Unformatted text preview: ACCT3563 Tutorial Activities – Accounting for carbon emission permits Learning Objectives 1. Awareness of Australia’s emission profile and carbon pricing mechanism; 2. Understand the issues in accounting and reporting for carbon emission permits; 3. Explore implications to financial reporting of current accounting treatments for emission permits; 4. Awareness of risks and opportunities to businesses and households of a carbon price 5. Awareness of carbon footprinting tools and encourage individuals to examine their emission activities and to use energy efficiently. Part A The following questions will kick‐start the discussions for general and reporting implications to businesses of a carbon price: (25 minutes) 1. Read Building a Green Economy by Krugman and provide a list of pros and cons of a carbon tax and cap‐and‐trade scheme. 2. What are the business implications of a carbon price in Australia? It may be useful for students to focus on a particular industry in answering this question (for example, mining, oil & gas, real estate, food manufacturing). Refer to the report prepared by PwC and ICAA on “ 20 issues on the business implications of a carbon cost”. 3. Company A has a facility that is liable under a cap‐and‐trade scheme. The facility is considered to be emissions intensive trade exposed (EITE) and is entitled to a subsidy (free permits) from the government to reduce the impact of a carbon price to this industry. Following are the relevant information. Date Transaction Permits Fair Value (tonnes of CO2‐e) 1 July X0 Free permits received from the 10,000 $25 government at the start of the period 30 June X1 Actual annual Emissions 12,000 $27 30 June X1 Purchase of permits 2,000 $27 Required: i.
Prepare the journal entries using the a) cost model; b) revaluation model; and c) net liability approach. ii.
Calculate the impact of the above transactions on Company A’s financial statements using: a. cost model; b. revaluation model; and c. net liability approach. iii.
Based on the outcomes provided in ii), list at least two (2) reasons why there is a need to have a definitive guidance on how to account for carbon emission permits. Part B The remainder of the session (25 minutes) involves a discussion of carbon footprinting for individuals. This will be a group activity (no more than 5 students per group). The group discussion aims to increase awareness of students on their activities that require energy use and to encourage them to reflect on their lifestyle by promoting smart energy use. Specifically, students will engage in the following activities/discussion based on the following: 1. List of personal activities that require energy use; and sources of energy use (usually electricity, gas and petrol); 2. Prepare a carbon footprint spreadsheet using a greenhouse gas calculator as provided in http://www.isa.org.usyd.edu.au/; (Note: This calculator is not accurate as it will be influenced by various factors not directly related to greenhouse gas emissions, such as price changes. It is however a start to document your carbon footprint) 3. Input your consumption (in dollar amounts per year) of the appropriate line items required in the GHG calculator. 4. Based on your consumption how do you compare with an average Australian, average world citizen; or an average person in India. 5. Reflect on how you might be able to reduce your energy consumption in future; thereby reducing your greenhouse gas emissions. 6. Given a list of energy saving tips (e.g. AGL and DCCEE) • List the energy saving tips you follow • List the energy saving tips that will be difficult/challenging to follow • Reflect on what might be done to encourage them to take on this challenge AGL Tips for Smarter Living (http://www.aglsmarterliving.com.au/energy
Insulating your walls, could save up to 20% off your heating usage charges. While ceiling insulation, which can be used to
prevent heat escaping through the roof, could reduce heating usage by an additional 10%.
Turning down your thermostat by just 1°C could cut your heating energy usage by up to 10%.
Rather than taking a bath, take a quick shower. And take a close look at your hot water system's thermostat – it should be
set at 60°C for a storage hot water system and no more than 50°C for instantaneous (or continuous flow) systems.
Energy saving lightbulbs can last up to 10 times longer than incandescent lightbulbs and use up to 75% less power.5
Keeping a lid on saucepans or using just enough water to cover vegetables reduces cooking time and energy usage. Using
the microwave rather than the oven could help reduce energy usage too.
Go cold. And you could save up to 80%* on the energy used to wash by washing in cold water (15°C) verses washing in
warm water using electrical water heating.
* Source: www.energyrating.gov.au
The more stars on the Energy Rating Label, the more energy efficient the appliance is when compared to similar appliances.
Energy Rating Labels also let you compare how much estimated energy an appliance will use annually under typical
Don't standby, switch off
Switching appliances off at the wall when not in use could save Australian households up to $950 million in energy usage
costs each year. Another easy option is to install energy-saving powerboards with individual switches.
As simple as it seems, during the cooler months drawing the curtains will help keep your heat inside where you want it
rather than escaping through your windows. 10 Source: Department of Climate Change and Energy Efficiency Suggested Solution: 1. Read Building a Green Economy by Krugman and discuss the pros and cons of a carbon tax and cap‐and‐trade scheme. The article looked at the economic and political aspects of one of the most critical questions of our times: “Do we have to act on global warming?” It provides a contrast between a carbon tax and a cap‐ and‐trade scheme. Krugman reasons on whether we have enough information to make a decision at all. He also stresses that given the relatively small cost and the chance to avoid problems by making adjustments to how we conduct business, the economic case for action is reasonable. Do not engage in a debate in class on whether the science is real on the effects of climate change. Although an important aspect, this is not the objective of this course and will only waste time in class when you could be focusing on value adding discussions. For example, thinking about the implications to businesses and what action could be taken to reduce the impact of climate change. In most cases the best approach to deal with this issue is by looking at the risks and opportunities to organisations which will be dealt with in Questions 2 and 3. The Australia’s legislative package may be described (in my opinion) to be a hybrid of carbon tax and cap‐and‐trade scheme (the latter is also known as an emissions trading scheme(ETS)). The fixed price period is akin to a carbon tax and the flexible price period is an ETS. Below will be some description of the features of both models. Carbon Tax Pros Cons
Polluters/Emitters know Government does not the price – certainty in know the level of pollution including this cost in their the country will generate business model (as emitters pay as they pollute); this could compromise national emission reduction targets The tax is imposed on the private sector while generating revenue for the government Cap‐and‐Trade Scheme (ETS) Pros
Cons Encourage to reduce Polluters are not aware of pollution as emitters are the price as this will be given a fixed limit and determined by supply and must pay beyond this limit demand for permits Government is certain of the emission numbers Potential revenue from handing out licences goes to industry instead of the government and this allows for this scheme to be workable as the pass‐
on price to consumers is reduced 2. What are the business implications of a carbon price in Australia. It may be useful for students to focus on a particular industry (for example, mining, oil & gas, real estate, food manufacturing, insurance and the banking industry). Suggested Points for discussion are in: Checklist prepared by PwC and ICAA Example of risk disclosures by Origin in the Carbon Disclosure Project 3. Suggested Solution Part i) Journal Entries Date 1 July X0 30 June X1 Cost Model Dr Allowances 250K (Asset/Intangible Asset) Cr Deferred Income 250K Dr Deferred Income 250K Cr Revenue (grant) 250K (no re‐measurement of asset in the cost model) Revaluation Model Dr Allowances 250K Net Liability (no entry‐ memorandum entry on receipt of free permits) (No entry ‐ Receipt of free permit was not recognised) (No entry ‐ Receipt of free permit was not recognised( Cr Deferred Income 250K Dr Deferred Income 250K Cr Revenue (grant) 250K Dr Allowances 20K Cr Equity‐ Revaluation Surplus 20K Dr Emissions Expense 324K Dr Emissions Expense 324K Dr Emissions Expense 54K (12,000 * $27) (12,000 * $27)
(2,000 * $27) Cr Provision to deliver Cr Provision to deliver Cr Provision to deliver allowances 324K allowances 324k allowances 54k Dr Allowances 54K Dr Allowances 54K Dr Allowances 54K Cr Cash 54K Cr Cash 54K Cr Cash 54K Compliance date after 30 June X1 – surrender of 12,000 permit to appropriate government designate Dr Provision to deliver Dr Provision to deliver Dr Provision to deliver allowances 324K allowances 324K allowances 54K Cr Allowances 304K Cr Allowances 324K Cr Allowances 54K (Asset/Intangible Asset) (Asset/Intangible Asset) (Asset/Intangible Asset) Cr P&L 20K Part ii): Excerpts from the financial Reports: Cost Model Income Statement Government Grant Emissions Expense P&L effect Increase in Revaluation surplus Balance Sheet Assets – Allowances Liabilities: Provision to deliver allowances Equity Revaluation surplus Revaluation Model Net Liability* $304,000 $324,000 $324,000 $324,000 NIL $54,000 ($54,000) $54,000 $54,000 $20,000 $250,000
$20,000 * Note that most transactions under this model is off‐balance sheet ** Note that there will be a $20,000 gain on surrender of permits recognised in the next accounting period. Part iii) Reasons for needing accounting guidance include: A. Inconsistency in financial reporting B. Lack of comparability between organisations C. Undermine investors’ confidence in the company’s strategy and approach to carbon transactions 20 issues checklist
Quantifying the impacts Yes New business ventures /
products If we cannot pass on our liability, can we still pass on the cost increase?
What is the appetite for cost increases with our customers, and how do we know this? 4.1 Do we understand all the potential assistance available from the government?
Have we started discussing the proposed ETS and the implications of a cost of carbon with our industry association?
Do we understand the timeframes and requirements for application for assistance? 5.1 Do we have a carbon trading strategy?
Do we plan to purchase eligible emissions units at auction or in a secondary market?
What investment and financing options have we considered or discussed? 6.1 Have we incorporated the cost of carbon into future cash flow forecasts?
Does our management have adequate, accurate and timely carbon information to support business decisions? 7.1 What are we doing to reduce GHG emissions to avoid direct and indirect costs? 7.2 Can a focus on carbon assist us in being more efficient in our overall carbon consumption?
What can we do to reduce our indirect GHG emissions? 8.1 How many products or services do we sell that are ‘low carbon’ alternatives? 8.2 Is there any potential to identify ‘carbon value added’ product or service opportunities within our existing products or services? 8.3 8. Reducing emissions and
improving efficiency Have we added carbon clauses to every sales contract? 7.3 7. Can we pass our liability through to our customers? 6.2 Management accounting 3.2 5.3
6. Where are indirect cost increases going to impact our business most? 5.2 Carbon trading 3.1 4.3
5. Have we incorporated direct and indirect carbon cost implications into our mergers and acquisitions, capital expenditure
and budgeting / forecasting processes? 4.2 Government assistance Have carbon clauses been added to our existing procurement contracts? 3.5
4. What is the impact of the ETS and / or, a carbon cost on our key suppliers? 3.4 Cost pass-through and
point of obligation 2.1 3.3 3. Have we included the resourcing / legal compliance obligations within budgets? 2.3 Supplier price increases Is there adequate documentation prepared to support the position taken? 2.2 2. Do we have any GHG emissions that we will be directly liable for? 1.3 Compliance obligation 1.1
1.2 1. Are we considering potential new business opportunities more aligned to a low carbon economy? Strategy: risks and opportunities
Physical 9.1 What are our physical risks? 9.2 9. What costs are associated with our physical risks? 10. Organisation performance
and market reputation What are the organisational and reputational risks associated with the organisations
response to climate change? 11. External stakeholders What are the risks and opportunities relating to external stakeholders associated with the
organisations response to climate change 12. Customers What are the risks and opportunities relating to our customers or associated with the
organisations response to climate change? 13. Suppliers What are the risks and opportunities relating to our suppliers associated with organisations
response to climate change? 14. Industry / competition What are the risks and opportunities relating to our competitors associated with the organisations
response to climate change? Getting the data right
15. Identifying your reporting
and permit liability 15.1 What GHG emissions are considered to be ours for reporting and permit liabilities? 16. Measurement and
accounting 16.1 What is the source of our data? 15.2 What joint ventures, partnerships and business relationships does our business have?
16.2 Is our data reliable?
16.3 What are the skills needed to prepare our data? 17. Systems and processes 17.1 Is our team collecting the right information and does it understand our record keeping requirements?
17.2 What controls do we have in place around the collation and reporting of emissions data?
17.3 Have we linked carbon source data to our existing financial systems? 18. Quality control 18.1 How do we document our level of comfort over the way the data has been collected and reported?
18.2 Are GHG emissions and climate change risks included in our broader risk management framework?
18.3 Is the GHG emissions data used for performance monitoring and decision making purposes?
18.4 Is the quality of reported non-financial data assessed by our internal audit team?
18.5 Are there synergies between the financial audit and carbon assurance process that can be leveraged? Communication
19. Internal communication 19.1 What is our internal communications strategy with respect to our response to climate change
and impact of a carbon cost?
19.2 Do the key teams within our organisation understand the potential impacts of a cost of carbon?
19.3 Do we have the most up-to-date GHG emissions information to report? 20. Communicating with
stakeholders 20.1 What information are our external stakeholders asking for in relation to the implications of
climate change and a cost of carbon?
20.2 Could we broaden our reporting to better address these requests? Comment No
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\ \ \" \ \ Integrated Sustainability Analysis (ISA) The University of Sydney www.isa.org.usyd.edu.au Calculate your annual carbon footprint
Fill in the amounts in the yellow cells that you consume in a full year.
Amounts are in Australian dollars and apply to the Australian economy.
Your emissions will be automatically calculated, as in Column G.
Emissions associated with exports are excluded.
To convert to annual figures use more familiar figures such as weekly costs. You can also enter formulae.
For shared items make sure you divide expenses by the number of people living in your household. Item Assumptions/calculations Amount (in $) Your emissions
(kg of CO2-e) Average
Fruit and vegetables
Bread, flour and cereals
All other food and beverages 3300 kg
1200 kg 3000 kg $800
Construction and maintenance
Rent, mortgage and lodgement expenses
Natural gas 6200 kg
600 kg 6500 kg $2,000
$300 Mobility (other than work related)
Private car or motorbike purchase, repair, service
Petrol or diesel
Air travel (moderate emissions scenario) 21700 kg
15000 kg 3500 kg $5,000
$10,000 Goods (other than second-hand)
Appliances and furniture
Clothing and shoes
Other goods 5700 kg
2100 kg 4000 kg $1,200
$3,000 3180 kg
0 kg 4000 kg $600
$3,000 $48,300 40 t Services
Water, waste and sewerage
Financial, legal and accounting, insurance, communications
Entertainment and all other services (cafes, restaurants, sport, etc)
Government services and defence
Totals Average World Citizen
Average person in India
Please note that this is a relatively simply calculator - more detailed calculators can be developed by ISA.
The estimates given in the table are averages over different products and producers and thus only indicative for your consumption.
Nevertheless, the overall total will in general be quite accurate. I ntegrated Sustainability A nalysis 4.5 t
1.5 t www.isa.org.usyd.edu.au 21 t Your footprint
Services Average Australian Carbon footprint (kg CO2-e) 3.300
3.180 World average 4.5 t
4.000 45 Food 40
35 Housing 30
20 Goods World average 4.5 t 15
10 Services 5
I n tegra ted S usta inab ility A n alysis Average
Australian Assumptions used in completion of spreadsheet
• Expenses have been annualised and represent one person’s costs. • Expenses for food are based on actual costs in one week. • Electricity, natural gas, water, waste and sewerage are based on actual
invoices received. • Petrol costs are based on actual expenses for a one month period. • All other expenses are based on estimates with reference to expenses incurred
in the last 12 months. Activities that required use of energy input
• Lighting at home and work • Making use of an air conditioner at home and in the car • Use of hot water for the dishwasher, shower and washing machine • Travel in private car • Making use of public transport (bus, train, plane) • Charging appliances including computers and phones • Watching TV Sources of energy used
• Electricity for lights and appliances • Petrol for private vehicles and public transport • Gas or diesel for public transport • Gas for hot water and stove Initiatives that will use less energy in future
• Turn off appliances at the plug point to avoid “over charging” • Turn lights and television off when not needed • Shorter showers, shorter dishwashing cycles and doing laundry at lower
temperatures will use less hot water • Install energy efficient appliances • Keep blinds closed at home to reduce heat build up from direct sunlight. This
will place less reliance on the use of an air conditioner. ...
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- Three '07
- Water heating, Emissions trading, Low-carbon economy, Low-carbon fuel standard, Low carbon diet, 2000-watt society