Emission allowances held for use may also meet the definition of intangible assets provided by
ASC 350.
Partial definition from ASC 350-10-20
Intangible Assets: Assets (not including financial assets) that lack physical substance.
Emission allowances evidence the authorization to pollute, based on the number of allowances that are allocated by a government entity or otherwise obtained. In addition, emission allowances lack physical substance. Emission allowances are not financial assets because cash is not delivered when they are used; instead, the emission allowance itself is delivered to demonstrate compliance with established regulations. Therefore, they meet the definition of an intangible asset.
Question 6-1
Is it acceptable to classify emission allowances as part of generation plant?
PwC response
Yes, but only in limited circumstances. As a result of prior acquisitions of emission allowances in a plant acquisition or business combination, some reporting entities may have recorded emission allowances as part of the overall property, plant, and equipment balance. Such presentation is acceptable for existing allowances, provided that management’s intent is to use the emission allowances in production.
However, property, plant, and equipment generally consists of long-term assets used to create and distribute products and services of a reporting entity. Emission allowances facilitate a reporting entity’s ability to satisfy emissions requirements related to the production of electricity and the allowances are not used in the physical generation of the electricity. Therefore, we believe the accounting for newly-acquired allowances should follow either an inventory or intangible asset model.
Emission allowances recorded as part of plant are depreciated over the useful life of the related plant asset.
Question 6-2
Does an emission allowance meet the definition of a derivative?
PwC response
No. An emission allowance itself does not meet the definition of a derivative because it does not contain an underlying. An underlying is a price or index that interacts with a notional amount in a contract to determine the settlement amount; an underlying is not the asset or liability itself. Therefore, an emission allowance itself does not contain an underlying and is not accounted for as a derivative.
However, as discussed in
UP 6.3.2.1, contracts for the purchase or sale of emission allowances (e.g., forwards, futures, or options) may meet the definition of a derivative. In addition, as discussed in
UP 6.6, a compliance obligation which requires a reporting entity to deliver emission allowances in the future may contain an embedded derivative.