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Our People in External Audit and Assurance Services
Reporting on Carbon Prices
Are you wondering what changes to your financial statements may be required now that the Federal Government has passed the Clean Energy legislative package?
You may be in one of three broad categories of affected parties. The first might be termed “major emitters” – approximately 500 entities who will have emission liabilities arising when the legislation commences on 1 July 2012. Second are entities receiving compensation for higher energy costs.Third is entities who may have material flow-on effects that should be disclosed in financial statements now.
Those effects may include higher energy costs, and higher input costs in a supply chain where there are carbon intensive goods or services.
The legislative package includes:
requiring approximately 500 liable emitters to buy a fixed price carbon unit from the Federal Government for each tonne of CO2 emissions from 1 July 2012 to 30 June 2015, before moving to market pricing;
providing free carbon units to some entities in energy intensive areas such as electricity generation. These may be used to offset the unit purchase liability or sold back to the government; and
providing some tax concessions and cash funding.
Disclosing impacts and uncertainties
Disclosures under various requirements of accounting standards and the Corporations Act are triggered by the passage of the legislation.
You should consider whether there are any significant impacts on your business model, and also whether there are significant uncertainties. These might arise because, for example, it is not known what costs will be passed on by suppliers.
Consider the need for:
Impairment assessments where cashflows may reduce because increased costs cannot be recovered. Examples are rate-regulated entities and not-for-profit entities that cannot price their outputs;
Liabilities required because an entity is locked into a contract which becomes onerous – ie unavoidable future performance will now be at a loss;
Impacts on any critical assumptions and forecasts that underpin existing financial statement disclosures; and
Disclosures about the future, such as those in a directors report.
Accounting for carbon assets and liabilities
The accounting by emitters is not settled, as an Interpretation IFRIC 3 Emission rights was made in 2004 but withdrawn in 2005 amidst disagreement. The AASB intends to publish a paper that draws out the relevant issues.
Meanwhile, there are 4 main options:
Use the principles of the short-lived IFRIC 3, with an intangible asset recognised at cost (purchased units) or fair value (units allocated for free) for carbon units acquired, and a liability recognised at best estimate of the amount required to settle as emissions are made;
Account for carbon units as intangible assets using a net liability approach. A liability is only recognised to the extent emissions liability exceeds carbon units held. Units are accounted for as intangible assets (purchased units at cost, free allocated units at nominal value);
The government grants approach applying AASB 120 with free allocated units recognised at either fair value or nominal value and purchased units at cost. Deferred income is recognised for any difference between the fair value of the rights acquired and their cost. That grant income is recognised in profit over the 3 year period to 2015. The entity has some choices on measuring the emissions liability; or
Between 2012 and 2015 initially account for carbon units allocated by the government as financial assets at fair value, along with a deferred income liability. The liability is reduced by matching it against the emission costs incurred.
Audit and Assurance
+61 3 9274 0600
Audit and Assurance
+61 3 9274 0600