By connecting the findings of several existing normative and empirical studies on the topic of accounting for emission rights, this thesis answers the following research question: Which information content do the different accounting practices have, that firms use to account for emission rights and which part of that information is valuable from a capital market perspective?
Results from this analysis can provide insights to standard setters regarding the necessary details of a future mandatory accounting solution for emission rights. Although several other emission trading schemes exist in the world, this thesis focuses on the geographical regions of the European Union (EU) and the United States of America (USA), since they are home to the largest and most mature emission trading schemes.
Table of Contents
1 Introduction
2 ER, ETS and their implications for firms
2.1 Regulatory background and geographical coverage of ETS
2.2 Accounting relevance of emission rights for firms
2.3 Financial accounting vs. non-financial disclosure
3 Accounting practices for ER
3.1 Overview of possible financial accounting practices
3.2 Financial accounting approaches used in practice
3.3 Information content of the financial accounting approaches identified
3.4 Non-financial disclosure practices and their information content
4 Information needed vs. information provided
4.1 Information about ER needed on the capital market
4.2 Comparison: Information provided and information required
5 Summary and implications
Research Objective and Key Themes
This thesis examines the information content of various accounting practices utilized by firms for emission rights (ER) and evaluates which information is considered valuable from a capital market perspective, aiming to provide insights for future standard-setting.
- Analysis of existing financial accounting treatments for ER under IFRS and FERC frameworks.
- Evaluation of the information content regarding qualitative criteria like reliability, relevance, and comparability.
- Comparison of financial accounting practices versus voluntary non-financial disclosure.
- Assessment of capital market reactions to emission-related information and valuation relevance.
- Investigation into the impact of regulatory environments and market maturity on accounting for ER.
Excerpt from the Book
3.1 Overview of possible financial accounting practices
No existing financial accounting standard issued by the IASB or the FASB explicitly covers ER (Lovell et al., 2013, p. 745). Therefore, the following section explains possible financial accounting treatments for ER to partially answer the first component of the research question: How do firms account for ER? In the USA, the US FERC approach is used nationwide irrespective of the type of emissions (SO2 or others) to be accounted for (Lovell et al., 2010, p. 16). In the EU, all listed companies must apply the endorsed IFRS for the preparation of their consolidated financial reports. For accounting issues not covered by any standard, IAS 8.10 refers to management´s judgment to find an accounting practice that results in relevant and reliable information (Lovell et al., 2010, p. 14; Warwick & Ng, 2012, p. 57).
It bears mentioning that many local standard setters like the Institut der Wirtschaftsprüfer (IDW) in Germany or equivalent institutions in Austria, France, Italy, Spain and the Netherlands have issued guidelines for firms in their respective jurisdictions. However, empirical evidence shows that even without IFRS regulations in place, compliance with these local guidelines is low (Allini et al., 2018, pp. 2199-2200, 2203-2204). Hence, the following analysis of financial accounting practices is based on IFRS and the FERC approach even though for smaller, non-capital market-oriented EU firms the application of national accounting standards would be possible.
Summary of Chapters
1 Introduction: This chapter introduces the environmental and economic context of emission rights, establishes the research question, and outlines the thesis structure.
2 ER, ETS and their implications for firms: This section explains the regulatory foundation of emission trading schemes, discusses the accounting relevance of ER, and differentiates between financial accounting and non-financial disclosure.
3 Accounting practices for ER: This chapter details various financial accounting methods, analyzes empirical evidence of current industry practices, evaluates information content based on qualitative criteria, and explores non-financial disclosure trends.
4 Information needed vs. information provided: This section compares the information currently disclosed by firms against information identified as relevant by capital market participants, including a synthesis of empirical valuation studies.
5 Summary and implications: The final chapter concludes the work by synthesizing the key findings and providing implications for standard setters regarding the need for mandatory, uniform accounting rules for ER.
Keywords
Emission Rights, ER, Emissions Trading Scheme, ETS, Financial Accounting, Non-financial Disclosure, Capital Market, Valuation Relevance, IFRS, FERC, Materiality, Carbon Disclosure, Sustainability Accounting, Environmental Regulation, Accounting Standardization
Frequently Asked Questions
What is the primary objective of this thesis?
The thesis aims to analyze the information content of different accounting practices used for emission rights and determine which aspects of this information are valuable for capital market participants to make informed decisions.
What are the central themes discussed in this work?
The work centers on the intersection of environmental regulation and financial reporting, specifically focusing on accounting for emission rights (ER), the dichotomy between gross and net accounting approaches, and the role of non-financial disclosures.
Which scientific methods are applied in the thesis?
The research primarily utilizes a literature-based analysis, connecting normative and empirical studies to assess the current state of accounting for ER and its impact on capital market valuation.
What does the main body of the work cover?
The main body covers the regulatory background of ETS, an overview of diverse financial accounting treatments, a comparison of these treatments against empirical market data, and an analysis of non-financial reporting practices.
What is the core research question?
The research question asks: "Which information content do the different accounting practices have, that firms use to account for ER and which part of that information is valuable from a capital market perspective?"
Which keywords best characterize this research?
Key terms include Emission Rights, Financial Accounting, Capital Market, IFRS, ETS, and Information Content.
Why is the FERC approach mentioned alongside IFRS?
The FERC approach is used as a significant reference point because it represents one of the few official regulatory bodies that provides legally binding guidance on accounting treatment for emission rights, particularly in the US electricity sector.
What is the significance of the "net approach" versus "gross approach"?
These are the two main categories of accounting for ER; the net approach offsets assets and liabilities and is widely used, while the gross approach provides more comprehensive information but can create accounting mismatches and earnings volatility.
- Quote paper
- Vicent Giese (Author), 2018, The information in accounting for emission rights, Munich, GRIN Verlag, https://www.grin.com/document/448493
