News & Media
August 3, 2009
Kenneth Winkelman Argues Numbers Under
Cap-and-Trade May Not Add Up
Cites Lack of Comprehensive International
Accounting Standards
In the July 2009 issue of the Journal of Accountancy,
Kenneth Winkelman, an associate of the law firm of Brian Andrew Tully, Esq.,
points out that, because of contrasting accounting standards in implementing
the cap-and-trade program, companies could be charged with producing
separate and conflicting financial statements as they attempt to comply with
environmentally related accounting standards both here and abroad.
Cap-and-trade, or emissions trading, is an administrative approach to controlling pollution through providing economic incentives for reducing industrial emissions. Companies are allowed to emit a pre-determined amount of emissions. There is a monetary value assigned to pollution and the company gets an "allowance" that enables it to emit one metric ton of carbon dioxide (CO2). The "cap" is the part of the program in which the government sets a maximum emissions amount for that company. In the "trade" part, companies can either sell their "allowances" to other companies, or buy them from other companies or governmental entities.
In his article "Accounting For Emissions," Mr. Winkelman addresses the possibility and frequent occurrences of financial discrepancies when reporting fiscal results. The reason for this is that there is no universal set of accounting standards relating to the treatment of allowances on a company's financial statements.
Under U.S Generally Accepted Accounting Practices (GAAP), allowances for specific emissions are reported at historical cost and classified as inventory. Purchased allowances are recorded at their exchange price, and those received from the U.S. Environmental Protection Agency at no charge have a zero basis. The International Financial Reporting Standards under the European Union (EU) consider emission allowances as intangible assets, and purchased allowances are recorded at cost. Allowances received from a governmental entity are reported at fair value.
The disparate results when calculating the intangible asset and related effects relating to greenhouse gas emissions makes it difficult for the market to function. Mr. Winkelman argues that discrepancies in income statement and balance sheet presentations can make it difficult for investors to make optimal investment decisions in a free market.
"Government mandates are likely in the future because of mounting concerns over greenhouse gas emissions. Given these challenges, the time has arrived for standard setters to provide definitive global accounting guidance to ensure consistent and transparent reporting of financial results associated with accounting for greenhouse gas emissions," Mr. Winkelman said.
Mr. Winkelman is an associate with the law firm of Brian Andrew Tully who specializes in dealing with financial issues.
