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The meet the obligations under Kyoto protocol Australia developed its own ETS called CPRS soon to be implemented. A summary of Australian proposed CPRS and few learning's from EUETS has been discussed in brief. The CPRS creates a market place for carbon price which has to be considered by business in compliance for the emissions. For the effective functioning and proper control of this scheme needs accounting, auditing and compliance reporting a brief discussion about these issues and they are compared in the context of EUETS. The financial statements of those companies have the effect of carbon price for accounting purposes the realisation methods that would be needed for assets, liabilities, revenues and expenses, how far does the existing accounting standards assist are briefly commented based on the research.
The evidence of impact due to Green House Gases (GHG) on climate change has raised concerns throughout the world prompting to act towards reduction of emissions making the world to think about the Emission Trading Schemes (ETS). European Union took the lead to experiment ETS for first time by developing European Union Emission Trading Scheme (EU ETS) and implemented from 1st January 2005. EUETS gave some experiences to other nations who are joining the party later enabling them to better design the scheme towards achieving the objective of the ETS. Australia's decision of reducing emissions complying Kyoto protocol led them to develop a national ETS therefore called as Carbon Pollution Reduction Scheme (CPRS).
“According to Australian Bureau of statistics, the Australian GHG emissions are the third highest per capita and the reasons for those are high reliance on coal, net emissions from land use due to change of forestry, the production of many goods with high emission levels.”
What is CPRS?
The core idea of CPRS is to introduce a price on carbon emissions to influence the business decisions by providing an economic incentive to reduce emissions. It's a cap and trade technique where cap is a limit on the total country's emissions and trade is to create a market and opportunities for carbon offsets. Liable emitters of green house gases need to obtain permits for every ton of CO2-e emission. 
CPRS will have effect on the prices of commodities which involves input factor of carbon across the economy prompting the people to go for low-carbon alternatives.
National Greenhouse and Energy Reporting Act 2007 (NGER ACT) monitors the operation of scheme and maintenance of national registers and reporting. It also enforces law for the rules established under NGER act in compliance for carbon emissions. The businesses are needed to disclose about the effects of carbon pricing and about the usage of permits in their financial reporting to help the investors to take a better informed decision. 
Proposed Australian Emission Trading Scheme (CPRS):
The Australian government targeted emissions levels by 2050 to be reduced to 60% of 2000 emission levels in accordance to Kyoto protocol. In relation to that government planned to reduce emission levels step by step in every 5year transitional period, while these projections are updated every year.
The carbon permits allocated are based on emission limits set by the government for compliance year these numbers are constantly reduced with reduction in projected emissions every year. Therefore the resulting demand for permits creates competition in the market leading to increase in the prices of permits either at auction or at secondary markets. Those firms value more for these permits will be prepared to pay more cost, for some firms it is cost effective to think alternative ways of reducing their carbon emissions rather than buying permits. The allocated permits and future permits for coming years (vintages) are auctioned where any individual or businesses can purchase, businesses are to estimate the carbon foot print for the compliance years depending on requirement permits are purchased at auction.
All liable entities have to report to government about their emissions for the year and submit their emission equivalent permits. In case any firm short of permits can buy permits at the last auction before reporting date or alternative offsets can be arranged, failing to provide enough permits can incur huge penalty.
A National Greenhouse Energy Reporting System (NGERS) controls the availability of carbon permits and keeps track of all the permits in the market. The scheme encourages secondary market where one can buy carbon credits or international Kyoto units can be submitted, three main options under review for carbon offsets are
- Clean Development Mechanism (CDM)
- Joint Implementation (JI)
- Kyoto emissions trading scheme.
As for submitting the permits any international Kyoto units can be purchased and submitted but prior to that those units has to be moved to Australian national registry and any number of international permits can be submitted.
Initially to reduce the complexity of implementation the scheme is limited to those who emit more than 25000 tons of CO2-e per annum therefore the 1000 firms are expected to cover under the scheme. Government is offering help to emission-intensive and trade exposed industries (EITE) by providing some free permits based on production to reduce the impact on these industries.
CPRS allows unlimited banking of permits allowing firms to bank the unused permits and use them in future. For those who are short on permits for the compliance year they can borrow the permits from the future years. Therefore the option for banking and borrowing prevents in price spikes at the end of compliance year and also allows business to manage their risks.
Learning's from EUETS:
European Union is the first who experimented and developed ETS playing motivators role for others who will follow.
- The scheme worked very well than expected, the phase-I trail was not expected of and reduction in emissions but surprisingly it did contributed in reduction of emissions. The scheme was successful in influencing the business decisions with consideration of carbon price as input factor.
- Market responded very well. Economy did not have much effect although the prices were raised on certain products and services across.
Some of learning's from EUETS for other world countries and also influenced the design and development of CPRS. The EUETS decentralised the carbon permits and created a market where the carbon permit price is decided by market.
- A good method of estimates of emissions and true data was clinical in allocation of carbon permits. There happened fluctuations in price because of changes in demand due to improper estimates.
- The allowance of banking of permits and allowing to auction vintage permits one can manage risk and price of carbon can be kept under control. To avoid failure to submit the permits for the compliance year this option helps and also gives an option to plan their emissions for next year.
- European Union was happy to follow the existing financial reporting and auditing methods for the usage of carbon permits.
- Due to the free allocation of permits to electricity and other sectors caused huge profits for electricity generators and therefore changes in demand for permits and thus the low price of carbon. To avoid that the govt decided to auction the permits.
Need for proper accounting standards and policies:
In Australia the major (1000 expected) companies who emit 25000 tonnes of CO2-e per annum and above are liable under Carbon Pollution Reduction Scheme to produce equivalent carbon permits for their carbon emissions in the compliance year.
The CPRS will have a significant impact on the financial statements of the liable companies. Since the carbon emissions are the liabilities whereas carbon offsets are assets to the companies.
In order to have a proper control on the Emission Trading Scheme and proper value recognition method of carbon related accounts there is a need for accounting standard.
Without a reliable accounting standard and guidance there is a lack of consistency in financial reporting that in turn could undermine investors' confidence in a company's strategy and approach to carbon transactions, including trading.
Realisation of Assets and Liability:
A Carbon credit is a generic term meaning that a value has been assigned to a reduction or offset of greenhouse gas emissions. Can we consider carbon credits as assets and what type of asset it is? Assetsare economic resources that are capable of being owned or controlled to produce positive economic value. Carbon credits are bought through auctions by a company and can be sold to another company if they are not used and it has an active market. So carbon credits can be considered as assets.
"Under AASB 138, an intangible asset is recognised when it is probable that the expected future economic benefits that are attributable to the asset will flow to the agency and the cost of the asset can be measured reliably."
We can argue that they may be intangible assets and its value increases or decreases depending on the market conditions. It can also be considered as investments which prevents the future cost. Intangible assets lack physical substance and usually are very hard to evaluate. If carbon credits have an active market its price will be determined by demand and supply and its valuation becomes easy and realistic. The government has planned to provide free units to companies in heavy carbon emitting industry. Valuating those credits are important, it should have nil value as those free units are not saleable. Any change in the value of the credits due to the recent market condition should be recognised.
"Liabilities are the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events." 
Liability arises when the company emits carbon and it is liable to the government which is compensated with the surrender of carbon credits. Therefore the accuracy in calculation of carbon emission is important. So far the calculation of carbon emission is a vague process.
Realisation of Revenues and expenses:
"Revenues are inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period."
When a company sells carbon credit in a market the gain from the sale of the asset should be recognised as profit. Carbon credits which are purchased will be recorded at purchase price but at the end of the year when the permit rolls over to next year it has to be valued at market price.
"Expenses are consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, which result in a decrease in equity during the reporting period." 
There is a chance of incurring loss in the change of value of the carbon permits. The profit and loss that are realise regarding the sale of the carbon credits affects income statement and the balance sheet.
The introduction of the Carbon Pollution Reduction Scheme creates a lot of tax issues. The deductions will be allowed to the expenditure incurred on the purchase of the carbon permit and the gains will be taxable on sale of those permits. Tax cannot be levied if the carbon permits are rolled over to next year, the timing of the deduction is deferred until the permits are surrendered or sold. The firm has to elect the method of valuing the permits in the first year in rolling balance method. This valuation method can be changed only once in a five year transitional period.
The value of the free permits issued under EITE will have nil value at the end of the first year. If those permits are held at the end of the second year it will be valued at historical value or market value depending upon the firm's election. The free permits issued under ESAS when held at the end of the year will be included in the firm's assessable income.
The value of the permits created by reafforestation and the destruction of synthetic gases will be included in the rolling balance and they are included in the taxable income of the firm. Deductions will be allowed for the permits that are surrendered or sold. There are no tax deductions for the penalties paid by the company for failing to surrender sufficient permits. But the purchase of permits for compensating the deficiency will be deductible. No state tax or territory tax will be applicable to this scheme.
Monitoring, Reporting and auditing:
A standard frame work for reporting and compliance for the emission of green house gases is introduced by the National Greenhouse and Energy Reporting Act 2007. The reported data should be accurate and credible in order to give confidence to the market. The liable entities should monitor the emission according to the methods available and has to keep proper records and documents to assure the reported emissions.
The estimated emissions recorded by the liable companies should be reported to government before surrendering the permits according to NGERS system. NGERS requires the liable entities to submit their carbon emission report annually on 31st October. The companies are also allowed to submit their report in frequent reporting periods i.e. quarterly. Frequent reporting will help give the timely flow of price sensitive information to the market throughout the year which in turn would help the market to be stable. The compliance to the company should also be considered while the reporting more frequently. The level of information regarding the emission which should be published is determined by the government. The government should publish the report as soon as they were submitted in order to provide timely information to the market.
With the implementation of the CPRS the standards of assurance regarding the reporting of the emissions should be strengthened. While auditing the type of carbon credits that the company holds, the method used to evaluate the amount of emission and submission of credits should be carefully audited. There are two options available to the liable entities in auditing the emission reports.
- Assurance undertaken by independent third-party practitioners on a mandatory basis.
- Self-assessment by entities, supported by an assurance team managed by the Government.
The assurance of carbon emission reports given by independent third party will provide a high level of confidence to the market on the accuracy and completeness of the data and it will increase the integrity and efficiency of the CPRS scheme. This approach is actually used in the EUETS.
If the self-assessment model is adopted the cost of compliance to the liable entity will be considerably reduced but it could reduce the credibility of the CPRS scheme. This could reduce market confidence in data and the demand for permits.
Companies emitting 125000 tons of CO2-e or more per annum are required to get the external auditing done by third party. Those who emit more than 25000 tons and less than 125000 tons of CO2-e are not essential to get the external audit done but the internal audit report will be sufficient.
The standard auditing methodologies and techniques should be implemented in an effective way to audit the reported emission data efficiently because Poor quality emission data may affect the market confidence and then the credibility of the scheme is questioned.
According to our opinion the probable steps involved in auditing the CPRS in an individual firm is as follows:
Based on the evidence obtained the auditor should state his opinion in the auditor's report according to Australian Accounting Standards Board (AASB).
Impacts on the business due to ETS: 
The introduction of the scheme will affect the financial position of the firm. The risk and the opportunity of the firm in respect to CPRS should be assessed. Implementation of CPRS may incur a cost of managing and controlling the scheme. This cost is very important to consider as it will increase the cost of the product that the company produces. The current business contracts will be affected as the scheme may increase the cost of production.
Pollution is a significant threat for the environment and carbon reduction is one of the most important issues of recent times and it is for the goodness of future global environment. The Australian government in the design of CPRS has considered vital key points from EUETS. Economy will observe a price rise in the commodities having their inputs which has a carbon factor especially electricity, transportation, mining and other sectors. The implementation of the scheme may provoke certain issues as discussed but by efficient control the objective of the scheme can be achieved. In order to stop carbon leakages and any irregularities in the implementation of the scheme ought to consider the control mechanism like proper accounting, reporting and auditing. The CPRS provides an incentive to develop low carbon emitting mechanisms and the government supports the activity by providing tax benefits for investing in alternative ways of reducing carbon emissions. The CPRS positioned carbon permits as financial instruments therefore realising as intangible assets while the emissions being liabilities in the books of accounts.
The auditing and assurance services are required to evaluate the accuracy of data and reliability of information in order to avoid the misuse of scheme. All the existing standards are good enough to support the auditors during the audit related to carbon permits and relevant reporting. Provision of methods and principles in the accounting practices pertaining to CPRS and its continuous revision of these practices will be evidential for the betterment of the scheme.
- Carbon pollution reduction scheme overview (FEB 2009), Retrieved on May 16th 2010 from http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/carbon-pollution-reduction-scheme-brief-overview.pdf
- Emissions Trading and other policy related matters (March 2008), Retrieved on May 16th 2010 from http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/Emissions-trading-other-related-policy-matters.pdf
- European Union Emission Trading Scheme article (MAY 2010), Retrieved on May 16th 2010 from http://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme
- Emissions trading in Europe (May 2008): The EU-ETS in Perspective Report by by A. Denny Ellerman, Paul L. Joskow, Retrieved on May 20th 2010 form http://www.pewclimate.org/docUploads/EU-ETS-In-Perspective-Report.pdf
- Accounting CPRS (May 2009): An article on Reporting and accounting under CPRS from GAS TODAY, Retrieved on May 16th 2010 from http://gastoday.com.au/news/reporting_and_accounting_under_the_cprs/00726/
- Public Sector Accounting standards board (March 1995): Statement of Accounting Concepts, Retrieved on May 29th 2010 from http://www.aasb.com.au/admin/file/content102/c3/SAC4_3-95.pdf
- CPRS Green Paper (July 2008): Ch5 Reporting and compliance, Retrieved on 18th 2010 from http://www.climatechange.gov.au/publications/cprs/green-paper/~/media/publications/green-paper/greenpaper-ch5.ashx
- CPA AUSTRALIA: CPRS potential business impacts, Retrieved on 20th May 2010 from http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/carbon-pollution-reduction-scheme-potential-business-impacts.pdf