Accounting for Carbon Emission Trading: An Australian Perspective A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Tharatee Mookdee Bachelor of Science Master of Professional Accounting Thammasat University, Thailand School of Accounting, College of Business RMIT University, Melbourne, Australia October 2013 DECLARATION I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. Tharatee Mookdee October, 2013 ii ACKNOWLEDGEMENTS I am deeply indebted to Professor Sheila Bellamy, my previous principal supervisor, Associate Professor Prem Yapa and Dr Gillian Vesty, my currents supervisors for their valuable comments, inspiring discussion, guidance, advice and encouragement. I attribute my achievements so far mostly to them. I am grateful to Associate Professor Suree Bhumibhamon, a forestry and natural resource management specialist, for inspiration in research topic selection.
I would like to thank the Honourable Julia Gillard, the Former Prime Minister of Australia, for inspiration along my PhD journey. I am thankful to the Honourable Anna Burke, the Federal Member for Chisholm, for her support. Also, I am grateful to Professor Craig Deegan and Associate Professor Robert Inglis for their useful comments in determining research questions and methodology. I am thankful to kind cooperation and collaboration from my practitioner and expert interviewees.
Without them I can’t access and construct research outcomes. I am thankful to Associate Professor Jantana Sakhakara, Associate Professor Nitaya Wongpinunwatana and Associate Professor Napalai Suwanathada for their long-time continuous advices since I was young. My thanks also extend to Prue Lamont, Kalpana Laji, Research administrative officers, Business Research Office, Marita Shelly, the research coordinator and RMIT Security for their assistance. I thank my father and mother for their endless unconditional love and supports.
I thank my younger super sister for her companion and academic inspiration. iii TABLE OF CONTENTS DECLARATION… … … … … … … … … … … … … .iii TABLE OF CONTENTS… … … … … … … … … .iv LIST OF TABLES… … … … … … … … … … … … … … .x LIST OF FIGURES… … … … … … .xiii Chapter 1: Introduction 1.2 Rationale for the Research … … … … … … … … … … … … … … … .3 Statement of Problem… … … … … … … … … … … … … … .5 Purpose of the study… … … … … … … … … … … … … … .6 Scope of Research… … … … … … … … … … … … … … … … … .8 Overview of Methodology and Methods… … … … … … … … … … … … … … .9 Plan of Study… … … … … … … … … … … … … … … … .11 Chapter 2: International Accounting Guidelines for Emissions Trading and Accounting for Emissions Trading Literature 2.2 International Guidelines on Accounting for Carbon Emissions Trading 2.1 The Emerging Issues Task Force’s EITF Issue 03-14, Participants’Accounting for Emissions Allowances… .2 IFRIC 3 Emissions Rights… … … … … … … … … … .3 Australian Accounting Standards Board’s UIG 3 Emissions rights and Renewable energy certificate… … … … … … … … … … … … … … … … … … .4 Other International Guidelines for Abatement certificates (Emission Allowance) created by US Utility Sectors … … … … … … … … … … … … … … … … … … … .3 Emissions Trading – Accounting Practices 2.1 Surveys of Accounting Practices Adopted by Participants in ETS Markets.1 Accounting Principles for Emissions Allowances/Abatement Certificates… … 36 2.2 Asset Classification and Recognition… … … … … … … … … … .1 Carbon credits/emissions allowances… … … … … … … … … … … .2 Source of abatement… … … … … … … … … … … … … … … … … .3 Other related intangible assets… … … … … … … … … … … … … … … .3 Applicable Value and Valuation 2.1 Carbon credits/emissions allowances… … … … … … … .2 Carbon sinks as source of abatement… … … … … … … … … .4 Revenues, Expense Recognition and Capitalization… … … … … … … .5 Disclosure and Accounting Policy Changes… … … … … … … … … … .1 Net Liability Approach… … … … … … … … … … … … … … … … … … … .2 Krupova' and Č erny's Modified Net Liability Method… … … … … … … .3 Three Fair Value Models for Emissions Accounting… … … … … … … .67 v Chapter 3: Theoretical Framework 3.… … … 81 Chapter 4: Research Methodology 4.1 The Qualitative Research Method … .2 Case Study Research … … … … … … .3Sample Selection and Criterion … … .5 Scope of Research … … … … … … … … … … … … … … … … … … … … … .6 Semi-structure interview … … … … … … … … … … … … … … … … … … … … .… … … … … … … 94 vi Chapter 5: Case Sites Background: Analysing Archival Data to Address Research Question 1 5.123 Chapter 6: Research Results and Analysis Parts 2 and 3 6.2 Research Result and Analysis Part 2: Underlying Reasons for Forest Carbon Credit Providers’policy 6.3 Research Result and Analysis Part 3: Experts’opinion… .175 vii Chapter 7: Conclusion and Further Research 7.2 The Research Questions and Summary of Thesis… … … .3 A Review of the Implications… … … … … … .4 Limitations of the study… … … … … … … … … … … … .5 Application of the research outcome … … .6 Further Future Studies… … … … … … … … … … … … … … … … … … … … … … … … … .192 --------------------- viii LIST OF TABLES PAGE Table 2.1 Summary of the withdrawn guidelines 20 Table 2.2 The summary of surveys conducted under EU ETS 34 Table 5.1 M’s Carbon Credits Related Accounting Policy from Fiscal Year 2005-2011 101 Table 5.2 H’s Carbon Credits Related Accounting Policy from Fiscal Year 2005-2012 112 Table 5.3 Summary of Accounting Policy of V Ltd Form Year End 2008-2012 121 Table 6.1 Summary of M’s Scope of Inventory 127 Table 6.2 Summary of M’s Asset Classification 128 Table 6.3 Summary of M’s Inventory Valuation 129 Table 6.4 Summary of M’s Carbon Sinks Valuation 130 Table 6.5 Summary of M’s Revenue Recognition 130 Table 6.6 Summary of H’s Scope of Inventory 136 Table 6.7 Summary of H’s Intangible asset 137 Table 6.8 Summary of H’s Carbon Credit Classification 140 Table 6.9 Summary of H’s Carbon Sink Classification 142 Table 6.10 Summary of H’s Forestry Right Classification 143 Table 6.11 Summary of H’s Scope of Inventory 143 Table 6.12 Summary of H’s Intangible Asset Classification 143 Table 6.13 Summary of H’s Intangible Asset Classification 145 Table 6.14 Summary of H’s Carbon Sinks Valuation 145 Table 6.15 Summary of H’s Revenue Recognition 146 Table 6.16 Summary of H’s Research and Development Cost 148 Table 6.17 Summary of H’s Amortisation of NGAC 148 Table 6.18 Summary of H’s Depreciation of Carbon sinks 149 Table 6.19 Summary of H’s Environmental credits Revaluation 150 Table 6.20 Summary of H’s Impairment testing of assets 150 Table 6.21 Summary of H’s Changes in Accounting Policy/Estimate 151 Table 6.22 Summary of V’s Scope of Inventory 155 Table 6.23 Summary of V’s Classification of Carbon Development Expenditure… 156 Table 6.24 Summary of V’s Inventory Valuation 157 Table 6.25 Summary of V’s Carbon Development Expenditure Valuation 158 Table 6.26 Summary of V’s Revenue Recognition 159 ix LIST OF TABLES PAGE Table 6.27 Summary of V’s Carbon Development Expenditure Recognition 161 Table 6.28 Summary of V’s Impairment testing 161 Table 6.29 Summary of V’s Disclosure and Changes in wording 162 Table 6.30 Summary of H’s Accounting Estimate Change 172 Table 6.31 Summary of V’s Wording for Inventory Policy 173 x LIST OF FIGURES PAGE Figure 1.1 Sample Selection Process 1 Figure 1.2 Australian Emissions Market 3 Figure 1.3 Forest Offset Providers’Major Operating Activities 4 Figure 1.4 Conceptual Frameworks 7 Figure 1.5 Theoretical Frameworks 9 Figure 2.1 The Economic Taxonomy of SGARAs by Roberts et al.1 Theoretical Model: Factor influencing carbon credit providers’ Accounting Practice 81 Figure 4.1 Sample Selection Process 89 Figure 5.1 Forest Offsets Providers’Major Operating Activities 97 Figure 5.2 Indicator 24- Carbon Accounting (Creation statistics) 99 Figure 5.3 Biological Carbon Sequestration 104 Figure 5.4 H’s Share Price from September 2004- September 2012 (AUD) 110 Figure 5.5 V’s Operating Processes 115 Figure 5.6 V’s Historical Stock Prices from 2008-2012 (AUD) 123 Figure 6.1 Preferred Classifications of Carbon Credits 175 Bibliography… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .193 LIST OF APPENDICES Appendix 1… … … … … … … … … … … … … … … … … … … … … … … … … … .… … 317 xi ABSTRACT The emergence of market-based mechanisms to reduce greenhouse gas emissions presents a challenge for accountants who are now required to reflect the new economic given to carbon credits and related assets in the company accounts. Given the absence of formal accounting guidelines, carbon market participants (liable entities and carbon credit providers) around the world are able to select accounting practices and reporting methods based on individual judgment. The main aim of this thesis is to explore current accounting practices (asset classification, sequent measurement and impairment testing) of Australian carbon credit providers.
In addition to exploring the underlying reasons for specific accounting practices, this study also aims to uncover emerging normative views drawing on expert opinions. The study was conducted using case-study methodology and in-depth interviews, supported by archival data and secondary data. The study used institutional theory to interpret research interviews. In general, it was found that disclosures of related accounting information are incomparable due to the lack of formal benchmark guidelines.
While the research results show accounting practices for carbon credits and related assets are in accordance with existing general accounting standards and conceptual frameworks, the preferred asset classification of carbon credits varies among the case site participants, according to specific market requirements and economic uncertainty. Applicable values and valuation methods differ from case site to case site due to the nature of each company’s business, internal operations and economic factors. Impairment testing conducted by each organisation requires reference price indices from various sources, but basically they are determined by the nature of assets and professionals. Revenue and expense recognition greatly relies on accounting estimation made by in-house, on-hand and external forestry professionals from government agencies and private bodies.
When trying to elicit an emerging normative viewpoint, the expert views indicate asset classification, valuation, impairment; revenue and expense recognition should be prepared conservatively, based on a true and fair view. In conclusion, accounting policy makers and professional accountants in Australia need to address these issues to improve the quality of the accounting information in this area.