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ACCOUNTING PRACTICES IN THE AUSTRALIAN CARBON MARKET Discussion Paper November 2011


INTRODUCTION

How will I account for my emissions?

The Australian Government released its Climate Change Plan: Securing a Clean Energy Future on 10 July 2011 and its draft Clean Energy Legislation Package on 28 July 2011 (draft legislation). These announcements outline the details of a two stage carbon policy mechanism

period) (collectively, carbon scheme). The Legislation Package has been submitted to Parliament in the 2011 spring sittings.

WHAT DOES THIS MEAN FOR YOU?

implement strategies to manage change is short and challenging. It is therefore important to identify and act on key issues now to minimise disruption to your business and avoid last-minute surprises. To assist businesses to prepare for these changes, the Carbon Market Institute is holding a workshop Accounting practices in the Australian carbon market – a Guide for Business at the Carbon Expo Australasia 2011 on 7 November 2011 and in February 2012 will also distribute a detailed guide for business to CMI members. This discussion paper highlights the issues that will be discussed in the workshop and business guide that could impact your business, including: What does your business need to consider in the face of this imminent change? ce and tax departments

How should I communicate my carbon data to the market? What are the tax implications of a carbon price? Where to next? The workshop does not aim to answer these questions in detail, but rather to expand the discussion around the business impact of carbon and to give you some ideas about what to do next. The business guide will discuss all these issues and more in further detail. We have set out the aforementioned questions that will be discussed in the workshop below to highlight key considerations and give a sense of their scope and possible impact.

HOW WILL A CARBON PRICE IMPACT MY CASH FLOW? the most pressing business concerns arising from the scheme. A price on due to the purchase and sale of carbon permits. There may also be indirect impacts on revenues and operating and capital costs for both liable and non-liable entities. Businesses should consider how they will manage changing liquidity requirements and working capital

WILL I NEED TO UPDATE MY TREASURY RISK MANAGEMENT POLICY? The carbon scheme is likely to change your business and treasury department should understand how the scheme will operate and how the business will be impacted. There should be a plan to manage any resultant risks. For example, when and how will permits be purchased? Will the company purchase

be impacted? Are you armed with the resources, information and knowledge you need to adapt?

Will I need to update my risk management policy? ing timetable impact my NGERS reporting requirements?

HOW WILL MY FINANCIAL REPORTING TIMETABLE IMPACT MY NGERS REPORTING REQUIREMENTS? Once the carbon scheme is in operation, carbon volume reports. Financial reporting of carbon data will make this information even more important to a wider variety of stakeholders.


reference to the amounts recorded for the emission permits held as assets that will be used to settle the liability.

Therefore this data will come under increasing scrutiny. The timing of when NGERS emissions data is received will dates (for example, half and full-year) may not coincide with an entity’s existing NGERS reporting timetable. How will you manage this? Do you have the systems and controls in place to provide data as and when you need it?

As part of an entity’s planning process, you should consider which accounting policy is most appropriate. This

HOW WILL I ACCOUNT FOR MY EMISSIONS?

in Australia or overseas to account for freely allocated or purchased carbon units and any related liabilities. In countries where emissions trading schemes have been in operation for some time, such as in Europe and New Zealand, a variety of acceptable accounting approaches have emerged. These are: a)

IFRIC 3 - Despite being withdrawn by the International Accounting Standards Board (IASB), International Financial Reporting Interpretations Committee (IFRIC) 3 can be applied. Carbon units are accounted for as intangible assets, initially measured at fair value. In the case of granted units, for the unit (generally nil) and its fair value is recognised as deferred income on the balance sheet and is recognised in income over the period the emissions are made (the compliance period). As emissions are made a liability is recognised at fair value.

b)

c)

Net liability approach - Carbon units granted for free are measured at a nominal amount (ie zero). The entity records a liability only to the extent that actual emissions made exceed the units granted and still held. The provision is measured at the current market price of the units, unless the entity applies an accounting policy where purchased units impact the measurement of the provision. No provision is recognised for the expected future shortfall of units as, at the reporting date, there is no liability in respect of future emissions. Government grant approach - This is similar to the requirements under IFRIC 3. However, rather than measuring the liability at the present market price of the permits, the liability is usually measured by

HOW SHOULD I COMMUNICATE MY CARBON DATA TO THE MARKET? Entities will need to determine how to communicate the true impact of carbon on their business. This message will policy choice and further complicated by potential diversity in entities’ accounting choice which may lead to a lack of comparability between entities.

WHAT ARE THE TAX IMPLICATIONS OF A CARBON PRICE? The carbon scheme has implications for your tax position. Do you have a strategy to manage the after tax cost of complying with a carbon pricing mechanism? Are you well placed to take advantage of tax opportunities and to avoid issues? Have you thought about deductibility and timing issues? What about the import of international units?

WHERE TO NEXT?

What are companies doing to manage this change? Business should consider undertaking the following tasks, if not already completed: 1)

Establish a governance committee or equivalent to business and roles and responsibilities are clear.

2)

Validate the quality of your emissions data and strategic plan to provide a sound basis for strategic decision-making and evaluate options to migrate greenhouse gas data into your mainstream to gather and review


emissions data in close to real-time to help assess carbon assets and liabilities accurately.

7)

Determine asset valuations and perform fully costed impairment tests.

3)

Identify your direct obligations and develop systems for compliance.

8)

4)

Review supply chain implications and consider the impact of carbon on upstream suppliers and downstream customers and markets, including strategies to pass on the carbon pricing costs.

5)

Trade exposed, emissions intensive industries to consider other EITE activities that could be eligible for assistance and have data audited and submitted

Develop a carbon strategy that covers internal abatement and purchasing credits based on your MACC assessments, consider tax and accounting treatment for new carbon commodities, identify the impact on your capital equipment and re-engineering of business processes and prepare to seek all available government grants and incentives including R&D expenditure tax

9)

Incorporate the risk of carbon emissions, pricing, and credit fraud into your fraud and corruption control framework including how it assesses, prevents, detects and responds to this risk and

data for the implementation of EITE assistance arrangements if not already completed. 6)

Develop Marginal Abatement Cost Curve (MACC) to assess the internal cost of reducing emissions to establish a hierarchy of investment under:

reputation implications. 10)

using the price collars as guidance.

Identify the various grant schemes where you could be eligible to receive funding, and be prepared to apply.

CONTACT If you have any questions, please contact Lloyd Vas, Markets and Research Manager at the Carbon Market Institute

Level 1, 486 Albert Street East Melbourne VIC 3002 Australia P

(03) 9245 0900

E

lloyd.vas@carbonmarketinstitute.org

Carbon Market Institute, email

W

www.carbonmarketinstitute.org

info@carbonmarketinstitute.org

a member of the

COPYRIGHT AND DISCLAIMER Copyright Š2011 the Carbon Market Institute (the CMI). No part of this document may be reproduced without consent. Permission is granted for normal and limited quotation provided that credit is given to the CMI. The opinions expressed in this publication do not necessarily re lect the opinions of the CMI directors, sponsors, partners or members. No responsibility is accepted by the CMI, its directors, sponsors, partners, or members or the authors of any articles for the accuracy of any information contained in this publication or the consequences of any person relying upon any information. The contents of this publication should not be relied upon as a substitute for professional advice.

Accounting Practices in the Australian Carbon Market: Discussion Paper  

With the introduction of a price of carbon from 1 July 2012, the time for businesses to implement strategies to manage change is short and c...