should treat acquired emission rights in the same way as purchased emission rights
(see 11.2.2 above). An acquirer that applies IFRIC 3 or the ‘government grant’ approach
would recognise acquired emission rights at their fair value, but cannot recognise a
deferred credit for a ‘government grant’ as it acquired the emission rights by way of a
business combination.
Consequently, an acquirer may report a higher emission expense in its statement of
profit or loss in the compliance period in which it acquires a business.
11.2.6
Sale of emission rights
The sale of emission rights that are accounted for as intangible assets should be
recognised in accordance with IAS 38. This means that they should be derecognised on
disposal or when no future economic benefits are expected from their use or disposal.
[IAS 38.112]. The gain or loss arising from derecognition of the emission rights should be
determined as the difference between the net disposal proceeds and the carrying
amount of emission rights. [IAS 38.113].
Prior to the sale the entity may not have recognised the obligation, to deliver allowances
equal to the emissions caused, at its fair value at the date of derecognition. If that were
the case then the entity would need to ensure that the liability in excess of the emission
rights held by the company after the sale is recognised at the present fair value of the
emission rights.
Both the gain or loss on the derecognition of the emission rights and the adjustment of
the liability should be recognised when the emission rights are derecognised. Any gain
should not be classified as revenue. [IAS 38.113].
If an entity that applies the ‘net liability’ approach were to sell all its emission rights at
the start of the compliance period, it would not be permitted to defer the gain on that
sale even if it was certain that the entity would need to repurchase emission rights later
in the year to cover actual emissions. A gain is recognised immediately on the sale and
a provision is recognised as gases are emitted.
If an entity enters into a forward contract to sell an emission right, it may be acting
effectively as a broker-trader. The entity should determine whether the contract is a
derivative within the scope of IFRS 9 by applying the requirements in that Standard (see
Chapter 42).
11.2.7
Accounting for emission rights by brokers and traders
IFRIC 3 did not address accounting by brokers and traders that are not themselves
participants in a cap and trade scheme. However, they hold emission rights as assets
held for sale in the ordinary course of business, which means that they meet the
definition of inventories in IAS 2. [IAS 2.6]. Under that standard a broker-trader may
choose between measuring emission rights at the lower of cost and net realisable value
or at fair value less costs to sell. Commodity broker-traders who measure their
inventories at fair value less costs to sell may recognise changes in fair value less costs
to sell in profit or loss in the period of the change. [IAS 2.3].
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assets
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When a company trades derivatives based on the emission rights, they fall within the
scope of IFRS 9 and are accounted for at fair value through profit or loss unless they
hedge the fair value of the emission rights granted to the company or qualify for the
‘own use exemption’. [IFRS 9.2.4].
When an entity holds emission rights for own use and also has a trading department
trading in emission rights, the company should split the books between emission rights
held for own use and those held for trading. The emission rights should be treated as
intangible assets and inventory respectively. This is illustrated in Extract 17.13 above.
11.3 Accounting for green certificates or renewable energy
certificates
Some governments have launched schemes to promote power production from
renewable sources, based on green certificates, renewable energy certificates, green
tags or tradable renewable certificates. There are similarities between green certificates
and emission rights, except that whilst emission rights are granted to reflect a future
limit on emissions, green certificates are awarded on the basis of the amount of green
energy already produced.
In a typical scheme, producers of electricity are granted certificates by the government
based on the power output (kWh) derived from renewable sources. Entities distributing
electricity (produced from both renewable and traditional sources) are required to hand
over to the government a number of certificates based on the total kWh of electricity
sold to consumers during the year, or pay a penalty to the extent that an insufficient
number of certificates is rendered. It is this requirement that creates a valuable market
for the certificates, allowing producers to sell their certificates to distributors, using the
income to subsidise in effect the higher cost of generation from renewable sources.
11.3.1
Accounting by producers using renewable energy sources
As in the case of emission rights, the award of green certificates is treated as a
government grant by a producer. An intangible asset representing an entitlement to that
grant is recognised at the point in time when the green electricity is produced. As with
any government grant, the entitlement is initially measured at either fair value or a
nominal amount, depending on the entity’s chosen policy. [IAS 20.23].
Where the entitlement asset is initially recognised at fair value, a credit entry is recorded
in the statement of profit or loss as either a reduction in production costs for the period
(on the basis that the purpose of the grant is to compensate the producer for the higher
cost of using renewable energy sources) or as other income, but not as revenue. [IAS 20.29].
Subsequent revaluation of the intangible asset is only allowed if an active market exists
for the green certificates, and the other requirements of IAS 38 are applied (see 8.2 above).
The intangible is derecognised when the certificate is sold by the producer.
11.3.2
Accounting by distributors of renewable energy
When the distributor is also a producer of renewable energy, it has the option to use
certificates granted to it or to sell them in the market. Accordingly, the permissible
accounting treatments of green certificates are in principle the same as those for
emission rights discussed at 11.2 above. The distributor is obliged to remit certificates
1286 Chapter 17
and therefore recognises a provision as sales are recorded (in the same way that a
provision for emission rights is recognised as emissions are made). The distributor might
apply a ‘net liability’ approach, discussed at 11.2.2 above, and only start to recognise a
provision once it has achieved a level of sales exceeding that covered by certificates
granted to the entity in its capacity as a producer.
If a distributor is not also a producer of renewable energy, it recognises a provision as
sales are made, measured at the fair value of green certificates to be remitted. A
corresponding cost is included in cost of sales. The provision is remeasured to fair value
<
br /> at each reporting date. If the entity purchases certificates in the market, they are
recognised as an intangible asset and initially measured at cost. Subsequent revaluation
is only allowed if an active market exists for the green certificates, and the other
requirements of IAS 38 are applied (see 8.2 above).
Alternatively, as discussed in Example 17.19 at 11.2.2 above, the asset held may be
designated by management as a reimbursement right in respect of the associated liability,
allowing remeasurement to fair value. Similarly, the entity could apply a carrying value
method, measuring the provision based on the value and extent of certificates already
held and applying fair value only to the extent that it has an obligation to make further
purchases in the market or to incur a penalty if it fails to do so.
11.3.3
Accounting by brokers and traders
As discussed at 11.2.7 above, brokers and traders should apply IAS 2 where green
certificates are held for sale in the ordinary course of business; account for derivatives
based on green certificates in accordance with IFRS 9; and properly distinguish those
held for own use (carried within intangible assets) from certificates held for trading
(included in inventory).
11.4 Accounting for REACH costs
The European Regulation18 concerning the Registration, Evaluation, Authorisation and
Restriction of Chemicals (REACH) came into force on 1 June 2007. The regulation
requires manufacturers or importers of substances to register them with a central
European Chemicals Agency (ECHA). An entity will not be able to manufacture or
supply unregistered substances. As a consequence, entities will incur different types of
costs, such as:
• costs of identifying the substances that need to be registered;
• testing and other data collection costs, including outsourcing services from
external laboratories, costs of tests in own laboratories – testing materials, labour
costs and related overheads;
• registration fees payable to ECHA; and
• legal fees.
These costs may be part of the development of a new manufacturing process or product,
or in the use of a new chemical in an existing manufacturing process or product. They
might be incurred solely by an entity or shared with other entities (clients, partners or
even competitors). Under the REACH legislation, cost sharing might be achieved by the
submission of a joint registration (whereby testing and other data collection costs are
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shared before the registration is filed) or by reimbursement (whereby an entity pays an
existing registrant for access to the registration and testing data used in its earlier
application for registration). Accordingly, questions arise as to whether such costs
should be capitalised or recognised as an expense and, if capitalised, on what basis the
related intangible asset should be amortised.
In our view, a registration under the REACH regulation is an intangible asset as defined
by IAS 38. [IAS 38.8]. As it gives rise to a legal right, the registration is identifiable. [IAS 38.12(b)].
Because a registration cannot be arbitrarily withdrawn and also establishes intellectual
property rights over the data used in the application for registration, a resource is
controlled. [IAS 38.13]. The future economic benefits relating to the registration arise from
either the right to reimbursement for the use by others of data supporting the entity’s
earlier application; or from the revenues to be earned and cost savings to be achieved by
the entity from the use of registered substances in its business activities. [IAS 38.17].
The appropriate accounting treatment under IAS 38 depends upon whether the
required data is collected by the entity or acquired from an existing registrant and on
whether the registration being completed is for a substance already used in an existing
process or product (an existing substance) or intended to be used for the first time or in
a new process or product (a new substance). The flow chart below demonstrates how
these different features interact with the requirements of IAS 38.
Has the Entity
incurred costs for ‘acquiring’
no
test data for registration purposes
yes
(rather than having performed
the tests itself)?
new
Is the Entity
existing
substance
registering a ‘new
substance
substance’ or an existing
substance?
View 2:
Capitalise costs
Capitalise costs
as development
View 1:
Capitalise costs
as development
costs if
Expense as
as separately
costs if
IAS 38.57
incurred
acquired asset
IAS 38.57
criteria are met
(11.4.3)
(11.4.2)
criteria are met
(11.4.1)
(11.4.3)
11.4.1
Costs of registering a new substance performed by the entity itself
If the entity itself incurs REACH costs, these activities meet the definition of
development in IAS 38. [IAS 38.8]. Accordingly, the entity must also meet the rigorous
rules in the standard described at 6.2.2 above which confirm that the related
1288 Chapter 17
development project is at a sufficiently advanced stage, is economically viable and
includes only directly attributable costs. [IAS 38.57].
Costs of identifying the substances that need to be registered would have to be recognised
as an expense when incurred, as this activity is regarded as research. [IAS 38.56].
11.4.2
Costs of acquiring test data from an existing registrant
An entity may acquire test data from an existing registrant that has already been used
by it in its earlier application for registration. These costs should be capitalised as a
separately acquired intangible asset (see 4 above).
11.4.3
Costs of registering an existing substance performed by the entity
itself
In this case two alternative treatments are acceptable. If the costs of obtaining a REACH
registration for existing substances used in existing processes are regarded as subsequent
expenditure on an existing intangible asset, the related costs should be recognised as an
expense as incurred, [IAS 38.20], (see 3.3 above). As unregistered substances will no longer be
available for use, this might indicate that the registration maintains the economic benefits
associated with the related production process or product and does not improve it.
Alternatively, it could be argued that the cost of registering existing substances should
be regarded as no different to the cost of registering a new product. Accordingly, for the
reasons noted at 11.4.1 above, such costs should be capitalised as an internally generated
intangible asset.
11.5 Crypto-assets
At the time of writing, nearly 1,700 different crypto-coins and tokens were traded or
listed on various crypto exchanges.19
Some crypto-assets entitle
the holder to an underlying good or service from an
identifiable counterparty. For example, some crypto-assets entitle the holder to a fixed
weight of gold from a custodian bank. In those cases, the holder is able to obtain
economic benefits by redeeming the crypto-asset for the underlying. While not money
as such, these crypto-assets share many characteristics with representative money.
Other crypto-assets (e.g. Bitcoin) do not entitle the holder to an underlying good or
service and have no identifiable counterparty. The holder of such a crypto-asset has to
find a willing buyer that will accept the crypto-asset in exchange for cash, goods or
services in order to realise the economic benefits from the crypto-asset.
Crypto-assets have different terms and conditions and the purpose for holding them
differs among holders. Hence, holders of a crypto-asset will need to evaluate their own
facts and circumstances in order to determine which accounting classification and
measurement under current IFRS should be applied. Depending on the standard, the
holder may also need to assess its business model in order to determine the appropriate
classification and measurement.
Crypto-assets generally meet the relatively wide definition of an intangible asset, as they
are identifiable, lack physical substance, are controlled by the holder and give rise to
future economic benefits for the holder.
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11.5.1
Crypto-assets – Recognition and initial measurement
Crypto-assets that meet the definition of an intangible asset and are being accounted
for under IAS 38 are only recognised if it is probable that future economic benefits will
flow to the entity and its cost can be measured reliably (see 3.1 above). Separately
acquired intangible assets will normally be recognised, as IAS 38 assumes that the
acquisition price reflects the expectation about future economic benefits. Thus, an
entity always expects future economic benefits, for these intangibles, even if there is
uncertainty about the timing or amount (See 4.1 above).
Crypto-assets that meet the definition of an intangible asset and are being accounted
for under IAS 38 are initially measured at cost (see 3.2 above).
The cost of acquiring crypto-assets would typically include the purchase price (after
deducting trade discounts and rebates if any) and the related transaction costs, which
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 254
