D2 - T5 Actividades reguladas y esquemas de intercambio - Darrel Scott

International Financial Reporting Standards

Pollutant Pricing Mechanisms and Rate-regulated activities Cartegena, Columbia November 2015

Darrel Scott IASB Board Member The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

Š IFRS Foundation. 30 Cannon Street | London EC4M

Agenda • Introduction • Conceptual Framework elements • Pollutant Pricing Mechanisms – Project background – Cap-and-trade emissions trading schemes – Accounting issues

• Rate Regulation – Project background and update – Defined rate regulation – Accounting issues

Assets and Liabilities

Rate Regulation and ETS activities • • • •

Governments restrict or regulate specified activities Variety of mechanisms used to achieve similar objectives Mechanisms may create rights and obligations Applying the IASB’s Conceptual Framework – – – – – –

Do the rights and obligations create assets/liabilities?

If so, should they be recognised?

What is the nature of those assets/liabilities?

When should they be recognised?

How should they be measured?

Should they be accounted for separately or in combination with related items?

Conceptual Framework • In May 2015, the IASB published proposals to revise the Conceptual Framework • Project objectives: To improve financial reporting by providing a more complete, clearer and updated Conceptual Framework that can be used by: – the IASB when it develops International Financial Reporting Standards (IFRS); and – others to help them understand and apply IFRS.

Comment deadline: 25 November 2015

Conceptual Framework Elements

• Elements are the basic building blocks from which financial statements are constructed Statement of financial position Assets

Liabilities

Equity

Statement(s) of financial performance Income

Expenses

Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events

Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities

• An economic resource is a right that has the potential to produce economic benefits.

• A present obligation is an obligation to transfer economic resources that: – the entity has no practical ability to avoid; and – has arisen from a past event (ie economic benefits already received or activities already conducted)

7 International Financial Reporting Standards

Pollutant pricing mechanisms (formerly Emission Trading Schemes)

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Where are we in the project?

• Early stages – staff research: identifying the financial effects of various schemes and current accounting practices – wide variety of accounting methods used in financial statements – IASB aims to issue a Discussion paper for comment

• Previous project (2005-2010) – Began after the issue (2004) and withdrawal (2005) of IFRIC 3 Emission Rights – IASB made some tentative decisions about cap-and-trade issues but these will be revisited

Purpose of this session • Generate discussion • Gather your views—the IASB has not been asked to make any decisions yet, we are researching the issues • Consider issues about the nature of any assets and liabilities created, when they should be recognised and how they should be measured

Looking from a ‘fresh start’ perspective – so starting with a blank sheet of paper

Growth of pollutant pricing mechanisms • Climate change is a critical issue • More jurisdictions developing some form of pollutant emissions reduction policy • Emissions trading schemes is a common solution • Others include ‘carbon taxes’ or environmental regulations

Pollutant pricing mechanisms European Emissions Trading Scheme (EU ETS) Republic of Korea cap-andtrade scheme Regional Greenhouse Gas Initiative (RGGI)

AB 32 Capand-Trade (California)

World Capital Initiative (WCI)

Tokyo Emissions Trading Scheme

New Zealand Emissions Trading Scheme

Many existing & proposed schemes

US Acid Rain Program

There are many emission trading schemes in place around the world. They differ in details but have many common features.

No current international guidance

Greenhouse Gas Reduction Scheme (GGAS)

Divergent accounting practices

Cap-and-trade type of schemes Common features Overall cap (emissions target)

Units of emission (eg tonnes of CO2) that may be released by emitters within commitment period

Implementation Allocation of allowances to participants up to of overall cap cap. Typically reducing instalments.

Trading mechanism

Allowances are tradeable.

Remittance obligation

Allowances covering total emissions made during the compliance year

Main accounting issues • What elements should an entity recognise in its financial statements for emissions trading schemes?

– Allowances – are they assets?

– If so, what type of asset? (intangible, financial, inventory) – What are the obligations/liabilities in the scheme – when do they arise?

– Should the assets/liabilities be recognised?

– How do you measure the assets and liabilities?

– What income/expenses arise and when do you recognise gains/losses?

Cap and trade scheme Example: Assets

Fact Pattern • On 1 Jan 14, government gives 50 000 free allowances to Entity A • Entity A expects to emit 52 000 tonnes during 2014 • A deep and liquid trading market exists for allowances but Entity A decides not to sell any of its allowances • On 30 Sept 14, Entity A purchases 2,000 allowances in the market • Entity A submits the 52,000 allowances to the scheme administrator on 1 Apr 15, in accordance with scheme rules

Does A have an assets before 1 Jan 2014? And on 1 Jan 2014? And on 31 Dec 2014?

Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events

Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities

• An economic resource is a right that has the potential to produce economic benefits.

• The allowances are tradeable instruments that: – are allocated free of charge or auctioned – have market value – can be sold or used to settle obligation

Cap and trade scheme Asset recognition

Allocated allowances (Free)

Purchased Allowances

Recognition Should allowances be recognised as assets? What type of asset?

Intangible, financial, inventory

Cap and trade scheme Measuring the assets Alternative 1:

Measure the assets initially and subsequently at fair value

Alternative 2:

Measure the assets initially at fair value or cost, no remeasurement

Alternative 3:

Measure the assets based on ‘intended use’ a) held for use: measure assets initially at fair value or cost, no remeasurement b) trading: measure assets initially and subsequently at fair value

Cap and trade scheme Example: Liabilities

Fact Pattern • On 1 Jan 14, government gives 50 000 free allowances to Entity A • Entity A expects to emit 52 000 tonnes during 2014 • A deep and liquid trading market exists for allowances but Entity A decides not to sell any of its allowances • On 30 Sept 14, Entity A purchases 2,000 allowances in the market • Entity A submits the 52,000 allowances to the scheme administrator on 1 Apr 15, in accordance with scheme rules

Does A have an obligation before 1 Jan 2014? And on 1 Jan 2014? And on 31 Dec 2014?

Conceptual Framework Definitions of Elements Asset: Present economic resources controlled by the entity as a result of past events

Liability: Present obligations of the entity to transfer an economic resource as a result of past events Equity: Assets - Liabilities

• Present obligation: obligation to transfer economic resources –

entity has no practical ability to avoid; and

–

has arisen from a past event (ie economic benefit already received or activities already conducted)

• Entity A has obligation for pollutants emitted in the period –

no obligation to emit

–

no obligation to return unused allowances

Cap and trade scheme Measuring the Liability Alternative 1:

Measure the liability at the market price of the number of allowances needed to settle the obligation, using actual volume of emissions

Alternative 2:

Measure the liability at the carrying amount of allowances on hand (cost or fair value), with any shortfall measured at the market price

Cap and trade scheme ‘Accounting mismatches’

Liability settled at end of compliance period

Asset recognised when allowances received

Obligation to remit allowances arises as emissions occur

Observed accounting practice: designed to minimise accounting mismatches caused by differences in the timing and measurement of assets and related liabilities

International Financial Reporting Standards

Rate Regulated Activities

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Discussion Paper

Reporting financial effects of rate regulation Observed accounting policies are designed to Comprehensive project for rateregulated activities: Discussion Paper published September 2014 Comment deadline: 15 January 2015

• What information is needed to help investors understand the financial effects of rate regulation?

• What do we mean by “rate regulation”?

• How does rate regulation affect the amount, timing and certainty of revenue, profit and cash flows?

• How should IFRS be amended, if at all, to provide relevant information to investors through IFRS financial statements?

Defined rate regulation • Is a restriction in the setting of prices that can be charged to customers for essential goods or services • Requires suppliers to adjust the selling price (rate) to – recover ‘allowable’ costs or unbilled revenue amounts, or – eliminate ‘excess’ revenue or profits

• Regulates the timing and amount of revenue (and profit) that an entity can bill to its customers Defined rate regulation creates differences between amounts reported to rate regulator and those reported in IFRS financials (‘regulatory deferral account balances’)

Reporting

Financial effects of rate regulation • Exploring viable financial reporting approaches • Responses to DP suggest strong support for recognising some regulatory deferral account balances • Most common suggestion is focus on a ‘revenue-based’ approach, using either: – an Interpretation of / amendment to IFRS 15 Revenue from Contracts with Customers; or – a separate Standard based on the principles in IFRS 15

• Relate the rights and obligations to the definitions of asset and liability in the Conceptual Framework

Defined rate regulation • Creates enforceable rights and obligations for entity and rate regulator • 3-way relationship Rate regulator Focus of the rate regulation project

Affects relationship between rate regulator and entity

Rate-regulated entity

Entity’s customers

Existing standards

The ‘revenue requirement’ • Allowable revenue based on estimates – Consideration entity is entitled to for estimated volume of sales to customers plus other rate-regulated activities to be performed in the period – Regulated rate (ie price per unit) equals estimated revenue requirement divided by estimated sales units

• Revenue requirement recovered through future billings to customers at regulated price per unit Observed accounting practice: revenue based on regulated price per unit and goods and services delivered to customers ie based on the contracts with customers

Accounting issue Should the entity recognise a ‘regulatory asset’ or ‘regulatory liability’ when: • the regulated rate reflects activities that: – occur in a different period?

– do not meet the definition of a ‘performance obligation’ in IFRS 15?

• the regulated rate will be adjusted in the next or subsequent period(s) to reverse any under- or over-recovery by the entity

Revenue Requirement Example

Fact Pattern • Entity A’s regulator determines a fixed revenue requirement of CU200million for 3 year period (x1, x2 and x3) • Determination includes: – CU10m per year for storm costs (no costs in x1 or x2, CU30m in x3) – CU5m per year for research project (project starts in x2) – CU5m per year for CU15m under recovered in prior period

• In x1, A actually receives CU210m

How much revenue should A report in x1? If not CU210m, what should happen to the difference?

Next steps • Continue research with targeted consultation/field work • Develop proposals for an accounting model • Consider implications of the responses to the Conceptual Framework proposals • Consult more widely through a second Discussion Paper

Thank you

32 International Financial Reporting Standards

Appendix Pollutant pricing mechanisms

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

•Š IFRS Foundation. 30 Cannon Street

Observed policies—allowances Approach Approach 1

Initi Allocated al

Approach 3

Approach 4

2

Recognise and

allowances measure at market

Recognise and

Recognise and

measure at cost,

measure at market

reco

value at date of

gniti

issue; corresponding allowances is nil.

issue; corresponding

entry to government

entry to income

grant.

(day 1 gain).

on

which for granted value at date of

Purchased Recognise and measure at cost. allowances

Observed policies—allowances (2) Approach 1

S of

Approach 2

Allowances are

Approach 3

Approach 4

Allowances are

Allowances are

ub allowances subsequently measured subsequently

subsequently

se

at cost or market value, measured at cost, measured at cost

qu

subject to review for

subject to review

or market value,

en

impairment.

for impairment.

subject to review

t tr ea tm en t

for impairment. of

Government grant

government amortised on a grant

systematic and rational basis over compliance period.

Not applicable.

Observed policies—liabilities Approach Approach 1 L i a b i l i t y

Approach 3

Approach 4

2

Recognise liability

Recognise liability when incurred

Recognise

when incurred

(ie as emissions are produced).

liability when

(ie as emissions are However, the way in which the

incurred

produced).

liability is measured means that

(ie as emissions

rec

often no liability is shown in the

are produced).

og

statement of financial position until

niti

emissions produced exceed the

on

allowances allocated to the

Init ial

participant.

Observed policies—liabilities (2) Approach 1

Approach 2

Approach 4

S Liability is

Liability is measured based on:

Liability is measured based on:

Liability is

u measured based

•

•

the carrying amount of

measured

the carrying amount of allowances

b on the market

on hand at each period end to be

allowances on hand at each

based on

s

value of

used to cover actual emissions (ie

period end to be used to

either

allowances at each

market value at date of recognition

period end that

if cost model is used; market value

cover actual emissions (nil or Approach 1 cost) on a FIFO or weighted or

at date of revaluation if revaluation

average basis; plus

Approach 2

the market value of

.

e

q would be required L u to cover actual i

Approach 3

model is used) on either a FIFO or

e emissions,

weighted average basis; plus

allowances at each period

the market value of allowances at

end that would be required to

each period end that would be

cover any excess emissions

allowances are on

required to cover any excess

(ie actual emissions in

hand or would be

emissions (ie actual emissions in

excess of allowances on

purchased from

excess of allowances on hand).

hand).

a n regardless of b t whether the i m l

e

i

a

t s y u r

•

the market.

•

Jargon busting • Pollutant pricing mechanisms: price- or market-based approaches used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. The price can be set directly (eg through a tax) or indirectly through a market.

• Cap-and-trade emissions trading scheme (ETS): a type of ETS in which the government sets an overall ‘cap’ on the volume of specified pollutants and uses tradeable ‘allowances’ (sometimes called certificates, rights or credits) of equal quantity to establish the price.

• Participants: entities that emit the specified pollutants that are subject to an ETS and have an obligation to remit allowances to the government.

• Traders: entities that buy and sell emissions allowances but are not participants in the scheme.

• Commitment period: the period over which the cap has been established.

• Compliance year: a year within the commitment period, for which the participant must verify its emissions and submit allowances.