The paper "Impact of Emission Trading Schemes on British Airways Financial Performance" is a wonderful example of a research paper on finance and accounting. Climate change dominated global news in recent times since its effects start to become evident as weather patterns have continued to change. A major milestone was achieved for climate change campaigners is when countries signed the Kyoto Protocol, where they committed to cutting emission of greenhouse gases by setting emission targets for their nations (Maydybura, Alina & Brian 2011, p. 123). A tool that has been used by nations to help them cut emissions has been the Emissions Trading Scheme where countries allow their industries to emit a certain amount of emissions with the aim of reducing the amount over time.
The system has also been referred to as the Cap-and-trade scheme. The EU Emission Trading System (EU ETS) is the largest trader of greenhouse gas emission allowances for power stations, industrial plants, and airlines in about 24 member countries of the EU. The carbon tax system is also another way countries encourage households to reduce the emission of greenhouse gases by investing and adopting greener practices.
Carbon taxes are mainly imposed on greenhouse gases emitted from the burning of fossil fuels. The advantage of the carbon tax system is that it does not favor a particular method of reducing emission, but encourages companies to invest in clean technologies. In recent times, this phenomenon has been reflected in the financial statements of companies operating in countries that have enacted greenhouse gas legislations. The taxes have also affected the operations, as well as disclosures made by entities.
In order to examine the impact emission trading schemes and carbon taxes have had on entities, the research will analyze the financial statements of British Airways. In particular, the analysis will cover the reporting and disclosure of these systems in the financial statements. Literature Review The EU has been on the forefront in implementing the emission trading scheme through the EU ETS, and this has seen the airline industry affected as all airlines flying in or out of Europe have to get an allowance for the emission of greenhouse gases. The aim of this chapter is to examine the literature that has analyzed accounting for emission trading systems and carbon tax, with the aim of broadening an understanding of the way companies report and disclose the greenhouse gas emission allowance.
In an article by Fornaro et al. , the author examined the evolution of accounting for emission by examining the recognition and measurement of allowances granted to companies under the U. S. GAAP and IFRS, where his results revealed diversity under the two standards (Heather 2010, p. 50). The author identified that the U. S.
GAAP required emissions allowances to be reported and measured based on the Federal Energy Regulatory Commission (FERC) “ Uniform Systems of Accounts” where allowances were classified as inventory and reported at historical cost. However, the accounting guidance provided by the FERC distorted liabilities, assets, and operating income for U. S. companies as emissions allowances were presently being received for free and had a zero-cost basis (Farnaro, Winkelman & Glodstein 2009). The IFRS in response to the authoritative accounting guidance of the FERC established the IFRIC 3 Emission Rights in 2004, which required emission allowance to be classified as intangible assets and accounted based on IAS 38, which allowed for reporting based on evaluation method or historical cost model (Farnaro, Winkelman & Glodstein 2009).
Purchased allowances were also required to be recorded at cost on the guidance of IAS 20 on Accounting for Government Grants and Disclosure of Government Assistance. The author notes that the standards as proposed by the IFRS were objected by the European Financial Reporting Advisory Group (EFRAG) based on the IFRIC 3 recognition of allowances received as revenue on the basis of the market price on the date of receipt (Farnaro, Winkelman & Glodstein 2009).
In conclusion, the author identified that there lacked comparability among companies in terms of their financial results.
British Airways 2011, British Airways Plc: Annual Report and Accounts, Year ended 31 December 2011.
British Airways 2012, British Airways Plc: Annual Report and Accounts, Year ended 31 December 2012.
Ernst and Young 2013, Tax implications of GHG emission allowances, Accessed from http://www.ey.com/US/en/Industries/Oil—Gas/Carbon-market-readiness—8—Tax-implications-of-GHG-emission-allowances
Ernst and Young 2013, Accounting Guidance for Emissions Programs, Accessed from http://www.ey.com/US/en/Industries/Oil—Gas/Carbon-market-readiness—4—Accounting-guidance-for-emissions-programs
Fornaro, JM, Winkelman, KA & Goldstein, D 2009, “Accounting for Emission: Emerging issues and the need for global accounting standards”. Journal of Accountancy, Vol. 208, No. 1.
Fazekas, D & Andor, 2012. Accounting Aspects of Emission Trading. Accessed from http://www.academia.edu/444656/Accounting_Aspects_of_Emission_Trading
Haupt, M & Ismer, R 2013, “The EU Emissions Trading System under IFRS – Towards a “True and Fair View” Accounting in Europe, Vol. 10, No. 1, p. 71-97.
Heather, L 2010, Accounting for Carbon, Association of Chartered Certified Accountants, Accessed from http://www.accaglobal.com/content/dam/acca/global/PDF-technical/climate-change/rr-122-001.pdf
Maydybura, A & Brian, 2011, “A study of the Determinants of Emissions Unit Allowance Price in the European Union Emissions Trading Scheme,” Australasian Accounting Business and Finance Journal, Vol. 5/94, p. 123-142.
Pat, C 2007, Accounting for Emission Rights. Deloitte Publications, Accessed from http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Deloitte_Accounting_Emissionright_Feb07.pdf
Raiborn, C & Massoud, M 2010, “Emissions Allowances: Accounting and Public Policy Issues”, Accounting and the Public Interest, Vol.10, No. 1, p.105-121.
Souchik, LE 2012, Accounting for Emissions Trading: How Allowances Appear on Financial Statements Could Influence the Effectiveness of Programs to Curb Pollution, 39 B.C. Envtl. Aff. L. Rev. 475, http://lawdigitalcommons.bc.edu/ealr/vol39/iss2/7/
Steenkamp, N, Rahman, A & Kashyap, V 2012, Recognition, Measurement and Disclosure of Carbon Emission Allowance under the EU ETS – An Exploratory Study, Accessed from http://www.utas.edu.au/__data/assets/pdf_file/0007/188539/Steenkamo_Rahman_Kashyap_15.pdf
Veith, S, Werner, JR & Zimmerman, J 2009, Competing Accounting Treatments for Emission Rights: A Capital Market Perspective. Accessed from http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000276189AB4
Yeoman, 2013, “Accounting for Cap and Trade”, BAP Journal, March 07, 2013. Accessed from http://www.betaalphapsi.pdx.edu/?p=2287
Zhang-Debreceny, E, Kaidonis, MA & Moerman, L 2009, “Accounting for Emission Rights: An Environmental Ethics Approach”, Journal of the Asia-Pacific Centre for Environmental Accountability, Vol. 15, No. 3, p. 19-27.