This essay is going to introduce the Australia Carbon Pricing Mechanism and discuss the guidance to how to account the transfer and surrender carbon units during the fixed price period and the flexible price period.

A)

The carbon pricing mechanism is the system which covers 60% of Australia’s carbon emissions. They include wastewater, electricity generation, stationary energy, industrial process, landfills and fugitive emissions. Companies acquire and surrender one carbon unit for one tonne of carbon emissions in producing progress. The carbon pricing mechanism has two stages:

Stage 1: Fixed pricing period

During the first three years from 2012 to 2015, government will sell an unlimited number of Australian carbon units (the right to pollute) to companies with the fixed price. These carbon units will be automatically surrendered. The fixed price is :

2012-2013: $23

2013-2014: $24.15

2014-2015: $25.40

During these three years, carbon units cannot be traded and banked. Australian government also provide some free carbon units as the assistance to some industries. These free carbon units can be traded between companies and these industries are able to sell free allocated carbon units back to the government before the 1 Feb after the financial year to which they relate.

Stage 2: Flexible pricing period

After the 30 June 2015, the Australia’s carbon pricing mechanism will move to a market driven approach. From that time, the price of Australia’s carbon units will be flexible which is set by the market.

In the flexible pricing period, there is an overall limit which called pollution cap of the carbon units sold by Australia government. The carbon units trading between companies is also allowed in this period. Except trading carbon units, the unlimited banking and limited borrowing of carbon units are allowed.

B)

I) The guidance of accounting for carbon units is from the Australian Accounting Standards Board (AASB) website and follow the rules in AASB.

II) During the fixed period, permits (carbon units) is purchased or received from government in government assistance. They satisfy the definition of an asset which defined in AASB Conceptual Framework. Permits are the resource which controlled by companies as the result of past events. And the benefits are able to be provided in future producing which settle emissions obligations or sell back to government.

1. Permits are defined as intangible assets during fixed period

Permits are the identifiable non-monetary assets and they have no physical substance in fixed phase. These satisfy AASB 138. Permits are similar to quotas and licenses and argue. Under this assumption, carbon units can be accounting as licenses and argue

2. Purchased carbon units as a prepayment

During fixed period, purchased carbon units cannot be transferred and relinquished. When permits are purchased, they will automatically be surrendered. This may have accounting implications. The automatic surrender of acquisition of carbon units can be treated as a prepayment of carbon tax. Some argue that a uniform accounting policy for measuring and recognizing the permits in acquisition or government assistance.

So the accounting for the acquisition is similar with accounting for licenses and argue. And the measurement of price is follow the fixed price decided by government in 2013.

C)

I) Guidance of carbon units offsetting carbon production by the company

The obligation of the emission per year can be define as the liabilities to an entity under the AASB137 Provisions, Contingent Liabilities and Contingent Assets. In AASB137 , a provision is recognised when:

(a) it has a legal or constructive present obligation arising from a past (obligating) event;

(b) an outflow of resources embodying economic benefits to settle that obligation is probable; and

(c) the obligation can be estimated