Financial Reporting for Pollution Reduction Programs

49 Pages Posted: 17 May 2017 Last revised: 21 Jun 2017

See all articles by Yonca Ertimur

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Jennifer Francis

Duke University

Amanda Gonzales

University of Nebraska at Lincoln

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: June 2017

Abstract

We apply the IASB’s conceptual framework to develop an accounting treatment for a cap-and-trade program. Under our treatment, firms recognize allowances as intangible assets, measured at fair value with a credit to cash for purchased allowances and to a current period gain for allocated allowances; firms recognize current period expense and accrue liabilities, at fair value, as they emit; both asset and liability are remeasured at fair value at every reporting date. We apply both our treatment and alternative treatments to transaction-level data from the U.S. SO 2 cap-and-trade program to provide ex ante evidence that financial reporting outcomes under alternative treatments, including our own, result in significant differences relative to current practice, including increased assets and liabilities, reduced net income, and increased income volatility. Our proposed treatment is most aligned with investor perceptions as indicated by the association between market value of equity and assets, liabilities and income.

Keywords: Pollution Reduction, Emission Rights, Conceptual Framework, Financial Reporting Effects

JEL Classification: M41, Q51

Suggested Citation

Ertimur, Yonca and Francis, Jennifer and Gonzales, Amanda and Schipper, Katherine, Financial Reporting for Pollution Reduction Programs (June 2017). Available at SSRN: https://ssrn.com/abstract=2969339 or http://dx.doi.org/10.2139/ssrn.2969339

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Jennifer Francis

Duke University ( email )

220 Allen Building
Durham, NC 27705
United States

Amanda Gonzales (Contact Author)

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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