Recognition, measurement and disclosure of carbon emission allowances under the EU ETS : an exploratory study

Purpose – Examine how UK companies account for carbon emission allowances under the European Union Emission Trading Scheme (EU ETS). Design/Method – Annual reports of UK companies are analysed to gather information about their practices in recognising and measuring carbon emission allowances under the EU ETS when allowances are received for free, purchased, used and surrendered. Also to ascertain where and what kind of information they disclose about emissions and allowances and the form of disclosure. Findings/Conclusion – Only one quarter of the UK companies analysed disclose their accounting practices regarding accounting for carbon allowances. Most companies recognise allowances received for free and purchased at cost as intangible assets with a corresponding credit entry either to cash or to a provisional liability. Companies are reluctant to disclose their practices regarding revaluation, amortisation and impairment of these intangible assets. When companies emit emissions, a cost is recognised in the income statement and a provisional liability recognised. For surrendered carbon allowances, most companies recognise a provisional liability with the corresponding credit entry to intangible asset. Companies that do disclose their accounting practices for carbon allowances are publicly listed and are in Steel, Cement and Bricks sectors. Most companies disclose their accounting practices in their accounting policy notes in their annual reports. Practical implications – Provides useful information to standard setters and policy makers in developing a comprehensive standard and guidance in how to account for these allowances. Findings could also be useful to other companies searching for guidance about this issue. Double entries for the accounting of allowances during different stages could also be useful for including the topic in accounting textbooks. Originality/value: Provides evidence of how UK companies account for carbon emission allowances during different stages. Provides a comprehensive table where accounts to be debited and credited in the same journal for different stages, can be seen in one glance. This table could be useful to the tertiary accounting education industry for inclusion in textbooks and accounting curriculum.