Tuesday, August 28, 2007

Accounting for Emission Credits

I have been dealing with an interesting accounting question the last several days. A ready-mixed concrete producer received emission credits as part of shutting down a generator and replacing the power source with something much friendlier to the environment. The producer wanted to know if it was possible to assign a value to these credits in their financial statements, as they have value and can be sold to a third party.

There were two primary issues here:
  1. What are the accounting rules for recognizing an intangible assets.
  2. What is accepted industry practice.

The producer had already done some research on accounting rules. I did some double checking, and we both came up with the same conclusion: Generally accepted accounting principles do not allow a business entity to capitalize a self created intangible asset. The emission credits would be considered self created, as it resulted from the actions of the business entity. The Emerging Issues Task Force has kind of punted around this issue. The sense I get is that there could be changes in this area, but they haven't happened yet.

I also checked with some of my colleagues at producers throughout the country. Nobody had seen an instance similar to this, but the general consensus was that it wouldn't be allowed under current accounting rules. Industry practice can be an "out" at times, but there does not seem to be industry practice that supports doing so.

What is particularly annoying in this situation is that this producer's financial statements can be considered misleading yet be in conformity with GAAP. GAAP says you can't put this on the balance sheet, yet the producer has an asset that has value but can't be reflected in the financial statements. The producer could disclose the existence of these credits in the notes to their financial statements.

Further annoyance: say Wolverine Ready Mix buys the assets of Acme Ready Mix, and Acme owns some of these emission credits. Wolverine would be able to pro rate part of the purchase price to these emission credits.

Verdict: Unfair.

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