1 Accounting for an Emissions Trading Scheme The Australian Government s Perspective Tim Youngberry First Assistant Secretary Department of Finance and Deregulation Australia
Presentation Overview and Key Terms Presentation Overview The Australia s emission trading scheme Accounting parameters Research conducted The options and a comparison of the options Main accounting treatment of our preferred option Key Terms Fiscal Balance (FB) = Accrual Budget Underlying Cash Balance (UCB) = Cash Budget Balance
Overview of Australia s Emission Trading Scheme Scheme will commence on 1 July 2010, subject to final government & Parliamentary approval Government is committed to reducing emissions by 60% of 2000 levels by 2050 A cap and trade scheme Majority of permits will be sold at auction Emitters obligations will be settled with the surrendering of emission permits The Australian Government will be the regulator/administrator of the scheme
Accounting Parameters No specific Australian or international accounting standard exists for the accounting for emission trading schemes Required to comply with the Australian Accounting Standards (AAS) which are based on the International Accounting Standards (IAS) Treatment adopted should ideally harmonise with the Government Finance Statistics (GFS)
Research Undertaken New Zealand Government treatment Current and proposed United Nations System of National Accounts (SNA) and GFS Withdrawn International Financial Reporting Interpretations Committee Interpretation 3 Emission Rights Survey of current private sector practices by emitters
The Options Key Features Option 1: Permits as a Kind of Currency This option treats a permit as an instrument which can be surrendered to settle the participants obligations, it is not a right to emit. Option 2: Advance Receipts/Tax Revenue This option considers that the scheme imposes a tax on participants and the emission permits are tax credits. Option 3: Sale of an Asset/Non-Tax Revenue Under this option permits are recognised as an intangible assets and is similar to the approach taken by the IASB in their withdrawn guidance.
Scheme receipts as a tax System of National Accounts Extract from Chapter 17 cross cutting and other special issues 17.342 Governments are increasingly turning to the issuing of emission permits as a means of controlling total emissions. These permits do not involve the use of a natural asset (there is no value placed on the atmosphere so it cannot be counted as an asset) and are therefore classified as taxes even though the permitted activity is one of creating an externality. (emphasis added by Department of Finance and Deregulation)
Tax impact of scheme Impact of Emissions Trading Scheme on the Ratio of Taxes to Gross Domestic Product (GDP) 2008-09 2009-10 2010-11 2011-12 UEFO forecast of taxation revenue $285b $283b $301b $319b (including CPRS) Percent of GDP 23.6% 23.4% 23.7% 23.8% Projected annual receipts from CPRS - - $11b $12b Percent of GDP - - 0.9% 0.9% Forecast of taxation revenue excluding CPRS $285b $283b $290b $307b Percent of GDP 23.6% 23.4% 22.8% 23.0%
Comparison of the Options Type of Revenue Issue Option 1 Option 2 Option 3 Timing of Fiscal Balance impact Timing of impact on (Headline) Cash Balance Timing of impact on Underlying Cash Balance Type of liability Tax Revenue Tax Revenue Gain on sale of non-financial assets Revenue recognised as emissions emitted are reliably measured Revenue recognised as emissions emitted are reliably measured On issue of permits On issue of permits On issue of permits On issue of permits No impact on the underlying cash balance Financing liability On issue of permits GFS: Financing liability GAAP: Non financing liability On issue of permits No liability
Option 1: Permits as a kind of Currency Advantages Reflects the substance of all the scheme transactions (issue, revenue collection and permits surrender). No fiscal balance impact at the issue of permits. Recognise revenue at the time the emitter s obligation is reliably measured. The fiscal aggregates improve at the time emitter s obligation is raised and settled. GAAP and GFS treatments could be consistent (financial liability, financing transaction, timing and measurement). No impact on private sector s current approaches. If permits sold in advance then no budget surpluses impact. Disadvantages More complex. The legislation must be correctly set up. This option requires the tracking of permits and their original purchase price from the auction to the surrendering of the permits through the national permits register. May not comply with present accounting standards. No positive impact on cash budget balance.
Option 2: Advance Receipts/Tax Revenue Advantages No fiscal balance impact on issue of permits. Recognise revenue at the time the emitter s obligation is reliably measured. The fiscal aggregates improve at the time emitter s obligation is raised and settled. Tracking of permits not required. Giving away permits treatment consistent with other schemes/gfs. Consistent with GFS treatment as tax revenue. Advised that it complies with AAS Disadvantages In contrast with GFS, this option would result in GAAP not treating the issue of permits as a financing transaction. In addition, there would be no receivable under GAAP as the consideration has effectively already been received at the time of issuing the permits. Does not reflect fully the purpose of an emission trading scheme, which is that the emitters settle their obligation by remitting permits. Difference in timing between cash and accrual budget impact.
Option 3: Sale of an Asset/Non-Tax Revenue Advantages Simple. Recognise revenue at the time of the issue of permits. Tracking of permits not required. Complies with present AAS Disadvantages Reflects form not substance. GAAP does not recognise that the government is giving away an asset when permits are allocated free of charge. Inconsistent with preliminary ABS advice that GFS revenue is likely to be tax revenue. The revised SNA review states that ETS should be recorded as tax revenue. If permits sold in advance then large increase in budget surpluses.
Preferred Treatment - Advance Receipts/Tax Revenue 1. Emission units sold at auction Implementation phase (2010 2012) Event Accounting treatment by the government Prepayment of Tax treatment (Option 2) Sale of units cash settlement within 60 days of the auction. Recognition of Revenue at the earliest when emissions emitted is reliably measured. Assistance package (households and industry) exclude free permits. Underlying Cash Balance: Full impact in derived cash flow when cash is received. Fiscal balance: No impact until the revenue is recorded, which would be at the earliest when emissions emitted can reliably be measured. Balance Sheet: Assets increase when cash is received and a liability, unearned revenue, is recorded. Fiscal balance: Improves by the amount of tax revenue recorded. Underlying Cash Balance: Nil impact. Balance Sheet: The unearned revenue liability is decreased by the amount recorded as revenue. Accounted for as government grants: Underlying Cash Balance: Full impact in derived cash flow when cash is paid. Fiscal balance: Full impact when they are due to be paid. Balance Sheet: Assets decrease when cash is paid and a liability is recorded until grant amount due is paid.
Preferred Treatment - Advance Receipts/Tax Revenue 2.Free emission units Accounting treatment Event Free Emission Units Grant Expense Units issued free of charge. Recognition of Revenue at the earliest when emissions are reliably measured. Accounting treatment by the government Fiscal balance: Full impact at the time of issue. Underlying Cash Balance: Nil impact. Balance Sheet: A liability is recorded until the application of the free units to an emitter s obligation. Fiscal balance: improves by the amount of tax revenue recorded. Underlying Cash Balance: Nil impact. Balance Sheet: The liability, initially recorded on issue of free units, decreases. 3.International Linking Accounting treatment options (Kyoto Units and Bilateral Agreement Units) International Units Emitter surrenders eligible International Emission Units to settle his/her obligation. Underlying Cash Balance: Nil impact. Fiscal balance: Negative impact. International units would likely be recorded as grants (or tax credit), unless they can be sold or redeemed. Only in the instance where the International units have some value for the government: Balance Sheet: International Units recorded as assets.
The Future Scheme to be finalised and legislation passed. Accounting Standard Setters to release standard/guidance risk that our preferred option will not meet requirements. The Auditor General has agreed to the broad concept but still to give final signoff. External accounting firm has confirmed that our preferred treatment meets the current Australian Accounting Standards