Polluter Corp. Polluter Corp. is a company that operates three manufacturing facilities and produces household cleaning products in the United States. The U.S. government grants this company with emission allowances (EAs) that can be used during 2010 to 2030. According to The Federal Energy Regulatory Commissions (FERC), Polluter Corporation records emission allowances as elusive assets with a cost basis of zero. The fiscal year is December 31. To control and decrease the release of pollutants, the government issue EAs to individuals to send out a particular stage of pollutions.
Each entity EA has a period year label. Each individual can freely anticipate in choosing who they want to sell the EAs or from whom they want to buy them. However, these transactions happen through a broker. At the end of an acquiescence period, each individual have to deliver EAs to balance the individual’s actual production or to pay the fine to the governing bodies. In order to reduce the quantity of greenhouse gas released, Polluter corp. is planning to update its services in 2014 with a cost of $15 million. However, this corporation will have need of emission allowances further than the owned amount. As a result, in April 2, 2010 Polluter Corp. purchased EAs for $3 million from Clean Air Corp. On the other hand, in preparation of the facility, it sold EAs of 2016 for $2 million to Dirty Chemical Corp. Required:
1) Purchase of EAs: The appropriate classification in the statement of cash flow in the Polluter Corporations December 31, 2010, for its purchase from Clean Air Corp as an Investing Cash Flow as in the balance sheet the company considers the EAs as elusive assets. Elusive assets are distinct in ASC 350-10-20 as assets and not included in financial assets. The EAs is granted to the Polluter Corporation from government that certainly considers as elusive assets by the Corporation. ASC 230-10-20 indicates that Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity’s inventory).
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Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraphs 230-10-45-12 and 230-10-45-21. By this I conclude that purchases of additional EAs by Polluter Corporation are treated as productive assets under the elusive assets. In fact, purchasing EAs should be classifying as investing as Polluter purchase EAs for future sale and also supporting the manufacturing. As a result, I conclude that the cash outflow to purchase the EAs is an investing activity.
2) Sale of EAs: Sales of EAs Polluter Corp. may classify the sale of EAs to Dirty Chemical Corp. as an investing cash inflow given the Company’s election to classify the EAs as an intangible asset on its balance sheet. According to ASC 230-20-45-12, which states, in part: All of the following are cash inflows from investing activities: c. Receipts from sales of property, plant, and equipment and other productive assets. As mentioned before, the EAs are treated as productive assets since they support the production of goods. Therefore, it is reasonable that the sales of the excess EAs will result in an investing inflow. Alternative 2: Inventory Model
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Polluter Corp. may also classify the sale of EAs to Dirty Chemical Corp. as an operating cash inflow because the EAs are consumed in the production of household cleaning products. Similar to the discussion above related to the purchase of EAs, the EAs represent operating activities as they are used in producing and delivering goods. Furthermore, if the EAs were recorded as inventory in the Company’s balance sheet under the inventory model, selling of the excess inventory will automatically result in an operating cash inflow. Classification under IFRS
The latest regulation of how to deal with the emission activity is the IFRIC 3 Emission Right that is issued by IASB in December 2004. Therefore, until definitive guidance on accounting for emission schemes is issued, an entity applying IFRS has the option of either: Applying the principles of IFRIC 3; or developing its own accounting policy based on the hierarchy of authoritative guidance in IAS 8 Accounting policies, Changes in Accounting Estimates and Errors.
There are several approaches to deal with emission rights with different impacts on net income and financial position of the entity. The main treatments are The IFRIC 3 approach, Net liability approach, and Government grants approach. They are different in the aspects of revenue recognition, record basis, and liability recognition. However, all approaches have a common feature that the EAs are only intangible assets to be accounted for under IAS 38. Under IFRS, activities related to purchase/sales of intangible assets result in investing activities. The reasons are similar to the reasons under U.S. GAAP. Therefore, even though there are several treatments to deal with the EAs, the purchase of additional EAs and the sale of excess EAs by Polluter Corp are all classified as investing activities. Classification under U.S. GAAP
The FASB staff indicated that EAs are finite-lived intangible assets based on expected use by the reporting entity. At present, the Company also records the current EAs as intangible assets. However, the SEC staff recently advised the accounting firms that it would not object an inventory model. Based on the SEC views, we are going to discuss the cash flow classifications under both intangible asset and inventory models. Conclusion
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Based on the above discussion, the classification of the EAs purchase/sale cash flow activities are mostly subjected to how the EAs are recorded on the Company’s balance sheet. Under U.S. GAAP, we believe Polluter Corp. can classify the activities as either investing cash flow or operating cash flow activities as long as it is consistent with the classification of the EAs in the Company’s balance sheet. Under IFRS, the Polluter Corp. can only classify the activities as investing cash flow because the EAs may only be recorded as intangible assets if the Company applies the IFRIC 3 approach. However, since the IFRIC 3 approach is not strictly required to each company, Polluter Corp. can still apply inventory/intangible assets models as it refers to the U.S. GAAP.
