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Pre-adoption of IFRS 9 to account for carbon derivatives: methodology and impact assessment
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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.
Author(s):
Yves Rannou
Groupe ESC Clermont
France
Pascal Barneto
IAE Bordeaux
France
Nadine Ricci-Xella
Aix-Marseille Université
France