Case Analysis : Polluter Corporation

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Introduction Background An emission allowance is an authorization by a permitting authority or the Environmental Protection Agency Administrator to emit a specified amount of pollutant during a specified period of time. This equates that if a company reduces its amount of pollution to lower levels than the allowance, then the company could sell emission credits to companies that fail to reduce their pollution or buy additional emission allowances if needed [Emission Credit]. An emission allowance is also referred as a permit, typically a marketable commodity that may be sold, traded, or bought for usage by entities covered by the emission allowance (EA) programs [Cap and Trade]. Case Summary Polluter Corporation (The “Company”) is a…show more content…
Issue 1: Appropriate Classification of Cash Flows Due to EAs Purchased in 2010 The Company in order to meet the demand for additional EAs in the fiscal years 2010-2014, purchased EAs on April 2, 2010 with a vintage year of 2012 from Clean Air Corp. for the amount of $3 million. The emission allowances are regarded as intangible, accordingly, the style of classification in a cash flow statement or any other financial statement is different than typical. In terms of classification, the emission allowances satisfy the definition of an intangible asset. These allowances are assets (not including financial assets) that lack physical substance and do not satisfy the typical definition of a financial asset FASB Nears Vote[FASB Nears Vote]. According to the Journal of Accountancy and the Federal Energy Regulatory Commission (FERC) the EAs are to be reported as historical cost, classified as inventory with purchased allowances recorded at their exchanged price and the EAs directly from the government (EPA) at no charge to have a zero basis. The weighted average cost method to be utilized for value estimations, and calculations for the value estimations to be monthly at estimated fair value or actual data (if available). [Accounting for Emissions]. Although the EAs are potentially used in an entity’s operations and have a projected life, the service potential does not
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