The International Accounting Standards Board faces a major challenge later this year when it decides whether to launch a project on pollution pricing mechanisms (PPM).
Any move by the board to clean up an increasingly fragmented landscape of accounting treatments for compliance and voluntary PPMs could have major implications for this increasingly important part of the green transition.
IASB chair Andreas Barckow said during a 9 July meeting of the board’s Accounting Standards Advisory Forum that although the issue “is not prevalent and material right now”, that position could change.
He said: “The question is: do we wait until this is the case, in which case we might be too late? Or do we just start now and have something ready when it becomes material?”
Barckow’s comments came after the IASB heard a series of potentially conflicting messages on the priority it should assign to any future project dealing with the accounting treatment of PPMs during its 20 June meeting.
The board’s staff indicated that “hopefully” they would return to the board “later in the year”, noting the complexity of the issues thrown up by the board’s discussions.
A project on PPMs was identified as a high priority by many respondents, including users, during the IASB’s Third Agenda Consultation. Despite this, the IASB did not include the topic in its active work plan due to resource constraints and the need to tackle more pressing issues.
Since then, however, stakeholders have pressed the board to prioritise the topic. In response, the IASB is currently reassessing the situation through horizon scanning activities. So far, the project team has learned that the prevalence and significance of PPMs, which includes both compliance and voluntary schemes, is increasing.
“Compliance markets are more mature than voluntary markets and the accounting issues are better defined,” they told the IASB.
However, regardless of the nature of the carbon credit or PPM, it appears that there is “diversity in accounting for both types of schemes”.
Equally, staff noted it was “difficult at this time to assess the materiality of these schemes to IFRS reporters, [although] an increasing number of them are participating in these schemes and the financial effects are material to some entities”.
The IASB staff research echoes a presentation by staff from Canada’s Accounting Standards Board to the July ASAF meeting.
The Canadian staff noted that it was possible to navigate to a suitable accounting treatment using existing IFRS standards, although they agreed that there was nonetheless diversity in practice. In particular, the Canadians observed that accounting for the assets and liabilities that potentially arise under PPMs was a problem area.
The IASB’s IFRIC 3 guidance, issued in 2004, was intended to address accounting for cap-and-trade schemes but was withdrawn a year later due to stakeholder concerns regarding mismatches in asset and liability recognition.
IASB staff have so far identified the ‘Emissions rights’ approach, the ‘Government grant’ approach, and the ‘Net liability’ approach (see IASB staff paper 10B, Appendix B) as possible accounting treatments for PPMs.
In addition, the US Financial Accounting Standards Board is gearing up to issue its accounting proposals for PPMs, addressing both compliance and voluntary arrangements.
But despite the apparent urgency of the issue, IASB member Bruce Mackenzie said he did not detect there was any real pressure for the IASB to act immediately.
He said he was surprised to see that “nobody could really give us the evidence that this is the biggest financial thing hitting people at the moment”.
If the board decides to tackle PPMs, project staff indicated that a workstream focused on disclosures would provide a quicker fix than one tackling measurement or recognition.
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