The EU Emissions Trading System under IFRS – Towards a ‘True and Fair View’

This research paper seeks to contribute to the latest discussions on the financial reporting for emissions trading schemes. It analyses the International Financial Reporting Standards' (IFRS) accounting policies for emissions allowances, liabilities and carbon hedging instruments which are currently applied by the majority of participants in the European Union Emissions Trading System (EU ETS). The paper introduces assessment criteria for the evaluation of different accounting approaches and argues that the current rules under IFRS are not fully appropriate. A future accounting standard on emission trading schemes should largely follow the recent tentative decisions reached by the International Accounting Standards Board and Financial Accounting Standards Board. However, a different solution is advocated for the subsequent measurement of emission allowances held for compliance and the credit-side entry for freely allocated allowances. Only such an adjusted approach would capture the particular nature and purpose of cap and trade emissions trading schemes like the EU ETS and hence result in financial information which is useful to management and investors alike.