Module 2 - Energy Efficiency: Accounting and reporting considerations
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The carbon pricing scheme has several tax implications that the tax function needs to consider: - Deductibility of carbon unit purchases and timing of deductions. The tax function needs to understand when carbon costs can be deducted. - Tax cost of free carbon units provided to EITE industries. The tax function needs to determine the tax value of these free units. - Tax treatment of importing international carbon units after the fixed price period. The tax implications of using different unit types needs to be understood. - Impact on fuel costs and fuel tax credits/excise exemptions due to the effective carbon price on fuels. Reductions in these credits/exemptions impact the tax liability. The tax function has
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Module 2 - Energy Efficiency: Accounting and reporting considerations
- 1. Energy efficiency – accounting and reporting considerations Module 2
- 2. Disclaimer This material has been developed as part of the UTS Business School and Ernst & Young „Leadership & Change for Energy Efficiency in Accounting & Management‟ project. The project is supported by the NSW Office of Environment & Heritage as part of the Energy Efficiency Training Program. For more information on the project, please go to: http://www.business.uts.edu.au/energyefficiency/. This presentation is for educational purposes only, and does not contain specific or general advice. Please seek appropriate advice before making any financial decisions. 2
- 3. Agenda ► Introduction ► Sustainability – accounting and reporting ► Managing the carbon price impact ► Impact on treasury function ► Impact on finance function ► Tax implications ► Where to next? ► Sustainability and financial reporting ► Over to you...reflect and plan 3
- 4. Outline 5.0 Contr ol 1.0 Define and monitor ener gy ener gy baseline Ener gy Efficiency 2.0 Measur e 4.0 Implement 2 ener gy data Oppor tunities 3 3.0 Analyse efficiency oppor tunities 4
- 5. Learning objectives for this module ► Describe the drivers behind sustainability strategies and energy efficiency measures ► Describe the key features of the carbon scheme and identify whether their organisation is a liable entity or significantly impacted ► Identify methods to reduce costs associated with the carbon scheme ► Apply the available different accounting approaches to accounting for carbon ► Describe the key challenges for the various business functions of both accounting for carbon and energy efficiency projects implemented ► Identify best practices within sustainability reporting, current and future trends and developments within financial reporting ► Have a general awareness of the various voluntary and compulsory reporting schemes in operation impacting data collection and financial reporting 5
- 6. Over to you ► What are some of the current issues you experience in accounting for sustainability/ energy efficiency measures within your organisation? ► What are some of the current issues you experience with reporting on sustainability/ energy efficiency measures within your organisation? 6
- 7. The sustainability pathway – two aspects of evaluating sustainability Understand what’s important to Stakeholders the business Business value in recognising the material sustainability Social Economic Environme issues, and setting a strategy ntal to respond Determine Material aspects Issues Risks Opportunities Responsibilities Set corporate goals Monitor Set targets/milestones Progress Set key performance indicators Stakeholder value in the company reporting on their performance Respond Inform Disclose Report 7
- 8. Is there a link to Shareholder Value? Community Marketplace Enhanced Alliance with Reduced reputation and business Access to and regulatory brand partners lower cost of intervention capital Better Access Customer to Resources satisfaction and loyalty Shareholder Value Attractive New business employer opportunities Improved safety Improved risk Cost savings performance Improved management productivity Workplace Environment 8
- 9. Shareholders – a critical stakeholder Van Stadenet al . 2010 . „Shareholders‟ requirements for corporate environmental disclosures: A cross country comparison‟. In The British Accounting Review. Vol 42. Iss. 4. Pp.227-240. 9 9
- 10. Climate Change – A Global Driver The Asia Pacific region contributes largely to global greenhouse gas (GHG) emissions, particularly China. Country targets to reduce emissions: ► China: 40% to 45% by 2020 (intensity basis on GDP) ► Indonesia: 26% to 41% by 2020 Carbon Disclosure Project ► Papua New Guinea: 50% by 2030 (CDP): Increasingly, companies are monitoring ► Singapore: 16% by 2020 greenhouse gas emissions ► Thailand: 30% by 2020 (energy sector only) and disclosing their approach to managing climate risk ► Australia: 5% to 25% by 2020 through the CDP, which is accessed by investors and Companies across the Asia Pacific are seeking to analysts globally. Over 3000 capitalise on GHG reduction opportunities to companies now report demonstrate to stakeholders – including investors – annually. that they are managing sustainability risks. 1 0
- 11. Managing carbon price impact 11
- 12. What we are going to cover.... ► Background of carbon scheme ► Are you liable? ► Impact on treasury function ► Impact on finance function ► Management accounts ► Financial accounts ► Tax implications ► Where to next? 12
- 13. Clean Energy carbon pricing system Core design elements ► Carbon price from 1 July 2012 fixed at $23 ► Growing at 2.5% real terms in 2013 and 2014 ($24.15 and $25.40) ► From 2015 a flexible price determined by market (cap and trade) ► Price floor established - $15 (growing) ► Price ceiling established - $20 above the international carbon price 13
- 14. Clean Energy carbon pricing system Core design elements (cont’) ► Liability determined per facility ► Over 25,000 tCO2e direct (scope 1) GHG emissions ► Permits (carbon units) auctioned by Government: ► 5% of liability can be met with units from the Carbon Farming Initiative ► No international permits during fixed price phase, but up to 50% after this ► Companies estimate and retire 75% of their liability by 15 June, with a „true-up‟ on the following 1 February ► EITE (emissions intensive trade exposed) companies will receive free carbon units 14
- 15. Sector and industries impacted - examples Liable entities Significantly impacted ► Steel making ► Manufacturing ► Aluminium smelting ► Retail ► Electricity generation ► Agriculture ► Water production ► Financial services ► Mining ► Insurance ► Waste ► Transportation ► Other industrial processes 15
- 18. Exercise 1: How will the carbon scheme impact aspects of your organisation? ► In your table groups, discuss how the carbon scheme will impact your organisation. ► As a group: ► Prepare a list of all the departments within your organisation you can see being impacted. ► Note which areas do you see most impact for a) cost rises b) cost savings? ► As part of the finance team, what opportunities do you see for driving down costs? ► Be prepared to share your ideas with the group 18
- 19. Business implications Strategy Design product Source Manufacture/ Sell Customer process materials produce service Sustainability of Product Costs of raw Production Pricing impact Brand strategy Supply chain business innovation materials efficiency structures Carbon strategy Fuel type mix Customer OTN dealings /impact on contract with customer business structures framework M&A Asset profitability Finance Treasury Tax HR IT Procurement Legal Regulatory Trading of permits Capability Monitoring Contract management and Compliance and and strategy reporting Functions Abatement project modelling capacity reporting systems Credit Ownership Reporting of Accounting assessment/ of liability liabilities Management Tax policies supplier (JVs) of cash implication viability DOA/ Funding governance Liquidity Reporting 19
- 20. Opportunities for driving down costs 20
- 21. Impact on operational functions 21
- 22. Impact on operational functions Finance Treasury IT Tax Carbon pricing Regulatory Procurement Legal HR 22
- 23. Impact on treasury function ► Risk management policy ► Evaluate changed business and finance risk ► Considerations include: ► Risk appetite ► Overall risk management strategy ► Determining a mitigation strategy ► Building carbon risks into existing risk measurement methods 23
- 24. Impact on treasury function Cash and liquidity management ► Ability to forecast cash flow, working capital & liquidity requirements is key ► Liable entities: ► Potentially higher revenue ► Cost of purchase of Carbon units ► Liable and non-liable entities: ► Higher operating costs from cost pass through ► Impact on capital budgets 24
- 25. Impact on Finance function 25
- 26. Impact on finance function Financial accounting ► Current international practice ► AASB / IASB discussions ► Other implications 26
- 27. Accounting approaches - impact on net assets and net profit before income tax each accounting period1 IFRIC 3 approach2 Net liability approach Government grant approach Reimbursement rights Carrying value method Reimbursement rights Carrying value method method method Balance Sheet Asset - Purchased units Cost MV Cost MV Cost - Free units Deemed cost Nominal amount Nominal amount MV Deemed cost Liability MV of units Cost of units - Emission obligation MV of units (all) (purchased)3 (purchased)3 MV of units (all) Cost of units (all) - Deferred income Deemed cost – Deemed cost – Deemed cost – (government grant) amortised4 Nominal amount Nominal amount amortised4 amortised4 Impact on net assets Yes No No No No Income Statement Revenue - Deferred income (government grant) Deemed cost Nominal amount Nominal amount Deemed cost Deemed cost - Revaluation No Yes No Yes No MV of units Cost of units Expense MV of units (all) (purchased)3 (purchased)3 MV of units (all) Cost of units (all) Cost of purchased units + effect of Impact on net profit fluctuation in market before income tax price on liability Cost of purchased units Cost of purchased units Cost of purchased units Cost of purchased units Cost = market price of units at date of purchase 1. Assuming financial year = compliance year (ie 30 June year end) and no settlement of obligation until following compliance year Deemed cost = market price of units at date of receipt 2. Assuming entity does not apply revaluation model under AASB 138. MV = market value of units at reporting date 3. Only recognise liability when obligation exceeds units allocated for free, ie when required to purchase units to settle obligation. Nominal amount = (in Australia) zero 4. Deferred income is recognised in income over the period of emissions consistent with the basis on which the expense is recognised, regardless of whether units are held or sold. http://www.ifrs.org/The+organisation/Members+of+the+IFRIC/About+the+IFRIC.htm 27
- 28. Example Fact set Entity A: ► Total emissions for the year: 30,000 tonnes of CO2-e ► Carbon units for the year (1 unit = 1 tonne of CO2-e) Free units Purchased units Number of units 20,000 10,000 Date Received Purchased beginning of year end of year FV at that date $15/unit $20/unit 28
- 29. Example T-accounts end of year before settlement IFRIC3 Net liability Reimbursement rights method Carbon unit 500 Liability (600) Carbon unit 200 Liability (200) Loss 300 Cash (200) Loss 200 Cash (200) Government grant Government grant Carrying value method Reimbursement right method Carbon unit 500 Liability (500) Carbon unit 600 Liability (600) Loss 200 Cash (200) Loss 200 Cash (200) 29
- 30. AASB discussions AASB September and October meetings: ► Discussion on application of international practice in Australia ► Specific focus - accounting treatment during fixed price period ► Consideration – is unit financial instrument? ► Still under review by Board and no decisions made 30
- 31. Future developments IASB project ► Emissions Trading Schemes currently inactive ► Options being discussed: ► Recognition of ► Purchased units - asset at fair values ► Free units - asset at fair values ► Liability: ► Obligation recognised for free units at fair value upon allocation ► Excess emissions with price input initially and subsequently measured at fair value; and recognition: ► Liability capped at quantity allocated until entity actually emits above allocated quantity; or ► Liability recognised for expected emissions throughout the compliance period 31
- 32. Practical Practical implications implications Fixed price period Flexible price period Present 1 July 2012 1 July 2015 Pre-effective date Other implications considerations: ► Impairment trigger at 31 ► Impact on budgeting and Dec 2011 or 30 June 2012? forecasting ► Onerous contracts? ► Impact on inventory costing ► Carbon units acquired in business combination ► Accounting by brokers / traders ► Forward contracts for carbon units ► (income) tax consequences 32
- 33. Impact on Regulatory Reporting 33
- 34. Impact on Regulatory Reporting ► Reporting Schemes ► NGERS Finance Treasury ► EEO ► RET IT Tax ► GGAS, ESS, VEET, Carbon etc. pricing Regulatory Procurement Legal HR 34
- 35. Reporting Greenhouse Gas emissions NGERS Reporting Thresholds (www.climatechange.gov.au) 35
- 36. National Greenhouse and Energy System (NGERS) ► Now in fourth year of reporting ► Mandatory for companies that report on: ► energy consumed and energy produced ► scope 1 and 2 greenhouse gas emissions ► Based on invoices for electricity, gas, fossil fuels ► Calculate emissions for each „facility‟ and each type of greenhouse gas for each facility expressed as tCO2-e. ► Department of Climate Change and Energy Efficiency audits and fines. ► NGER methodology underpins: ► Carbon Pricing Mechanism ► Government National Greenhouse Inventory ► National Carbon Offset Standard 36
- 37. Financial and NGERS reporting timelines 37
- 38. Energy Efficiency Opportunities (EEO) Act ► Requires businesses to identify, evaluate and report publicly on cost effective energy savings opportunities ► Mandatory for corporations that use more than 0.5 petajoules (PJ) of energy per year (45% of energy use in Australia) 38
- 39. National Carbon Offset Standard (NCOS) ► Voluntary offset market ► Sets minimum requirements for calculating, auditing and offsetting the carbon footprint of an organisation or product to achieve „carbon neutrality‟. ► Provides guidance on what is a genuine voluntary offset ► Administered by Low Carbon Australia 39
- 40. Exercise 2: Data capture issues and solutions ► What information are you asked to provide for management in relation to NGERs or other sustainability reporting measures. What additional information do you foresee having to provide under the carbon scheme? ► What issues are associated with this? ► What can you suggest to overcome these issues? 40
- 42. Impact on tax function Tax implications and strategy ► Deductibility ► Timing of deduction ► Tax cost of EITE carbon units ► Import of international units 42
- 43. Impact on tax function Fuel and pass-through costs ► Effective carbon price on business use of fuels ► Reductions in fuel tax credits ► Reductions in the automatic remission or exemption of excise 43
- 44. Impact on tax function Restructures, grants, R&D and others ► Business restructures ► R&D incentive ► Grants and financial assistance ► Passing on carbon costs – experiences from GST ► Developing carbon compliance systems 44
- 45. Where to next? Quick 10 step implementation check-list for liable and impacted entities Action to be taken 1.Establish a governance committee 2.Identify your obligations and develop systems for compliance 3.Review joint venture agreements 4.Determine asset valuations and perform impairment tests 5.Assess the impact from upstream suppliers 6.Develop strategy to pass carbon costs to customers 7.Develop your accounting treatment policy 8.Validate the quality of emissions data gathering and timing of carbon reporting 9.Develop MACC to assess short and long term investment strategies 10.Considering grant schemes if eligible 45
- 46. Resources ► Ernst & Young publications ► Accounting for a clean energy future ► Navigating the complexities of carbon pricing policy Key issues from the Australian Government’s Clean Energy Legislation Package ► Accounting for emissions reductions and other incentive schemes ► Mastering the Challenge – Practical IFRS guidance for power and utilities ► Ernst & Young‟s International GAAP 2011 http://www.ey.com/AU/en/Services/Specialty-Services/Climate-Change-and- Sustainability-Services/The-business-of-climate-change---Carbon-pricing ► Institute of Chartered Accountants Australia publications ► Australia needs a consistent basis for the financial reporting of emission rights ► Australia’s Proposed Emissions Trading Scheme – The Tax Policy Dimension 46
- 47. Further resources available Visit: www.ey.com/au 47
- 48. Sustainability and Financial Reporting 48
- 49. Sustainability – Who values it, and how is it communicated? Sustainability: is creating long-term shareholder value by embracing opportunities and managing risks derived from social, environmental and economic factors. To know how to respond to sustainability and maximise value, businesses need to understand the external drivers related to sustainability and how this translates to their own business in terms of risks and opportunities. Number of Sustainability Reports published. Source: Corporate Register 49
- 50. Key Sustainability Terms ► Non-Financial or Sustainability Reporting: the practice of measuring, disclosing and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development ► Corporate Social Responsibility (CSR): the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large ► Triple bottom line: reporting on financial, environmental and social performance ► Environmental and Social Governance (ESG): focussing on those areas of sustainability not associated with financial performance, ESG is the oversight and corporate function for managing environmental and social impacts and opportunities. 50
- 51. A typical Sustainability Reporting Journey Include some Increase disclosures on Produce a stand- reporting of current alone sustainability performance in Sustainability performance the Report Annual Report 51
- 52. What are the global reporting trends? ► Europe was the first to report ► Continual trend of increased reporting, particularly in Europe Trends in Asia Sustainability reports published from the Asian region have historically been from Japan. However, companies across the Asia pacific are increasingly reporting. The most significant growth in recent years has come from Chinese companies. 52
- 53. The sustainability frameworks companies use ► Global Reporting Initiative (GRI-G3) ► AccountAbility‟s Principles Standard (AA1000APS) ► Accounting for Sustainability‟s Connected Reporting Framework ► Various industry-specific guidelines The GRI framework is the most widely used frameworks globally. It provides guidance on indicators to be. Sector supplements for selected industries are provided in addition to the core guidelines 53
- 54. GRI – Indicators that provide a framework for sustainability report content 54
- 55. More information on Sustainability Reporting Sustainability reporting occurs in many different formats. Four of the world‟s leading practice frameworks are: ► Global Reporting Initiative (GRI) ► The first and most widely adopted global www.globalreporting.org framework for sustainability reporting. ► Corporate Responsibility Index ► Benchmarking tool to build business strategy to (CRI) incorporate corporate responsibility issues. www.corporate-responsibility.com.au ► Adoption is mostly by large companies. ► FTSE4GOOD ► Measures the performance of companies that meet globally recognised corporate responsibility www.ftse.com/Indices/FTSE4Good_Index_Series standards, and to facilitate investment in those companies. ► Tracks the environmental, economic and social ► Dow Jones Sustainability Index performance of Australian companies that lead (DJSI/AuSSI) their industry in terms of corporate sustainability. www.aussi.net.au 55
- 57. Why is Integrated Reporting on the agenda? ► Financial crisis ► Focus on short-term profits and rewards irrespective of their long-term sustainability ► Demonstrated the need for capital market decision-making to reflect long- term considerations ► Called into question extent to which standard corporate reporting disclosures highlight systematic risks to business sufficiently ► Limitations of current reporting ► Do not fully consider the social, environmental and long-term economic context within which the business operates Integrated reporting brings together data that is relevant to the performance and impact of a company in a way that creates a more profound and comprehensive picture of the risks and opportunities a company faces, specifically in the context of the drive towards a more sustainable global economy 57
- 58. Integrated Reporting – bringing together financial and non-financial disclosures Financial Sustainability Analysts Analysts Integrated Report ► Integrated Reporting is the combination of financial and non-financial reporting in a Annual Governance Sustainability Financial single document, either in Statement Statement Report place of, or additional to separate financial and sustainability reports. 58
- 59. How the IIRC proposes to address these issues ► The Discussion Paper Towards Integrated Reporting – Communicating Value in the 21st Century presents the rationale for Integrated Reporting ► Offers initial proposals for the development of an International Integrated Reporting Framework and outlines the next steps towards its creation and adoption ► Purpose is to prompt input from all those with a stake in better reporting, including producers and users of reports ► Integrated Reporting proposals were put forward to the G20 Finance Ministers meeting held in October 2011 59
- 60. Integrated Reporting ► The bringing together of financial and non-financial information for reporting is the future of company disclosures. ► South Africa are leading the way by mandating integrated reporting for all listed companies. The chart on the right shows what is required. 60
- 61. The Benefits of Integrated Reporting ► Emphasises an organisation's use of and dependence on different resources and relationships or “capitals” (financial, manufactured, human, intellectual, natural and social), and the organisation‟s access to and impact on them 61
- 62. The Benefits (cont.) ► Results in a broader explanation of performance than traditional reporting ► Reporting this information is critical to: ► a meaningful assessment of the long-term viability of the organisation‟s business model and strategy; ► meeting the information needs of investors and other stakeholders; and ► ultimately, the effective allocation of scarce resources. 62
- 63. The building blocks ► Five Guiding Principles underpin the preparation of an Integrated Report ► Strategic focus ► Connectivity of information ► Future orientation ► Responsiveness and stakeholder inclusiveness ► Conciseness, reliability and materiality 63
- 64. Key Content Elements ► Presentation of the Elements should make the interconnections between them apparent. ► Organisational overview and business model ► Operating context, including risks and opportunities ► Strategic objectives and strategies to achieve those objectives ► Governance and remuneration ► Performance ► Future outlook 64
- 65. Mandatory disclosures under the ASX ► Principles 7 of the Australian Stock Exchange (ASX) Corporate Governance Council‟s Principles of good corporate governance and best practice recommendations for the disclosure of material business risks. ► “material business risks may include, (but are not limited to): operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks.” ► These requirements have recently been extended (3.2), to introduce a requirement for disclosure on gender diversity. ► Companies must make disclosure relating to a diversity policy which includes measurable objectives for achieving gender diversity. They must also disclose in their annual report their achievement against those objectives, as well as the proportion of women on the board, in senior management and employed throughout the whole organisation. 65
- 67. Improved confidence through assurance Three „tiers‟: ► Reasonable Assurance – like financial statement audit ► Limited Assurance – selected scope and more limited procedures ► Verification (not assurance) – sometimes referred to as agreed- upon-procedures Most commonly used standards: ► International Standard for Assurance Engagements (ISAE) 3000: ► Accountability‟s AA1000 Assurance Standards (and its AA1000 Assurance Principles Standard) ► Mix of both 67
- 68. Trends in Assurance ► Most companies that have assurance utilise the ISAE3000 standard ► The majority engage an assurance provider for limited assurance ► New „standards‟ require recommendations to be included in the statements – but this has led to some confusion 68
- 69. Over to you...reflect and plan 69
- 70. Identify the desired business outcomes? Starting point for your Change Management activities: ►Identify the business outcomes desired from the project or the change. Desired Future Current State State Describe in terms of: ► Business KPIs ► Operational KPIs ► Behaviours 70
Hinweis der Redaktion
- This module will focus on the main financial and non-financial reporting considerations for organisations as they strive to become more energy efficient and sustainable.The module provides participants with information on current trends within Australia and Asia Pacific around sustainability reporting and the value of assurance reporting to shareholders and addresses current hot topics of the carbon scheme and integrated reporting and highlights the impacts these will have on organisations financial accounting and reporting functions.It is intended to provide participants with an introduction into the various reporting frameworks applicable to them as they move towards becoming more sustainable.Is there anything else you would like covered in this module?
- The purpose of this slide is to identify any participant expectations that differ from the session objectives and to highlight how these will be dealt with e:g note down any points for a future follow upIt is also intended to encourage initial engagement in the upcoming topic by personalising the subject and allowing participants to reflect and share their own experiences. This serves a dual purpose of identifying any topics that are missing from this session and should be considered for inclusion in future sessions.
- This module will focus on the ‘disclose and report’ aspects of evaluating sustainability.Finance and accounting professionals have a key role to play in evaluating sustainability, in terms of accounting and reporting considerations on financial metrics and also reporting on non-financial metrics which will be discussed in later modules.
- Along with the drivers discussed in the last slide – climate change has had possibly the most profound impact on sustainability reporting to date and will continue to be one of the most significant influencers on an organisations sustainability strategy and decisions made on energy efficiency projects initiated.The United Nations, through the Conference of Parties (and Meeting of Parties for those signatories under Kyoto), has established climate change as the most important environmental (and economic) impact of our (and future) generations.The Asia Pacific has large areas of coastal inhabitation, and as such, has the most to lose from a changing climate. Across the Asia Pacific, countries (and therefore the companies within them) must meet demanding emissions reductions goals.The Carbon Disclosure Project (CDP) has over 3000 companies reporting on their emissions profiles and around impacts of climate change to their future business.
- Run through the topics to cover.
- Scope one emissions are those directly released from a facility as a direct result of the activities of that facility
- Note to the speaker : It can be complex to identify which facilities are liable and is beyond the scope of this presentation. However, it is generally a facility that emits greater than 25,000 tonnes of CO2 equivalent emissions that are covered by the legislation for all industries that are not exempt.
- This diagram presents the timetable for the fixed price period. There are two key periods. The fixed price period where the price of carbon units has been pre-determined in legislation and the flexible price period where the price will be determined through market mechanisms (an emissions trading scheme). The diagram shows:the timing of the allocation of free permits and when they can be bought back by the government.when permits must be purchased and surrendered to meet emissions obligations. Some carbon permits are to be allocated by the government to power generators or liable entities with EITE activities for free. The remaining permits will be sold by the government at a fixed price during the fixed price period and auctioned during the flexible price period.Some entities with EITE (Energy Intensive Trade Exposed) activities will be granted an allocation of permits each compliance period based on a company’s production and a regulated emissions intensity baseline ( benchmark). They will receive either 94.5% or 66% shielding depending on the level of emissions intensity (and how they compare to their industry benchmark). This assistance will decline overtime.Power Sector : An Energy Security Fund will provide transitional assistance in the form of a tranche of free permits for certain generators (brown coal-fired) as well as scope for payments for the closure of some emissions-intensive coal fired generation capacity (approx 2000MW). For the first year of the fixed period, companies will receive cash compensation instead of free permits.Refer to EY publication for a copy of this diagram.
- Handout for participants
- This slide focuses on how entities can determine how to drive down their carbon related costs. For example, entities might : - buy up to 5% of its obligation via CFI (Carbon Farming Initiative) opportunities. - develop a MACC (Marginal Abatement Cost Curve) to identify opportunities and the related costs to reduce their emissions e.g. It can help to determine when to undertake capital expenditure to reduce carbon, purchase CERs/CFIs etc.To do so, entities need to map their cost of carbon throughout their supply chain. This will be covered during subsequent modules.
- Wheel sent to editor for formatting
- Treasury risk management policyTreasurers will need to know how the carbon scheme will operate and how the business will specifically be impacted in order to evaluate the changed business and finance risk exposure in order to adequately manage those risks. For example, treasury risk management policy will need to be updated to consider:Determining how to manage risks associated with purchasing permits to cover liabilities e.g.:Determining when to purchase permits and how. E.g. how much at auction, through forward contractsDetermining whether the entity will enter into other products such as domestic or accredited international carbon offsets. Which counterparties will be appropriate to deal with?As the market develops and e.g. banks bring out products, will an entity enter into contracts for such products?Agreeing the level of exposures to which the company will allow and determining a strategy to ensure that the entity is always within an acceptable risk exposure range(E.g. will there be a policy in place to determine how far forward to purchase permits to cover the forecast liability in future compliance periods – i.e. how open an exposure will an entity retain in future periods)Building the risks associated with carbon into existing ways to measure risk for other exposures (carbon will need to be included in measures such as VaR etc – possibly too detailed for the workshop)
- Cash and liquidity management This area of a treasury function focuses on forecasting a company’s cash needs to run its business and then managing the group’s cash flows, borrowings etc to ensure cash needs are met. A treasury function needs to be able to forecast all cash in and out flows and identify potential shortfalls or surpluses Treasury will need to understand the following cash impacts resulting from the scheme:Liable entities – potential cash flow impactsMay get an increase in revenue (and cash) in across the compliance period if some of the costs of carbon have been passed through to customers, assuming no decrease in demand due to increased price (may not be a realistic assumption for some)Purchasing permits cash outflow:Fixed price period: two limited windows when can purchase units to cover obligation – cash outflows for each compliance period occur in two defined timeframesFlexible price period: (1) may purchase some units to cover obligation during auctions (some permits for future compliance periods will be auctioned in advance); (2) may purchase some units through forward contacts in the lead up to / during compliance periodsKey question for businesses to assess: How will an entity ensure that they’re adequately managing their cash/funding and liquidity requirements given the timing of payment of obligation?Liable and non-liable entities – potential cash flow impacts For non-liable entities, may need to increase prices to reflect cost pass throughs. May impact cash inflows due to impact on volume and price, increase in working capital Changes to operating costs due to carbon impact (carbon cost pass throughs, input costs like energy, raw material etc, monitoring, reporting, compliance costs) Impact on capital costs (abatement and energy efficiency initiatives, incremental expansion project costs)
- HandoutIFRIC (International Financial Reporting Interpretations Committee) 3 methodAllocated permits recorded as an intangible and subsequently measured at fair value or at cost. Any difference between the cost and the initial fair value (on recognition) gives rise to a government grant.Grant initially recognised as a deferred income, then recognised in the P&L as emissions are made ( on a ‘systematic’ basis).Liability accrued at faire value as emissions are made at spot/market price at balance sheet date. This is a fixed price (discounted) in the fixed price period and likely to be a market price in the flexible period.The application of IFRIC 3 met with significant resistance on the basis that it resulted in a number of accounting mismatches:A measurement mismatch between the asset and liabilities recognised – if the cost model is applied to value the asset, the liability will be measured at current value, while the asset will not.A mismatch in the location in which the gains or losses on those assets and liabilities are reported – if the fair value model is applied to value the asset, the changes in value will be recognised in equity, while the changes in the value of the liability will be recognised in the income statement.A timing mismatch – as permits would be recognised when they are obtained, typically at the start of the year, whereas the emission liability would be recognised during the year as it is incurred.Net LiabilityPermits are recorded as intangible at nominal amounts (free permits at nil) or at cost (purchased permits).Liability recorded if and only if emissions exceed freely allocated permits held. There are two approaches that can be taken with respect to measurement:“Carrying value method” : the provision is measured at the carrying amount of the purchased permits on hand. The provision for any excess emissions (actual emissions exceeding purchased permits on hand) is measured at the market price at reporting date.“Reimbursement method”. Alternatively, an entity may view their purchased emission permit as reimbursement rights in respect of their liability. Therefore, tothe extent that the number of emission rights on hand does not exceed the number of emission rights necessary to settle the liability, an entity can re-measure these purchased rights to fair value (market price at reporting date) through profit and loss. Consequently, the purchased permits that will cover the obligation and the provision will be measured at market price.The government grant approach is the same as the IFRIC 3 approach, except the two approaches that can be taken with respect to measurement under the net liability approach can also be applied:“Carrying value method” : the provision is measured at the carrying amount of the permits on hand (purchased and freely allocated). The provision for any excess emissions (actual emissions exceeding purchased permits on hand) is measured at the market price at reporting date.“Reimbursement method”. Alternatively, an entity may view their purchased emission rights as reimbursement rights in respect of their liability. Therefore, tothe extent that the number of emission rights on hand does not exceed the number of emission rights necessary to settle the liability, an entity can re-measure these permits (purchased and freely allocated) to fair value (market price at reporting date) through profit and loss. Consequently, the permits that will cover the obligation and the provision will be measured at market price.
- IFRIC 3At the beginning An assets is recognised for its faire value 20 000 x 15 = K$ 300Half yearHalf of the deferred income is recognized in the P&L (timely basis)The liability is recognised at fair value: 15 000 x 18 = K$ 270Year EndAll of the deferred income is recognized in the P&L (timely basis)The liability is recognised for its value: 30 000 x 20= K$ 600 Net liabilityAt the beginning No recognition of assets as there are freely allocatedHalf yearThe free permits cover the emission => no liabilityYear EndThe liability is recognised for its value in excess of the permits20 x 10,000 = K$ 200 Government grant carry valueAt the beginning An assets is recognised for its faire value 20 000 x 15 = K$ 300Half yearHalf of the deferred income is recognized in the P&L (timely basis)The liability is recognised for its value with the permits in hand: 15 000 x 15 = K$ 225Year EndAll of the deferred income is recognized in the P&L (timely basis)The liability is recognised for its value with the permits in hand: 20 000 x 15 = K$ 300The excess liability is recognised for its fair value in: 10 000 x 20 = K$ 200 Government grants reimbursement At the beginning An assets is recognised for its faire value 20 000 x 15 = K$ 300Half yearThe liability is recognised for its fair value: 15 000 x 18 = K$ 270The intangible are revaluate at fair value: 20 000 x 18 = K$ 360Half of the deferred income is recognized in the P&L (timely basis)Year EndAll of the deferred income is recognized in the P&L (timely basis)The liability is recognised for its fair value: 30 000 x 20 = K$ 600The intangible are revaluate at fair value: 20 000 x 20 = K$ 400
- AASB – discussed at September and October meetingsStaff identified potential diversity in accounting policy choicesStaff proposed to limit choices to a ‘gross’ approachNo decisions made by the AASBAccounting treatment during the fixed price period – AASB staff’s viewCompanies can sell freely allocated permits back to the government. Are they financial assets ?Prefer all permits recognised initially at fair valueLiability accrued as emission are madeImpact on the international methods?AASBFocus was only on the fixed price period as it is possible that the IASB will finalise their ETS project before the commencement of the flexible price periodStaff proposed permits = possibly intangible assets (govt grant and deferred income); as emit recognise a liability. Cannot be offset. If permits are intangible assets, prefer that they’re not recognised at nominal amount (although, this is an option under AASB 120) .During the last meeting, the treatment for the fixed period was discussed. During that period, some companies will receive permits not only to cover the direct emissions obligations but also to compensate the increased of other expenses (fuel, electricity, transport,...).The staff also considered whether free permits are actually financial assets that should be accounted for as financial instruments (a government grant of a financial assets). They believe this might appropriate because those companies can sell back free permits back to the government for a fixed amount of cash.The AASB will make neither decisions nor express any preferred view. However the staff may issue a paper discussing their own views. Before your clients settle on any accounting policy choice, suggest consulting FAAS. EY’s viewEY’s current discussions are that none of the approaches considered acceptable, which have been discussed, should be prohibited. It may be possible to consider that permits issued for free in the fixed price period are a form of financial asset which has been issued under a government grant. In this case, it would be accounted for under AASB 139 and recognised initially at fair value (this would be the discounted amount). The discount would be unwound in the income statement over time. The deferred income (related to the government grant) would be unwound into the income statement as appropriate as would be done under the IFRIC 3 or government grants approaches. E.g. If permits are allocated for free for the purposes of meeting direct emissions obligations, as emissions are made over the compliance period. If permits are allocated for free for the purposes of compensating for increased energy costs, as these increase energy costs are incurred over the compliance periodThis is not EY’s ‘official’ view at this stage, but it will be confirmed shortly (please check with Lynda Tomkins, Matt Honey, Carolyn Pedic or Mariande Mays at the date of your presentation to see whether there are any changes in the status of EY’s views)
- Adequate internal controls must be applied to reporting of emissions numbers throughout the financial year / compliance period –> half- and year-end may not coincide with NGERS reporting period but adequate assurance over emissions volumes must be available for financial reporting periods and for management reporting purposesOnce the carbon scheme is in operation, carbon numbers will be required for the financial reports. Financial reporting of carbon data will make this information even more prominent; more users will impacted and this data will come under increasing scrutiny. You may need to think about the quality of your emissions data and the adequacy of your controls around it. Furthermore, the financial reporting balance dates (e.g. half and full-year) may not coincide with the NGERs reporting timetable. How will entities manage this? Does your client have the systems in place to provide data as and when you need it? EY’s view is that the announcement of the details of the carbon pricing scheme after 30/6/11 but before financial statements were finalised was an adjusting subsequent event. EY considers that entities should have considered whether this was an impairment trigger under AASB 136, in their circumstances. If so, their impairment models should have been updated for any changes in assumptions that became known as a result of the details of the announcement of the draft legislation. Not all entities did this or they did not make good disclosures about the impact of the announcement on their impairment models, even when they were clearly impacted entities. With the legislation due to be passed in early November, all entities should update or further update their assumptions when the legislation is passed. NB: with respect to permits, we would usually expect that permits should be tested as part of a larger CGU. Carbon units acquired in a business combinationIn a business combination an acquirer must recognise the acquiree’s identifiable intangible assets (including carbon units) at their fair value. Therefore, any carbon units recorded at nil in the acquiree’s financial statements will be recognised at fair value in the acquirer’s consolidated financial statements. Consequently, an acquirer cannot apply the net liability approach to carbon units acquired in a business combination, as the units were not granted through a government grant. Instead, the acquirer should treat acquired carbon units in the same way as purchased carbon units. An acquiree may however continue to apply its own accounting policy in its separate financial statements. An acquirer can only recognise a provision for its acquiree’s actual emissions that have occurred up to the reporting date (and not for forecast emissions). Accounting by brokers/tradersIn the flexible price period, liable entities and broker-traders may hold carbon units for sale in the ordinary course of their business. These units meet the definition of inventory and can be recorded at either the lower of cost and net realisable value or at fair value less costs to sell in accordance with their policy as permitted by AASB 102 Inventories. Forward contracts for carbon unitsIn the flexible price period, if an entity enters into a forward contract to sell or purchase carbon units, it needs to consider whether the contract is a derivative within the scope of AASB 139 Financial Instruments: Recognition and Measurement, based on the criteria in this standard. An entity may enter into forward contracts to sell carbon units. If the entity does not have a past practice of net settlement or an intention of actively trading carbon units, the forward contract may have been entered for ”own use purposes” and would not be within the scope of AASB 139. Although it is not the entity’s business to sell carbon units forward, it could still be considered to be a normal sale transaction as the quantity of carbon units received is not within the control of the entity. An entity may also enter into forward contracts to purchase carbon units. This may be to supplement a shortfall in carbon units held compared with actual or projected emissions. An entity must assess whether it has a past practice of net settlement or an intention of actively trading carbon units. If the forward contract has been entered into for ”own use purposes” then it would not be within the scope of AASB 139 if the carbon units will be physically delivered under the contract. However, an entity may actively trade carbon units at the same time and be unable to determine which forward contracts will result in purchase or sale of carbon units for own use. Own use accounting cannot then be applied if there are no controls in place to separate forward contracts entered into for trading purposes and those for own use. Impairment of assets Both before and after the commencement date, the carbon pricing mechanism may be an impairment indicator for goodwill and other tangible and intangible assets, if entities do not have the ability to pass on costs. These entities will need to re-evaluate the appropriateness of valuation models used – for both value-in-use and fair value measures - and reassess assumptions used in those models. Financial statements will need to include disclosures of assumptions used in impairment testing, (including for periods beyond the initial fixed price period), the size of the potential impact and the sensitivity of those assumptions. Onerous contracts The carbon pricing mechanism may lead to onerous contracts, if entities are not able to pass on costs, as a result of which the economic benefits expected to be received under the contract will become lower than the costs of meeting the obligations under it. Entities, therefore, need to consider whether they should recognise a provision in accordance with AASB 137. Impact on budgeting and forecasting As noted above, entities may be impacted directly (for liable entities) and/or indirectly (through increased prices of energy and goods and services from a flow through of the carbon price across the domestic supply chain). Entities should consider updating assumptions used in their budgets and forecasts, to reflect these anticipated price increases. The direct impacts can easily be established in the fixed price period, as in this period the price for carbon units has been pre-determined by the Government. This may not be so easy in the flexible price period. The indirect impacts in both the fixed and flexible price periods also may be more difficult to estimate. Impact on inventory costing The costs attributable to inventories under AASB 102 comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition (AASB 102.10). Entities need to consider including the costs resulting from the introduction of the carbon pricing mechanism into their inventory costing if these costs are regarded as a cost that is incurred in bringing goods to their present location and condition (and not a cost relating to idle capacity). Similarly, the carbon emission cost resulting from the delivery of a service should be considered part of the cost of that service (e.g. transportation companies) and should be accounted for similarly to other costs of that service.
- Adequate internal controls must be applied to reporting of emissions numbers throughout the financial year / compliance period –> half- and year-end may not coincide with NGERS reporting period but adequate assurance over emissions volumes must be available for financial reporting periods and for management reporting purposesOnce the carbon scheme is in operation, carbon numbers will be required for the financial reports. Financial reporting of carbon data will make this information even more prominent; more users will impacted and this data will come under increasing scrutiny. You may need to think about the quality of your emissions data and the adequacy of your controls around it. Furthermore, the financial reporting balance dates (e.g. half and full-year) may not coincide with the NGERs reporting timetable. How will entities manage this? Does your client have the systems in place to provide data as and when you need it?
- Costs of buying permits deductible - but need to manage timing issuesFree units for EITE’s - can create tax costImport of international units – tax issues associated with importation, establishing centralised carbon treasuries, and investing in Kyoto projects
- An effective carbon price will be imposed on business use of fuelsreductions in the level of fuel tax credits currently claimable on non-gaseous fuels (some exceptions)reductions in the automatic remission or exemption of excise on gaseous fuels (LPG, LNG, CNG)Indirect carbon costs will arise where entities with direct liability or effective carbon price (via fuel) pass on costs to customers – no tax issues
- Consequential tax aspects of business restructures – close downs, new capex, structuring, financeR&D incentive – re-engineering processes, investing in new technologyGrants – array of new grants and financial assistancePassing on carbon costs to customers – experiences from GST introductionDeveloping carbon compliance and review systems – similarities to tax compliance function
- Companies can report in a number of ways – but this diagram represents the most likely pathway for those starting out.Phase 1: Most companies begin the journey of sustainability reporting by including some current environmental and social performance information as part of the annual report or review, such as:Water Use and/or Energy UseGreenhouse Gas Emissions dataOccupational Health and Safety PerformanceEmployee data (e.g. training, diversity, and retention)Phase 2:By year 2 most businesses have assessed the material aspects of sustainability, and have put in place programmes to monitor performance and report. The second reporting year allows the company to:Identify programmes to address key risks or poor performancehighlights successes in the businesssets targets for Key Performance Indicatorsdraws from reporting frameworksPhase 3: As the business improves its strategy and approach to managing sustainability in the organisation, and increases the monitoring of key performance data – a sustainability report is often produce. This usually utilises a recognised framework for reporting, like:Global Reporting Initiative’s G3 Sustainability Framework GuidelinesAccounting for Sustainability’s Connected reporting framework
- The most commonly applied framework is the Global Reporting Initiative’s G3 guidelines for sustainability performance. It sets out a range of key performance indicators for companies to respond to. In doing so, companies can self-assess their reports as either A, B, or C-rated, based on the number of indicators reported. If the report is assured in any capacity, it will receive an A+, B+, or C+ respectively.The GRI framework was developed through an international, multi-stakeholder process, and adopted early by major corporations such as General Motors, Hewlett-Packard, and Johnson & Johnson. Its comprehensive guidelines include principles for ensuring report content and quality, and define 49 core performance indicators along with 30 additional indicators and sector supplements.AA1000APS sets out three tenants of reporting in relation to engaging with stakeholders - that sustainability performance reported should be material to the organisation; that it should include the views of all stakeholders, and that it should respond to stakeholders in the most appropriate way.ISO2600 is a recently created standard for sustainability. Generic in nature it sets out the key tennents for non-financial metricsThe GRI framework is one of the most widely used frameworks globally. GRI-G3, provides guidance on indicators to be reported that support sustainability performance disclosure. It is relevant to all organisations, regardless of size, sector or location, and can be voluntarily, flexibly and incrementally adopted. Sector supplements for selected industries are provided in addition to the core guidelines to capture unique sustainability issues and improve comparability between industry peers for analysts and investors.
- Indicators cross the three areas of social, environmental, and economic.There are additional sector supplements for some sectors, such as banking and real estate.
- Financial crisis:Individuals and organisations focusing on short-term profits and rewards irrespective of their long-term sustainabilityDemonstrated the need for capital market decision-making to reflect long-term considerationsCalled into question extent to which corporate reporting disclosures, as they exist today, highlight systematic risks to business sufficientlyLimitations of current reporting :Do not fully consider the social, environmental and long-term economic context within which the business operatesIntegrated Reporting will help to bring together data that is relevant to the performance and impact of a company in a way that will create a more profound and comprehensive picture of the risks and opportunities a company faces, specifically in the context of the drive towards a more sustainable global economy
- Discussion PaperRationale for move to integrated reportingInitial proposals for development of International Integrated Reporting FrameworkNext steps (including ED in 2012)Comments on DP by 14 December 2011EY submitting a comment letter
- Business Model and Value Creation Central to Integrated Reporting is the organization’s business model. There is no single, generally accepted definition of the term “business model”. However, it is often seen as the process by which an organization seeks to create and sustain value. An organization determines its business model through choices that typically recognize that value is not created by or within the organization alone, but is: • influenced by external factors (including economic conditions, societal issues and technological change) that present risks and opportunities, which create the context within which the organization operates, • co-created through relationships with others (including employees, partners, networks, suppliers and customers), and • dependent on the availability, affordability, quality and management of various resources, or “capitals” (financial, manufactured, human, intellectual, natural and social). Integrated Reporting therefore aims to provide insights about: • significant external factors that affect an organization, • the resources and relationships used and affected by the organization, and • how the organization’s business model interacts with external factors and resources and relationships to create and sustain value over time. For background only:Resources and relationships or “capitals” All organizations depend on a variety of resources and relationships for their success. The extent to which organizations are running them down or building them up has an important impact on the availability of the resources and the strength of the relationships that support the long-term viability of those organizations. These resources and relationships can be conceived as different forms of “capital”. The purpose of the following categorization and descriptions, based on various sources and established models,8 is to help readers understand the concepts underlying this Discussion Paper; it is not intended to be the only way the capitals can be categorized or described. The extent to which different organizations use or impact each of these capitals varies: not all capitals are equally relevant or applicable to all organizations. Financial capital: The pool of funds that is: • available to the organization for use in the production of goods or the provision of services, and • obtained through financing, such as debt, equity or grants, or generated through operations or investments. Manufactured capital: Manufactured physical objects (as distinct from natural physical objects) that are available to the organization for use in the production of goods or the provision of services, including: • buildings, • equipment, and • infrastructure (such as roads, ports, bridges and waste and water treatment plants). Human capital: People’s skills and experience, and their motivations to innovate, including their: • alignment with and support of the organization’s governance framework and ethical values such as its recognition of human rights, • ability to understand and implement an organization’s strategies, and • loyalties and motivations for improving processes, goods and services, including their ability to lead and to collaborate. Intellectual capital: Intangibles that provide competitive advantage, including: • intellectual property, such as patents, copyrights, software and organizational systems, procedures and protocols, and • the intangibles that are associated with the brand and reputation that an organization has developed. Natural capital: Natural capital is an input to the production of goods or the provision of services. An organization’s activities also impact, positively or negatively, on natural capital. It includes: • water, land, minerals and forests, and • biodiversity and eco-system health. Social capital: The institutions and relationships established within and between each community, group of stakeholders and other networks to enhance individual and collective well-being. Social capital includes: • common values and behaviours, • key relationships, and the trust and loyalty that an organization has developed and strives to build and protect with customers, suppliers and business partners, and • an organization’s social licence to operate.
- By describing, and measuring where it is practicable, the material components of value creation and, importantly, the relationships between them, Integrated Reporting results in a broader explanation of performance than traditional reporting. In particular, it makes visible all the relevant capitals on which performance (past, present and future) depends, how the organization uses those capitals, and its impact on them, as illustrated by the diagram below. This information is critical to the effective allocation of scarce resources. It will provide a meaningful presentation of the organization’s prospects for long term resilience and success, and facilitate the informational needs of, and assessments by, investors and other stakeholders. Importantly, a reporting framework centred around an organization’s business model provides a better basis for management to explain what really matters, bringing reporting closer to the way the business is run.
- Guiding Principles – Five guiding principles underpin the preparation of an Integrated Report (see page 13). • Strategic focus • Connectivity of information • Future orientation • Responsiveness and stakeholder inclusiveness • Conciseness, reliability and materiality
- Content Elements – The principles should be applied in determining the content of an Integrated Report, based on the key elements summarized below. The presentation of the elements should make the interconnections between them apparent (see page 14 – 15). • Organizational overview and business model • Operating context, including risks and opportunities • Strategic objectives and strategies to achieve those objectives • Governance and remuneration • Performance • Future outlook
- Module one introduced participants to the concept of change management and how attending this seminar was a starting point for effecting change within their organisation for driving energy efficiency measures or supporting an existing change management strategy for driving the organisation towards more energy efficiency practises.
- Encourage participants to think back to the change management ideas they were introduced to in module one (they will have already seen this slide).Ask them to spend a few minutes thinking about what was covered in this module and how this can be applied to their organisation. Use the guide on this slide as a starting point. What are the business outcomes participants desire? What will need to change to successfully address some of the key issues and ideas generated in this session?