The market for carbon credits is steadily maturing. Charterpoint looked at the accounting treatment that applies to Australian Carbon Credit Units received from the Clean Energy Regulator, particularly in relation to government entities. We found that government agencies should consider including appropriate disclosures in their annual financial statements regarding the volume of ACCUs issued to them and how these have been accounted for.
The Australian Government’s Emissions Reduction Fund program allows for eligible carbon emission reduction projects to be registered with the Clean Energy Regulator and to obtain carbon credits for avoided emissions.
A number of government entities, particularly in the local government sector, have registered carbon emission reduction projects with the Clean Energy Regulator and are receiving Australian Carbon Credit Units (ACCUs) for avoided emissions.
Examples of projects that have been registered by government entities include:
Landfill gas projects
Savanna burning projects
Diverting legacy waste from landfill
Biodiverse carbon conservation
Waste composting facilities.
An ACCU is a unit issued to a person by the Clean Energy Regulator by making an entry for the unit in an account kept by the person in the electronic Australian National Registry of Emissions Units (Registry). Each ACCU issued represents one tonne of carbon dioxide equivalent (tCO2-e) stored or avoided by a project (1).
Carbon credits in the form of ACCUs are real property and can be transferred, bought or sold; through reverse auctions back to the Australian government, or on the secondary market.
The accounting issues that arise from this are:
Are the ACCUs issued able to be recognised as intangible assets under AASB 138?
Is a fair value able to be determined for the ACCUs issued to registered persons?
Specific AASB Guidance
As there is currently no authoritative Australian Guidance on accounting for ACCUs, Charterpoint considered the following information:
Australian Accounting Standards Board (AASB) Staff Paper – Possible Financial Reporting Implications of the Fixed Price Phase of the Carbon Pricing Mechanism for Emitter Entities (Version 3) – July 2012, updated to July 2013.
AASB 138 Intangible Assets.
AASB 13 Fair Value Measurement.
The ASSB Staff Paper provides the views of the AASB staff only and clearly states that it should not be relied on as authoritative accounting advice. It also only deals with issues that may arise for emitter entities during the fixed price phase of the carbon pricing mechanism. The paper states that “the financial reporting implications of the flexible price phase will need to be considered by the AASB”. The AASB Staff Paper states that ACCUs do not meet the definitions of a financial asset (2).
There is no published guidance from the AASB on the current treatment of ACCUs.
AASB 138 Intangible Assets
To be recognised as an intangible asset of the registered person, ACCUs need to demonstrate the following criteria:
Identifiability – the asset is identifiable if it either:
is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged; or
arises from contractual or other legal rights.
Control – the registered person has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.
Future economic benefits – it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity.
Reliably measurable – the cost of the asset can be reliably measured. In respect of not-for-profit entities, where an asset is acquired at no cost, or for a nominal cost, the cost is its fair value as at the date of acquisition.
It is our view that the ACCUs issued to a registered person are separable from and arise from the legal rights of the registered party with the Clean Energy Regulator.
Accordingly, it is our view that the ACCUs meet the identifiability test.
Control & Future Economic Benefits:
In forming a view as to whether the registered person controls the future economic benefits flowing from the ACCUs, consideration needs to be given to any specific agreements relevant to the ACCUs.
The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way. (AASB138.13)
If the registered person can demonstrate that it does have control of the ACCUs, then AASB138.44 would apply.
AASB138.44 provides: In some cases, an intangible asset may be acquired free of charge, or for nominal consideration, by way of a government grant. This may happen when a government transfers or allocates to an entity intangible asset such as airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to access other restricted resources. In accordance with AASB 120 Accounting for Government Grants and Disclosure of Government Assistance, an entity may choose to recognise both the intangible asset and the grant initially at fair value (3). If an entity chooses not to recognise the asset initially at fair value, the entity recognises the asset initially at a nominal amount (the other treatment permitted by AASB 120) plus any expenditure that is directly attributable to preparing the asset for its intended use.
AASB138.44 makes no mention of the need to have an active market to initially measure an intangible asset at fair value where it was received by way of government grant (4). As such, the critical issue is whether the fair value can be estimated reliably rather than if an active market exists.
If a fair value of the ACCUs was to be established, reference would be made to the auction results published by the Clean Energy Regulator (5).
If the ACCUs were to be subsequently revalued, then AASB138.75 would apply. AASB138.75 provides: After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.
A fair value for an intangible asset can only be recognised where there is an active market. AASB138.78 notes that it is uncommon for an active market to exist for an intangible asset, although this may happen. The standard provides example of active markets for taxi licences, fishing licences or production quotas.
An active market is defined in AASB13 as “a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.”
While the Clean Energy Regulator does not publish individual contract prices, as they are commercial in confidence, it does publish details of the average price paid for ACCUs at each auction. It also publishes information on the carbon abatement contracts awarded by the Clean Energy Regulator and the total number of ACCUs transferred to, and purchased by, the Commonwealth each financial year. The register also includes data about contract duration, end date and status, and whether a contract was established under one or more conditions precedent.
The average price per tonne of abatement at the seventh auction held 6-7 June 2018 through the Emissions Reduction Fund was $13.52. The average price for carbon credits at all 7 auctions held to date (between 2015 – 2018) is A$11.97.
The availability of this public information supports the assertion that there is an active market for ACCUs and as such, that a fair value for the ACCUs could have been established.
Our review of local, state and Commonwealth government agencies in receipt of ACCUs found no examples of ACCUs being recognised as intangible assets.
We also found that current practice is not to disclose the volume of ACCUs issued to government agencies, or how these are accounted for, in their annual financial statements.
Our research indicates that the present industry practice by government agencies is to not account for issued ACCUs and to only recognise income when the ACCUs are sold.
We also note the following:
Under the intangible asset accounting model, entities generally measure emissions credits or allowances issued to them and acquired in the open market at cost. Therefore, when an entity is issued emissions credits or allowances, it only has a nominal or zero cost. Conversely, emissions credits or allowances purchased would have a cost associated with them.
While not a commonly applied practice, under the intangible asset accounting model, it’s also possible for an entity to reflect even issued emissions credits or allowances at their fair value when received.
Entities generally do not amortise the emissions credits because their economic benefit isn’t diminished until they are consumed. As such, the costs of the credits are not charged to expense until they are sold or used.
The emissions credits or allowances are subject to impairment under the indefinite lived intangible asset impairment model or the fixed asset impairment model for finite intangible assets, to the extent a company is amortising the emissions credits.
The emissions credits are classified as long-term in the balance sheet, and the cash inflows and outflows related to the emissions credits are classified as investing activities in the statement of cash flows.
What does this mean for government agencies?
Based on our discussion above we conclude that:
Government agencies should consider including appropriate disclosures in their annual financial statements of the volume of ACCUs issued to them and how these have been accounted for.
The ACCUs issued to government agencies can be recognised as intangible assets, subject to any specific agreements relevant to the ACCUs.
There is sufficient market information available from the Clean Energy Regulator for government agencies to be able to reliably measure the fair value of the issued ACCUs.
Australian Accounting Standards Board (AASB) Staff Paper – Possible Financial Reporting Implications of the Fixed Price Phase of the Carbon Pricing Mechanism for Emitter Entities (Version 3) – July 2012, updated to July 2013, page 10.
AASB 120 applies only to for-profit entities. Not-for-profit entities are required to recognise the intangible asset and the grant initially at fair value in accordance with AASB 1004 Contributions.
Even though it is initially measured at fair value, it is still on the cost model going forward. Fair value is really just a deemed cost on acquisition date.
Please note that, in accordance with the policy of Charterpoint Pty Ltd (the Firm), we are obliged to advise that neither the Firm, nor any member, employee, sub-contractor or associate of the Firm undertakes any responsibility in any way whatsoever to any person or organisation in respect of the information set out in this brief, including any errors or omissions therein, arising through negligence or otherwise however caused. The Firm has compiled the accompanying assessment on available information and other sources, and no audit or verification of the data has been undertaken. The analysis has been prepared for, and is furnished solely for, information and discussion purposes.