Accounting alert 2011/03 - Impacts of the proposed Australian carbon pricing mechanism
Considerations for financial reporting at 30 June 2011
An overview of the Australian carbon pricing proposals
At the date publication of this Accounting alert (May 2011), the Federal Government had announced a proposal for a two-stage plan for a carbon price mechanism for the Australian economy. The proposal currently envisages a scheme involving a fixed carbon price period for three to five years before a transition to an a market based emissions trading scheme. The Federal Government has proposed that the carbon price mechanism commence on 1 July 2012, subject to the ability to negotiate agreement with a majority in both houses of Parliament to pass legislation during calendar 2011.
The carbon pricing framework has been agreed by Government and Greens members of the Government’s Multi-Party Climate Change Committee (MPCCC). The other members, Mr Tony Windsor and Mr Robert Oakeshott, have agreed that the proposal should be released for community consultation. The Federal Opposition has indicated it opposes the introduction of the carbon pricing framework. Accordingly, there is no certainty as to whether the carbon pricing mechanism will be implemented in accordance with the Government’s wishes.
The MPCCC is expected to continue to discuss other important elements of the proposal including the starting level of the fixed price, any phasing in of sectors of the economy, and assistance for both households and industry. As a result, at the date of this publication date, the final form of the carbon pricing framework is largely unknown and this situation may continue through the June 2011 financial reporting season.
Notwithstanding the lack of an enacted carbon pricing mechanism in the Australian economy, the effects of a price on carbon cannot be ignored in financial reporting or the wider business context. Existing legislation requires an increasing number of entities to monitor their carbon emissions and the uncertainty surrounding a carbon price is being reflected in market transactions in industries heavily exposed to a carbon price.
Impact on financial reporting at June 2011
In relation to carbon accounting itself, there is currently no formal guidance at the International or Australian levels on how to account for permits issued under emission trading schemes. IFRIC 3 Emission Rights was withdrawn in June 2005 by the IASB because of a lack of symmetry between the recognition and measurement of the permit asset and the emissions obligation. There are however various accounting treatments currently adopted in Australia. The ‘fixed price’ and government compensation elements of the proposed Australian scheme may also introduce additional consequences.
The IASB and AASB have both added emission rights accounting to their respective agendas, however any consideration of the topic by the IASB has effectively been deferred until after June 2011 at the earliest, when the IASB reconsiders its forward agenda. Latest indications from the AASB indicate they are taking a ‘watching brief’ on IASB developments before deciding on how to proceed.
Notwithstanding the lack of accounting guidance on how to account for emissions trading schemes, the possibility of some sort of carbon price mechanism being eventually introduced into Australia results in a number of financial reporting considerations for the current period. These include:
- Impairment testing – the passage of any legislation may be a ‘trigger’ for impairment testing in some cases. If the enabling legislation is not passed prior to the end of the reporting period, there may still be an impact. In any case, the current market assessment of the risks arising from introducing a carbon pricing mechanism will need to be built into impairment testing, either directly (under a fair value model) or indirectly (by adjusting discount rates used in value in use models for risk premiums attached to the possible carbon pricing mechanism)
- Provisions and contingent liabilities – the effects of any enabling legislation will need to be taken into consideration in the measurement of existing provisions (particularly environmental provisions) once the legislation is ‘virtually certain’ of being enacted. New obligations may also arise under current and existing legislation around carbon emissions and carbon credits
- ‘Carbon pass-through’ and price adjustment clauses in contracts – in light of the uncertainty around the introduction of a carbon pricing mechanism in Australia and passage of enabling legislation to implement it, many longer-dated agreements (particularly in the electricity sector) may have included clauses permitting an adjustment for the effects (if any) of an introduced carbon pricing mechanism. Many entities will be required to fair value these clauses, either because the contract itself is a derivative or the clause represents an embedded derivative
- Hedging programs – carbon pass-through and price adjustment clauses in hedging arrangements may be included in hedging arrangements. Management will be required to consider how they designate hedge relationships which make use of contracts that contain multiple risks. Even where the hedge relationship has been appropriately articulated, the carbon pass-through could potentially undermine hedge accounting or hedge effectiveness
- Disclosure of significant adjustments and estimation uncertainties – in industries where the proposed carbon pricing mechanism may have a material impact, additional disclosures should be considered to comply with the requirements of AASB 101 Presentation of Financial Statements. Such disclosures might include the manner in which the proposed carbon pricing framework has been taken into account in the determination of recoverable amount and the likely impact on the measurement of provisions
- Carbon and energy reporting legislation – the National Greenhouse and Energy Reporting Act 2007 (NGER) requires companies that meet certain reporting thresholds to report they carbon emissions, energy consumption and energy production on an annual basis (June). This reporting underpins much of the data that will be used to administer compliance with the carbon pricing mechanism. There is a need for organisations to develop systems, business processes and governing structures to ensure robust, reliable and timely non-financial data can be produced
- Disclosures under ASX Principle 7 – an entity will be required to report how it manages its material business risks arising from the carbon pricing framework under the ASX Corporate Governance Principles and Recommendations
- Continuous disclosure – the need to provide more general information to the market about the likely impacts of a carbon price on forecast results and operations should be considered. Carbon exposed industries might expect a certain amount of shareholder activism on this issue in the lead up to the June 2011 reporting season.
More general information on carbon and sustainability can be found at http://www.deloitte.com/view/en_AU/au/services/climatechangesustainability/index.htm.