Accounting options of emission rights (EU ETS) according to 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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^[1] For the HGB localized in Germany