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6.4 Sales of emission allowances
Publication date: 20 Jul 2016
us Utilities guide
A reporting entity that sells emission allowances will need to determine when to recognize revenue and how to determine the related expense when accounting for it under an executory contract model.
6.4.1 Revenue recognition
Any time a reporting entity enters into a contract for the sale of emission allowances, it should assess whether the contract meets the definition of a derivative. See UP 6.3.2.1 for information on factors to consider in the assessment. Contracts that meet the definition of a derivative should be accounted for following the guidance in ASC 815.
If the sale is accounted for as an executory contract because it does not meet the definition of a derivative, revenue is typically recognized when title to the emission allowances is transferred to the counterparty.
Question 6-4
If the reporting entity sells emission allowances that it could otherwise use to meet a compliance obligation, should it defer recognition of any gain on sale?
If the reporting entity sells emission allowances that it could otherwise use to meet a compliance obligation, should it defer recognition of any gain on sale?
PwC response
Generally, no. Reporting entities sometimes sell emission allowances even though the allowances could be used to meet a compliance requirement. In that circumstance, a question arises as to whether it is appropriate to defer any gain on sale as an offset to future expense associated with a potential purchase obligation to meet the compliance requirement. As discussed in UP 6.6, the compliance obligation should be accounted for separately from any emission allowances held by the reporting entity. If there are no contingencies and there is no continuing involvement associated with the sale, reporting entities should not defer gains received on the sale or exchange (such as from vintage year swaps) of emission allowances.
However, if the reporting entity had planned to use the allowances to meet its compliance obligation, the sale could result in an increase in this obligation (as a result of the need to buy allowances from the market), thus potentially offsetting the gain on sale. See UP 6.6 for further information on measuring an emission allowance compliance liability.
6.4.2 Expense recognition
A reporting entity should recognize emission allowance expense at the time of recognition of the related sale. Emission allowances held for sale generally should be accounted for as inventory. As such, the reporting entity should apply an appropriate inventory costing model (e.g., specific identification; weighted average cost; first-in, first-out) to determine the appropriate expense.
Question 6-5
How should a reporting entity calculate the expense for allowances sold if it follows an intangible model for emission allowances?
How should a reporting entity calculate the expense for allowances sold if it follows an intangible model for emission allowances?
PwC response
As discussed in UP 6.2.1, we would generally expect a reporting entity to account for emission allowances held for sale as inventory. However, in some circumstances, if a reporting entity sells emission allowances accounted for as intangible assets, we believe it should follow an expense model similar to that used for emission allowances classified as inventory. The cost of emission allowances recorded as intangible assets should be recorded as an expense when sold.
In addition, for those emission allowances a reporting entity classifies as intangible assets and uses for compliance, the cost should be allocated against the compliance liability at the time they are used or surrendered (see UP 6.6).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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