What is Carbon accounting? If an emissions trading scheme becomes law in Australia, how will it affect financial statements?

Carbon accounting is a process of undertaking measurements and accounting for greenhouse gas emissions from the land based activities and other types of pollution. To reduce carbon emissions, many various market mechanisms are being introduced. One of them is carbon emissions trading scheme which has been adopted by many countries for a number of years now. Carbon emissions trading is a scheme based on market for improvements in environment. It allows parties to buy and sell sanctions for emissions or credits for reduction in emissions of certain toxic wastes.Introducing a new accounting standard on carbon emissions trading can be argued as it may create problems in financial statements. One of the problems is linked to fair value measurement issue when accounting for carbon.

Decision-usefulness theory states that information provided in the financial reports will help users decide whether the past decision and the information used to make them were correct, and can also help in making better economic decisions in the future. If the voluntary social and environmental information disclosed to the public doesn’t give a true and fair view, then there would be a breach of corporate social responsibility by firms and organisations involved in carbon trading. This would be followed by legitimacy theory which proposes that organisations would always have to ensure that they operate within the bounds and norms of their societies. It is assumed that the society allows the organisation to continue its operations as long as it generally meets society’s expectations. Legitimacy theory emphasizes that the organisation must appear to consider the rights of the public at large and not merely those of its investors. Therefore, disclosing of incorrect financial information on carbon trading would make organisations hard to meet general societal norms and expectations as the information provided would be less reliable and comparable.
Throughout the years, traditional accounting measurements have been developed and amended for reporting purposes. Hence, the transition from historical cost accounting to fair value accounting (FVA) occurred because the values that appear on financial statements are not economically relevant since they were incurred. Fair value shows evidence that it discloses informative values to the investors, however the level of the information efficiency is based on professional estimates and judgments. There are various approaches in determining a value for accounting purposes. Fair value measurement is one of the measurement techniques practiced in the world. Consistent with other standards, fair value is defined within the accounting standard as ‘the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction’. Because of the unique nature of many intangible assets, in most cases an ‘active market’ will not exist (Whittington, 2010). Therefore, there is a connection between accounting for carbon and fair value. In financial accounting, carbon emissions trading is considered an intangible asset, meaning if there is any asset revaluation, then it would be hard to revalue the intangible asset in its early years. The requirements of AASB 138 states that intangibles may be revalued only if there is an ‘active market’. An active market is defined as ‘a market exhibiting all of the following: the items are homogenous, willing buyers and sellers can normally be found and prices are publicly available’.

In conclusion, a carbon emission trading is an environmental strategy which uses the markets to produce a cleaner environment. Implementing a new accounting standard for carbon emissions would represent a number of challenges for companies when preparing financial reports. Many companies will have to go through a number of changes in order to follow the conceptual framework effectively. The financial statements have to fulfill the qualitative characteristics of relevance and reliability, while the subsequent presentation of the financial information should be both understandable and comparable (Henderson et al, 2006). This is reflected by the measurement issue of fair value accounting when accounting for emissions trading as an intangible asset. Finally, it is clear that accounting for carbon emissions trading is a very vital step and it will definitely benefit many companies, but at the same time, will create some disadvantages.