European Union Carbon Market Glossary
Accounting for emission allowances
- Category: European Union Carbon Market Glossary
The EU Directive 2003/87/EC set up a greenhouse gas emission quota system for the European Union. This system was incorporated into national laws. Among other things it requires obligated actors to surrender to the State a number of greenhouse gas emission credits each year, corresponding to their emissions for the year.
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Issuers are required to provide information on the accounting policies used for the recognition, measurement and presentation of emission trading schemes (including information on the main terms and nature of such schemes). Disclosures should explain how these schemes impact their financial performance and financial position, indicating which line items in the financial statements are affected and, where applicable, any differences and impacts across different jurisdictions. For example, issuers should provide quantitative disclosures on the amount of GHG credits or renewable energy certificates owned and/or owed, consumed or sold.
Where applicable, issuers may need to recognise provisions (and provide disclosures) when local legal arrangements on GHG emissions give rise to obligations to purchase GHG emission rights exceeding any rights that the issuer currently holds.
Given as an example, EdF Consolidated Financial Statement at 31 December 2021 indicates that the accounting treatment of emission rights in the group depends on the holding intention. Two economic models coexist in this regard in the group:
- rights held under the “Trading” model are included in “Other inventories” at fair value, the change in fair value observed over the year is recorded in the income statement;
- rights held to comply with regulatory requirements on greenhouse gas emissions (the “Generation” model) are recorded in intangible assets as “Greenhouse gas emission rights – green certificates”:
- at acquisition cost when purchased on the market;
- at nil value when allocated free of charge (in countries that still have a free allocation system).
A provision is established at the year-end when the estimated annual emissions by an entity are higher than the rightsheld or purchased on the forward market, less any rights sold on the forward market. This provision is equal to the acquisition cost up to the amount of rights acquired on the spot or forward markets, andto market prices for the balance. It is cancelled when the rights are surrendered to the State.
At the closing date, the portfolio of emission rights and the obligation to surrender rights for the emissions of the yearare presented gross, without netting. If the number of emission rights at the end of the year and not subject to forward sale is higher than the number ofrights to be surrendered to the State for the year’s emissions, an impairment test must be applied to the excess. If the realisable value is lower than the net book value, impairment is booked.
ESMA Public Statement of 25 October 2023 (European common enforcement priorities for 2023 annual financial reports, ESMA32-193237008-1793)
Accounting for emission trading schemes
ESMA reiterates that issuers should provide information on the accounting policies used for therecognition, measurement and presentation of emission trading schemes (including information on the main terms and nature of such schemes) - see paragraph 112 of IAS 1 and Paragraph 10 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Disclosures should explain how these schemes impact their financial performance and financial position, indicating which line items in the financial statements are affected and, where applicable, any differences and impacts across different jurisdictions. For example, issuers should provide quantitative disclosures on the amount of GHG credits or renewable energy certificates owned and/or owed, consumed or sold. Moreover, ESMA highlights that, where applicable, issuers may need to recognise provisions (and provide disclosures) when local legal arrangements on GHG emissions give rise to obligations to purchase GHG emission rights exceeding any rights that the issuer currently holds (paragraphs 14, 84-92 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets). |
Regulatory chronicle
25 October 2023
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