Impairment considerations for emission allowances can be complicated by environmental and carbon legislation proposed or enacted at the federal, regional, or state level. For example, significant developments in recent years include the Environmental Protection Agency’s successor to the Clean Air Interstate Rule, which governs emissions of sulfur dioxide and nitrogen oxide, as well as the Cross-State Air Pollution Rule (CSAPR). Phase 1 implementation of CSAPR is scheduled for 2015 and Phase 2 beginning in 2017. In addition, new rules governing power plant emissions continue to be proposed. Such developments illustrate the continued evolution of the regulatory landscape that could impact the value of emission allowances. Ongoing legislative developments regarding emissions could also trigger the need for impairment evaluations for utility plant.
Measurement of potential impairment of emission allowances may require significant judgment, depending on the availability of transparent forward pricing information. Furthermore, the impairment model varies, depending on how the emission allowances are classified.

6.5.1 Inventory

Impairment of emission allowances classified as inventory is based on a lower-of-cost-or-market model. See UP 11.2 for further information on lower-of-cost-or-market considerations for inventory.

6.5.2 Intangible assets

In accordance with ASC 350-30-35-14, emission allowances classified as intangible assets should be reviewed for impairment based on the guidance provided by ASC 360. Any impairment measurements would also be performed in accordance with ASC 360. This guidance requires evaluation of impairment in response to events or changes in circumstances that suggest the carrying value may not be recoverable. Impairment indicators include:
  • A significant decline in the price of emission allowances
  • An adverse change in the manner in which the reporting entity’s generating assets are used, impacting the possible usage of the allowances (e.g., resulting from a change in the fuel mix)
  • A significant adverse change in the business or regulatory environment, such as a regulatory action requiring that a plant be shut down
If an impairment evaluation is triggered, the reporting entity should perform the analysis based on facts and circumstances existing at the balance sheet date. Changes in value subsequent to the balance sheet date would be incorporated in any impairment analysis performed in the subsequent period.

6.5.3 Plant

Emission allowances classified as part of plant also should be evaluated for impairment in accordance with the requirements of ASC 360. Triggering events are similar to those described in UP 6.5.2 for emission allowances classified as intangible assets. However, when considering a significant decline in prices or adverse changes, the evaluation should be performed at the level of the plant asset or asset group (rather than simply for emission allowances on their own). ASC 360 defines asset group as follows.

Definition from ASC 360-10-20

Asset Group: An asset group is the unit of accounting for a long-lived asset or assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

The definition notes that the asset group is based on the lowest level of identifiable cash flows. In the case of emission allowances held as part of the overall plant balance, the emission allowances will be included in a broader asset group for impairment (such as the plant or potentially a group of plants, depending on operations and other entity-specific factors). Emission allowances classified as part of plant would not be tested for impairment on a stand-alone basis. Because impairment is considered in the context of the entire plant balance, a decline in the market value of the emission allowances alone generally would not trigger a potential impairment of either the emission allowances or the plant. See UP 12.5 for further information on evaluating asset groupings for power plants in the context of an impairment evaluation.
Consistent with the approach for intangible assets discussed in UP 6.5.2, the reporting entity should perform the analysis based on facts and circumstances existing at the balance sheet date. Subsequent changes in value would be incorporated in any related subsequent period impairment analysis.
Question 6-6
Should emission allowances that are classified as intangible assets be included in an impairment analysis of plant?
PwC response
It depends. Whether emission allowances classified as intangible assets are included in a plant impairment analysis will depend on whether the allowances are part of the asset group. In accordance with ASC 360-10-35-17, an impairment charge should be recognized if the carrying value of a long-lived asset group is not recoverable and exceeds its fair value.
We believe emission allowances should be included in the asset group for a specified plant if the allowances are required for operation of the plant and were obtained for that purpose. Furthermore, if it is determined that an impairment charge is required, the charge should be allocated among the long-lived assets in the asset group, including emission allowances classified as intangible assets. Any other assets in the group should be tested for impairment in accordance with other applicable guidance.
However, if the allowances are intended for the broader compliance obligation of the reporting entity, it should not include the allowances in the asset group. If the plant is expected to need emission allowances for its operations, the expense considered as part of the cash flows in a long-lived asset impairment test would be determined based on market prices.
See BC, Example 3, and BC for further information.
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