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Economic characteristics of the embedded are not clearly and closely related to the host
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Met
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• The host contract is a liability for emissions compliance (i.e., a debt host).
• Changes in the price of emission allowances are not clearly and closely related to a debt host instrument.
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Hybrid instrument is not remeasured at fair value under otherwise applicable U.S. GAAP
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Met
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• Although some of the measurement techniques used to measure a compliance obligation are similar to a fair value measurement, the obligation is not a fair value measurement.
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A separate instrument with the same terms as the embedded derivative would be a derivative instrument subject to ASC 815
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It depends
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• A firm commitment to receive or deliver emission allowances in the future may meet the definition of a derivative (see UP 6.3.2.1).
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Method
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Considerations
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Accrue as you go
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• Expense is recognized as the obligation arises; expense is based on fair value, cost, or another rational method
• Results in better matching of the expense with the related emissions
• Emissions held are offset against the compliance obligation when they are surrendered, relieving the asset and the related liability
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Accrue when a shortfall occurs
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• Emission allowances are expensed as used; any shortfall is accrued when it occurs
• May result in uneven expense recognition throughout the year
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