Utilities, power companies, and energy traders may buy, sell, and hold emission allowances to meet emissions requirements associated with generating electricity or to profit from market price changes. The term “emission allowance” refers to a tradeable instrument that conveys a right to emit a unit of pollution. This chapter provides interpretive guidance on accounting for the initial acquisition of emission allowances issued as part of U.S. federal, regional, and state programs. It also addresses emissions-related topics such as sales of allowances, impairment, and accounting for compliance. See UP 7 for information on accounting for renewable energy credits.

The accounting for emission allowances can be complex and is subject to judgment because of the lack of authoritative guidance. Both the FASB and IASB have previously attempted to address the topic. However, the FASB removed the project from its agenda in January 2014 and no guidance was issued. The IASB is still in the research phase of their project on emission allowances and have not provided a timeline for completion. Absent other guidance, emission allowances are accounted for using the guidance in ASC 330, Inventory, or ASC 350, Intangibles.

In addition, IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, provides guidance on the initial measurement of nonmonetary grants and may be applied to emission allowance accounting. This guidance may be used by analogy for U.S. GAAP reporting due to the lack of specific U.S. GAAP authoritative guidance.

This chapter addresses the accounting and reporting of emission allowances. It includes details regarding the assessment of emission allowances as possible derivatives and the relevant guidance when assessing emission allowances for impairment.