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Pre-adoption of IFRS 9 to account for carbon derivatives: methodology and impact assessment

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This paper aims at contributing to the latest discussions on the financial regulation of carbon derivatives linked to the European Union Emission Trading Scheme (EU ETS).
From the withdrawal of IFRIC 3, the absence of a commonly accepted accounting standard has led to the use of various methods by EU ETS companies to account for carbon derivatives. If it raises concerns about the comparability of their financial statements, the ability to inform on their cost of complying with EU ETS obligations is hindered.
To address these two issues, it is shown that IFRS 9 should be applied to report carbon derivatives used for cash flow hedging. To this respect, two measures of hedging effectiveness: the minimum variance and the VaR measures based on static and time-varying ratios are proposed.
If the first measure can be used to inform on the usefulness of carbon derivatives for cash flow hedging, the second one enables EU-ETS companies to assess the relevance of hedged portfolio rebalancing allowed by IFRS 9.
Building on these new insights, the authors show how a EU ETS company may adopt IFRS 7 disclosure requirements to better inform about the nature and extent of carbon derivatives positions in their financial statements.


Yves Rannou    
Groupe ESC Clermont

Pascal Barneto    
IAE Bordeaux

Nadine Ricci-Xella    
Aix-Marseille Université


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