In the meantime the global climate change is on everyone's lips. The results are already visible. Raising temperatures worldwide, raising water shortage in Africa, increasing risk of inland floods in Europa and desertification all over the world are only a few effects of global climatic change (NASA, 2012). This can result into changing ecosystems, upcoming resource conflicts and economic and insured losses. Main driver for climate change is a changing greenhouse effect triggered by greenhouse gases in particular by Carbon dioxide (CO2) (IPCC, 2007, pp. 36-37). Because of these reasons, the Kyoto Protocol was adopted by the United Nations already in 1997, where the countries of the world have agreed to limit or reduce their greenhouse gas emissions (United Nations, 1997, pp. 2-3). Inspired by the Kyoto Protocol the European Union decided to reduce their greenhouse gas emissions by 80-95% till 2050 compared to 1990 (European Commission, 2011, p. 4). One of these greenhouse gas emissions reduction instruments is the so-called EU-ETS system (European Commission, 2011, pp. 6-7). Therefore emission (especially carbon emissions) were declared to a scarce commodity by market. Emission forced henceforth emission rights which are traded on the stock market (i.a. on the EEX). Nethertheless following questions are uprising regarding these emission rights:
Are these emission rights accountable?
If yes, how should these emission rights are accountable to HGB, IFRS and U.S. GAAP?
These questions aren’t easy to answer, although it seems to be. To answer them, the main accounting systems and the EU-ETS system will be described a little bit further, in the beginning of this assignment. Afterwards, the accountability question of EU ETS will be answered. Then some accounting opportunities (without granting completeness) will be further described in relation to the accounting systems HGB, IFRS and U.S. GAAP.
1 List of Contents
2 List of Tables
3 List of Abbreviations
4 Introduction
5 Definitions
5.1 HGB
5.2 IFRS
5.3 U.S. GAAP
5.4 Emission rights (EU ETS)
6 EU ETS and main accounting systems
6.1 HGB accounting of EU ETS
6.1.1 Production or trade?
6.1.2 Purchased or free of charge?
6.2 IFRS accounting of EU ETS
6.3 U.S. GAAP accounting of EU ETS
6.3.1 Intangible Asset Model
6.3.2 Inventory Model
6.3.3 Other Models
7 Results and Conclusion
8 Bibliography
2 List of Tables
Table 1: Balance sheet in Germany, following HGB (§ 266 HGB)
Table 2: Example for an IFRS balanced sheet
Table 3: Sample U.S. GAAP balance sheet (Banks, 2007, p. 28)
Table 4: Framework to account emission rights in IFRS (Haupt & Ismer, 2011, p. 19)
3 List of Abbreviations
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4 Introduction
In the meantime the global climate change is on everyone's lips. The results are already visible. Raising temperatures worldwide, raising water shortage in Africa, increasing risk of inland floods in Europa and desertification all over the world are only a few effects of global climatic change (NASA, 2012). This can result into changing ecosystems, upcoming resource conflicts and economic and insured losses. Main driver for climate change is a changing greenhouse effect triggered by greenhouse gases in particular by Carbon dioxide (CO2) (IPCC, 2007, pp. 36-37). Because of these reasons, the Kyoto Protocol was adopted by the United Nations already in 1997, where the countries of the world have agreed to limit or reduce their greenhouse gas emissions (United Nations, 1997, pp. 2-3). Inspired by the Kyoto Protocol the European Union decided to reduce their greenhouse gas emissions by 80-95% till 2050 compared to 1990 (European Commission, 2011, p. 4). One of these greenhouse gas emissions reduction instruments is the so-called EU-ETS system (European Commission, 2011, pp. 6-7). Therefore emission (especially carbon emissions) were declared to a scarce commodity by market. Emission forced henceforth emission rights which are traded on the stock market (i.a. on the EEX). Nethertheless following questions are uprising regarding these emission rights:
- Are these emission rights accountable?
- If yes, how should these emission rights are accountable to HGB, IFRS and U.S. GAAP?
These questions aren’t easy to answer, although it seems to be. To answer them, the main accounting systems and the EU-ETS system will be described a little bit further, in the beginning of this assignment. Afterwards, the accountability question of EU ETS will be answered. Then some accounting opportunities (without granting completeness) will be further described in relation to the accounting systems HGB, IFRS and U.S. GAAP.
5 Definitions
To understand the European Union Emissions Trading System (EU ETS) and the different accounting options for these carbon pollution rights is necessary to understand three different accounting standards and their principles for an international acting company localized in the European Union[1].
Following accounting standards will be treated:
1. HGB → Handelsgesetzbuch (Germany)
2. IFRS → International Financial Reporting Standards
3. U.S. GAAP → Generally Accepted Accounting Principles (USA)
5.1 HGB
The German HGB (Handelsgesetzbuch) defines the legal framework of business people who want to make business in Germany. Pursuant § 266 HGB defines the structure of the balance sheet under German law. Following HGB the balance sheet is defined in following (table 1, unfortunately just available in German language). One basic of proper accounting principles (pursuant HGB) is the so called prudence (principle) to safeguard of creditor interests (Hahn & Wilkens, 2000, p. 201). It decides materially from the fair-value principle in IFRS and U.S. GAAP (PwC, 2012, pp. 103-104) which is protecting the shareholder more, than the creditor (Antill & Lee, 2005, p. xxi).
Table 1: Balance sheet in Germany, following HGB (§ 266 HGB)
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5.2 IFRS
IFRS (International Financial Reporting Standards) is an accounting standard, which defines the accounting standard for companies throughout the world (except in the United States where U.S. GAAP is followed). It was introduced to achieve two objectives (Antill & Lee, 2005, p. xxi):
- Produce high quality standards
- Work to improve harmonization of preparation and presentation of financial statements
As already mentioned in HGB definition IFRS is based on fair-value principles. IFRS (like U.S. GAAP) must be understandable, relevant, reliable, consistent and comparable and have to provide a fair presentation of its operational and financial situation (Finkler, et al., 2011, p. 40). An IFRS accounting looks a little bit different to HGB (table 2):
Table 2: Example for an IFRS balanced sheet
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5.3 U.S. GAAP
U.S. GAAP (United States Generally Accepted Accounting Principles) is an accounting standard, which defines the accounting standard for publicly traded and privately held companies, non-profit organizations, and government authorities which are located in the United States (Boone & Kurtz, 2010). U.S. GAAP financial statements must be understandable, relevant, reliable, consistent and comparable and have to provide a fair presentation of its operational and financial situation (Finkler, et al., 2011, p. 40)(like IFRS). U.S. GAAP is in a transition phase to get into convergence with IFRS (Shamrock, 2012, p. 2) (Saudagaran, 2009, pp. 2-53 and 2-54). Despite that, this convergence process is not yet complete and will need some time. In following a sample U.S. GAAP balance sheet:
Table 3: Sample U.S. GAAP balance sheet (Banks, 2007, p. 28)
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Frequently asked questions
What is the main topic of this document?
The document discusses the accounting of EU Emission Trading System (EU ETS) under different accounting standards: HGB (German Commercial Code), IFRS (International Financial Reporting Standards), and U.S. GAAP (United States Generally Accepted Accounting Principles).
What are the key accounting standards discussed?
The document focuses on HGB, IFRS, and U.S. GAAP, outlining their basic principles and how they might apply to emission rights.
What is HGB?
HGB (Handelsgesetzbuch) is the German Commercial Code. It provides the legal framework for businesses operating in Germany, including balance sheet structure and accounting principles like prudence.
What is IFRS?
IFRS (International Financial Reporting Standards) is an accounting standard used globally (except mainly in the United States). It aims to provide high-quality, harmonized financial reporting, based on fair-value principles.
What is U.S. GAAP?
U.S. GAAP (United States Generally Accepted Accounting Principles) is the accounting standard used in the United States. It is in a transition phase to converge with IFRS.
What is EU ETS?
EU ETS (European Union Emissions Trading System) is a system designed to reduce greenhouse gas emissions within the European Union. It involves trading emission rights, essentially making emissions a scarce commodity.
What questions does the document address regarding emission rights?
The document seeks to answer whether emission rights are accountable and, if so, how they should be accounted for under HGB, IFRS, and U.S. GAAP.
What are some of the factors affecting EU ETS accounting?
Some factors influencing EU ETS accounting considerations include: Whether the emission rights are for production or trade, and if they were purchased or received free of charge.
What is the prudence principle under HGB?
The prudence principle under HGB prioritizes the safeguarding of creditor interests, differing from the fair-value principle used in IFRS and U.S. GAAP, which tend to protect shareholder interests more.
Does the document provide a complete guide to accounting for EU ETS?
No, the document outlines some accounting opportunities related to the EU ETS, but it does not grant completeness of the subject matter. It’s intended as an introduction and exploration of key considerations.
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- Sascha Kurze (Author), 2013, Accounting options of emission rights (EU ETS) according to HGB, IFRS and U.S. GAAP, Munich, GRIN Verlag, https://www.grin.com/document/214221
