FASB Codification research paper - Essay Example

03-14 “Participants’ Accounting for Emission Allowances under a “Cap and Trade” Program” (Fornaro and Winkelman et al, n.p.). According to the results of that discussion, U.S. accounting practices for emissions allowances can be found in the “Uniform System of Accounts”, published by the Federal Energy Regulatory Commission (FERC) in 1993 (Fornaro and Winkelman et al, n.p.; FASB, n.p.). According to FERC, emissions allowances should be classified as inventory assets, and be reported at historical cost; in case of purchased allowances, these should be “recordered at their exchange price while those received from the EPA at no charge have a zero basis” (Fornaro and Winkelman et al, n.p.).

FERC requires to apply the weighted-average cost method and to perform calculations monthly based either on reasonable estimates or actual data (Fornaro and Winkelman et al, n.p.). At its November 19, 2010 meeting, FASB jointly with IASB provided two measurement models for measuring the purchased allowances (FASB 2010, 2). Tentative decision of the Boards was the following “purchased allowances should be initially and subsequently measured at fair value” (FASB 2010, 2). . full recognition on sale to third party (absent a SFAS 71 requirement to defer gains as a regulatory liability); classification of cash flow statement inflows and outflows as operating; based on inventory exchange guidance in EITF 04-13 and SFAS 153, carryover basis is on vintage year swaps; lower of cost or market approach to impairment (Deloitte Touche Tohmatsu, 5).

IFRS In December 2004, the International Financial Reporting Interpretations Committee (IFRIC) issued its final version of the project “Emission Rights” (Fornaro and Winkelman et al, n.p.). According to IAS 38, emissions allowances are accounted as intangible assets to which can be applied a revaluation method or the historical cost model (Fornaro and Winkelman et al, n.p.). Purchased allowances should be recordered at cost; the difference between the price paid and fair value of allowances is initially reported as deferred income/liability and in case of sale is systematically recognized as revenue over the compliance period (Fornaro and Winkelman et al, n.p.).

However, in June 2005 IFRIC 3 was withdrawn as it “created unsatisfactory measurement and reporting mismatches”. In 2007, the results of the study carried out by the International Emissions Trading Association (IETA) and PricewaterhouseCoopers has shown that “58 % classified purchased allowances as intangible assets; the rest 42% classified them as inventory, current assets or other items on the balance sheet, or simply depreciated or amortized their allowances (Fornaro and Winkelman et al, n.p.).

The FASB staff indicated that profits from sales of emissions allowances should not be deferred even if the sales results in anticipated short positions in the future. Considerations should be given under SFAS 71, Accounting for the Effects of