The Federal Government aims to have the Carbon Pollution Reduction Scheme (CPRS) legislation through Parliament by June 2009, paving the way for a start date of 1 July 2010. While roadblocks to this timeline still exist, it would be a foolhardy Chief Executive Officer who did not plan ahead for the carbon-constrained economy.

The current aim is to create a robust and transparent market for carbon in Australia, underpinning a reduction in Australia’s greenhouse gas emissions at the lowest possible economic cost. The scheme is designed to achieve this through auctioning the majority of scheme permits to create an effective price mechanism. The robustness, transparency and integrity of this market, however, also needs to be supported by an appropriately transparent and robust accounting and assurance framework.

However, progress on the accounting side has been slow, with a specific accounting standard some way off development. At a recent meeting of the International Accounting Standards Board (IASB), a tentative agreement was reached that emission permits were an asset, but there was no conclusion as to the type of asset, or the treatment of the credit side of the accounting entry.

In the meantime, the effects of the CPRS continue to be felt across industry sectors. Carbon will soon become a real input cost for many, if not all, Australian businesses and managing the commercial risks and opportunities of that input will become an essential business priority. It is important that management of financial risks in regard to carbon’s effect on asset values and income statements does not get crowded out by current concerns over the global financial crisis.

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Accounting implications

In simple terms, entities within the energy industry are likely to fall into one of two main categories – that of ‘emitter’ of that of ‘consumer’.

Emitters: The vast majority of energy companies will be ‘emitters’ – meaning, entities that are liable under the CPRS. Entities with a ‘facility’ that emits more than 25,000 tonnes (t) of carbon dioxide equivalent (CO2-e) per annum will be required to purchase and surrender carbon pollution permits – Australian Emission Units (AEU) – to cover their emissions. For landfill gas, the threshold drops to 10,000 t CO2-e per annum.

These permits will be assets on the balance sheet and are likely to be intangible assets, measured initially at the cost of purchase. A corresponding liability will arise for the obligation to surrender these permits, as CO2-e is emitted.

Due to the potential cost of purchasing permits, large emitters should be assessing their auction strategies, calculating their marginal cost of reducing emissions, and considering how to manage this new financial risk.

Strongly affected industries (SAIs) and emissions-intensive trade-exposed entities (EITEs): Certain emitters within the energy sector may be eligible for free permits from the government. These permits will be accounted for differently, under government grant accounting. This may lead to both permits and liability being recognised at nil value on the balance sheet, although this accounting treatment remains under review by the IASB.

Consumers: For those entities not liable under the CPRS, and therefore not required to purchase permits, the impact of the scheme will still be felt. This is due to the fact that liable entities will be looking to pass on the additional cost of carbon to all consumers; prices for all process inputs are likely to rise, impacting on budgets and forecasts. Consumers themselves should be assessing their own supply contracts to ensure that these costs can again be passed on.

Both consumers and emitters will need to assess the impact of carbon on the carrying value of their assets. A lot has been said by members of the energy industry about the potential impairment implications of the scheme, and this concern may be well founded. Impairment testing for the reporting period may provide an indication of the tests to come, as carbon is included in present value calculations for the first time for many entities.

What next?

Accounting for carbon emissions will take many companies into entirely new territory, for which no specific accounting standard currently exists.

In the absence of authoritative accounting guidance, a diverse range of accounting treatments has evolved. This in turn has led to a lack of consistency in financial reporting that could undermine investors’ confidence in a company’s strategy and approach to carbon transactions, including trading. Companies need to consider:

  • As a business within the energy industry, are you an emitter or a consumer?
  • Have you considered the accounting and other financial implications of carbon and how you might explain it to investors/analysts? Bear in mind that these activities could impact on income statements and volatility of results, balance sheets, cash flows and liquidity, and reporting key performance indicators and ratios.
  • Have you considered the implications for and drafted relevant accounting policies?
    • Are your accounting policies transparent, in line with industry best practice and in line with current accounting standards?
  • Are your systems and controls in place for measuring emissions as robust as your financial systems? Bear in mind that the assets and liabilities arising from the scheme will be subject to audit.
  • Have you considered how to value your carbon-related assets and liabilities at each balance sheet date?
  • Have you considered the potential impairment implications of cost of carbon?

    • As the climate change debate continues and the impact of increasing carbon emissions becomes more evident, it is essential for companies to understand the risks and opportunities and, more importantly, to know how to communicate them.