when do they arise? – Should the assets/liabilities be recognised? – How do you measure the assets and liabilities? – What income/expenses arise and when do you recognise gains/losses?
Cap and trade scheme Example: Assets
Fact Pattern • On 1 Jan 14, government gives 50 000 free allowances to Entity A • Entity A expects to emit 52 000 tonnes during 2014 • A deep and liquid trading market exists for allowances but Entity A decides not to sell any of its allowances • On 30 Sept 14, Entity A purchases 2,000 allowances in the market • Entity A submits the 52,000 allowances to the scheme administrator on 1 Apr 15, in accordance with scheme rules
Does A have an assets before 1 Jan 2014? And on 1 Jan 2014? And on 31 Dec 2014?
Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events
Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities
• An economic resource is a right that has the potential to produce economic benefits. • The allowances are tradeable instruments that: – are allocated free of charge or auctioned – have market value – can be sold or used to settle obligation
Cap and trade scheme Asset recognition
Allocated allowances (Free)
Purchased Allowances
Recognition Should allowances be recognised as assets? What type of asset? Intangible, financial, inventory
Cap and trade scheme Measuring the assets Alternative 1:
Measure the assets initially and subsequently at fair value
Alternative 2:
Measure the assets initially at fair value or cost, no remeasurement
Alternative 3:
Measure the assets based on ‘intended use’ a) held for use: measure assets initially at fair value or cost, no remeasurement b) trading: measure assets initially and subsequently at fair value
Cap and trade scheme Example: Liabilities
Fact Pattern • On 1 Jan 14, government gives 50 000 free allowances to Entity A • Entity A expects to emit 52 000 tonnes during 2014 • A deep and liquid trading market exists for allowances but Entity A decides not to sell any of its allowances • On 30 Sept 14, Entity A purchases 2,000 allowances in the market • Entity A submits the 52,000 allowances to the scheme administrator on 1 Apr 15, in accordance with scheme rules
Does A have an obligation before 1 Jan 2014? And on 1 Jan 2014? And on 31 Dec 2014?
Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events
Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities
• Present obligation: obligation to transfer economic resources –
entity has no practical ability to avoid; and
–
has arisen from a past event (ie economic benefit already received or activities already conducted)
• Entity A has obligation for pollutants emitted in the period –
no obligation to emit
–
no obligation to return unused allowances
Cap and trade scheme Measuring the Liability Alternative 1:
Measure the liability at the market price of the number of allowances needed to settle the obligation, using actual volume of emissions
Alternative 2:
Measure the liability at the carrying amount of allowances on hand (cost or fair value), with any shortfall measured at the market price
Cap and trade scheme ‘Accounting mismatches’
Liability settled at end of compliance period
Asset recognised when allowances received
Obligation to remit allowances arises as emissions occur
Observed accounting practice: designed to minimise accounting mismatches caused by differences in the timing and measurement of assets and related liabilities
International Financial Reporting Standards
Rate Regulated Activities
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Discussion Paper
Reporting financial effects of rate regulation Observed accounting policies are designed to Comprehensive project for rateregulated activities: Discussion Paper published September 2014 Comment deadline: 15 January 2015
• What information is needed to help investors understand the financial effects of rate regulation? • What do we mean by “rate regulation”? • How does rate regulation affect the amount, timing and certainty of revenue, profit and cash flows? • How should IFRS be amended, if at all, to provide relevant information to investors through IFRS financial statements?
Defined rate regulation • Is a restriction in the setting of prices that can be charged to customers for essential goods or services • Requires suppliers to adjust the selling price (rate) to – recover ‘allowable’ costs or unbilled revenue amounts, or – eliminate ‘excess’ revenue or profits
• Regulates the timing and amount of revenue (and profit) that an entity can bill to its customers Defined rate regulation creates differences between amounts reported to rate regulator and those reported in IFRS financials (‘regulatory deferral account balances’)
Reporting
Financial effects of rate regulation • Exploring viable financial reporting approaches • Responses to DP suggest strong support for recognising some regulatory deferral account balances • Most common suggestion is focus on a ‘revenue-based’ approach, using either: – an Interpretation of / amendment to IFRS 15 Revenue from Contracts with Customers; or – a separate Standard based on the principles in IFRS 15
• Relate the rights and obligations to the definitions of asset and liability in the Conceptual Framework
Defined rate regulation • Creates enforceable rights and obligations for entity and rate regulator • 3-way relationship Rate regulator Focus of the rate regulation project
Affects relationship between rate regulator and entity
Rate-regulated entity
Entity’s customers
Existing standards
The ‘revenue requirement’ • Allowable revenue based on estimates – Consideration entity is entitled to for estimated volume of sales to customers plus other rate-regulated activities to be performed in the period – Regulated rate (ie price per unit) equals estimated revenue requirement divided by estimated sales units
• Revenue requirement recovered through future billings to customers at regulated price per unit Observed accounting practice: revenue based on regulated price per unit and goods and services delivered to customers ie based on the contracts with customers
Accounting issue Should the entity recognise a ‘regulatory asset’ or ‘regulatory liability’ when: • the regulated rate reflects activities that: – occur in a different period? – do not meet the definition of a ‘performance obligation’ in IFRS 15?
• the regulated rate will be adjusted in the next or subsequent period(s) to reverse any under- or over-recovery by the entity
Revenue Requirement Example
Fact Pattern • Entity A’s regulator determines a fixed revenue requirement of CU200million for 3 year period (x1, x2 and x3) • Determination includes: – CU10m per year for storm costs (no costs in x1 or x2, CU30m in x3) – CU5m per year for research project (project starts in x2) – CU5m per year for CU15m under recovered in prior period
• In x1, A actually receives CU210m
How much revenue should A report in x1? If not CU210m, what should happen to the difference?
Next steps • Continue research with targeted consultation/field work • Develop proposals for an accounting model • Consider implications of the responses to the Conceptual Framework proposals • Consult more widely through a second Discussion Paper
Thank you
32 International Financial Reporting Standards
Appendix Pollutant pricing mechanisms
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
•Š IFRS Foundation. 30 Cannon Street
Observed policies—allowances Approach Approach 1
Initi Allocated al
Approach 3
Approach 4
2
Recognise and
allowances measure at market
Recognise and
Recognise and
measure at cost,
measure at market
reco
value at date of
gniti
issue; corresponding allowances is nil.
issue; corresponding
entry to government
entry to income
grant.
(day 1 gain).
on
which for granted value at date of
Purchased Recognise and measure at cost. allowances
Observed policies—allowances (2) Approach 1
S of
Approach 2
Allowances are
Approach 3
Approach 4
Allowances are
Allowances are
ub allowances subsequently measured subsequently
subsequently
se
at cost or market value, measured at cost, measured at cost
qu
subject to review for
subject to review
or market value,
en
impairment.
for impairment.
subject to review
t tr ea tm en t
for impairment. of
Government grant
government amortised on a grant
systematic and rational basis over compliance period.
Not applicable.
Observed policies—liabilities Approach Approach 1 L i a b i l i t y
Approach 3
Approach 4
2
Recognise liability
Recognise liability when incurred
Recognise
when incurred
(ie as emissions are produced).
liability when
(ie as emissions are However, the way in which the
incurred
produced).
liability is measured means that
(ie as emissions
rec
often no liability is shown in the
are produced).
og
statement of financial position until
niti
emissions produced exceed the
on
allowances allocated to the
Init ial
participant.
Observed policies—liabilities (2) Approach 1
Approach 2
Approach 4
S Liability is
Liability is measured based on:
Liability is measured based on:
Liability is
u measured based
•
•
the carrying amount of
measured
the carrying amount of allowances
b on the market
on hand at each period end to be
allowances on hand at each
based on
s
value of
used to cover actual emissions (ie
period end to be used to
either
allowances at each
market value at date of recognition
period end that
if cost model is used; market value
cover actual emissions (nil or Approach 1 cost) on a FIFO or weighted or
at date of revaluation if revaluation
average basis; plus
Approach 2
the market value of
.
e
q would be required L u to cover actual i
Approach 3
model is used) on either a FIFO or
e emissions,
weighted average basis; plus
allowances at each period
the market value of allowances at
end that would be required to
each period end that would be
cover any excess emissions
allowances are on
required to cover any excess
(ie actual emissions in
hand or would be
emissions (ie actual emissions in
excess of allowances on
purchased from
excess of allowances on hand).
hand).
a n regardless of b t whether the i m l
e
i
a
t s y u r
•
the market.
•
Jargon busting • Pollutant pricing mechanisms: price- or market-based approaches used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. The price can be set directly (eg through a tax) or indirectly through a market. • Cap-and-trade emissions trading scheme (ETS): a type of ETS in which the government sets an overall ‘cap’ on the volume of specified pollutants and uses tradeable ‘allowances’ (sometimes called certificates, rights or credits) of equal quantity to establish the price. • Participants: entities that emit the specified pollutants that are subject to an ETS and have an obligation to remit allowances to the government. • Traders: entities that buy and sell emissions allowances but are not participants in the scheme. • Commitment period: the period over which the cap has been established. • Compliance year: a year within the commitment period, for which the participant must verify its emissions and submit allowances.