Polluter Corp. (the “Company”), an SEC registrant, operates three manufacturing
ID: 2456400 • Letter: P
Question
Polluter Corp. (the “Company”), an SEC registrant, operates three manufacturing facilities in the United States. The Company manufactures various household cleaning products at each facility, which are sold to retail customers. The U.S. government granted the Company emission allowances (EAs) of varying vintage years (i.e., the years in which the allowance may be used) to be used between 2010 and 2030. Upon receipt of the EAs, the Company recorded the EAs as intangible assets with a cost basis of zero, in accordance with the Federal Energy Regulatory Commission (FERC) accounting guidance for EAs. The Company has a fiscal year end of December 31.
As background, in an effort to control or reduce the emission of pollutants and greenhouse gases, governing bodies typically issue rights or EAs to entities to emit a specified level of pollutants. Each individual EA has a vintage year designation. EAs with the same vintage year designation are fungible and can be used by any party to satisfy pollution control obligations. Entities can choose to buy EAs from, and sell EAs to, other entities. Such transactions are typically initiated through a broker. At the end of a compliance period, participating entities are required to either (1) deliver to the governing bodies EAs sufficient to offset the entity's actual emissions or (2) pay a fine.
The Company currently emits a significant amount of greenhouse gases because of its antiquated manufacturing facilities. The Company plans to upgrade its facilities in 2014, which will decrease greenhouse gas emissions to a very low level. On the basis of the timing of the upgrade, the Company currently anticipates a need for additional EAs in fiscal years 2010–2014. However, upon completion of the upgrade, the Company believes it will have excess EAs in fiscal years subsequent to 2014 because of reduced emissions as a result of the upgrade.
The Company currently has forecasted the updates to its facilities will cost approximately$15 million.
As the Company operates in a capital intensive industry, analysts and investors focus on a number of important ratios and measures, including working capital, capital expenditures, cash flows from operations, and free cash flow. As a result, the board of directors and management provide forward-looking guidance on these ratios and measures and expend great effort managing these results in light of the Company’s operational needs.
The Company entered into the following two separate transactions in fiscal year 2010, which will impact the Company’s results as presented in the statement of cash flows, which the Company prepares under the indirect method.
To meet its need for additional EAs in fiscal years 2010–2014, on April 2, 2010, the Company spent $3 million to purchase EAs with a vintage year of 2012 from Clean Corp.
In an effort to offset the costs of the April 2, 2010, purchase of 2012 EAs, the Company sold EAs with a vintage year of 2016 to Dirty Corp. for $2 million.
Required:
What is the appropriate classification in the statement of cash flows in the Company’s December 31, 2010, financial statements for its purchase of 2012 EAs from Clean Corp.?
What is the appropriate classification in the statement of cash flows in the Company’s December 31, 2010, financial statements for its sale of 2016 EAs to Dirty Corp.?
If the Company reported its results pursuant to IFRSs rather than U.S. GAAP, how would the Company record the purchase and sale of its EAs differently?
Explanation / Answer
Answer
What is the appropriate classification in the statement of cash flows in the Company’s December 31, 2010, financial statements for its purchase of 2012 EAs from Clean Corp.?
Based on the codification section 805-50-3-1-2 of FASB, these allownaces will be recognized as intangible assets at their cost.
When a company buys assets, the cash outflow due to purchase will be classified in the investing section of the statement of cash flows.
Accounting Entry for Purchase
DR. Emissions Allowance, Assets 3,000,000
CR. Cash 3,000,000
What is the appropriate classification in the statement of cash flows in the Company’s December 31, 2010, financial statements for its sale of 2016 EAs to Dirty Corp?
Based on the Statement 153 of FASB the gain from sale of the 2016 EAs will be recognized at the sale price/market price.
When the company buys any assets , the cash outflow due to purcahse will be clasified in the investing activities section of the cash flow statements
Accounting Entry for Sale
DR Cash 2,000,000
CR. Gain on Sales of EAs 2,000,000
If the Company reported its results pursuant to IFRSs rather than U.S. GAAP, how would the Company record the purchase and sale of its EAs differently
Purchase of 2012 EAs
The purchae of EAs will have the same amount under iFRS as under US FASB
DR Emission Allowance 3,000,000
CR Cash 3,000,000
Sale of 2016 EAs
Since IFRS requires EAs given to Polluter to be recognised as a differed income there is a revenue associated with a sale of EAs under IFRS
DR Cash 2,000,000
CR Emission Allowance $2,000,000
DR Government Grant, Differed Income $2,000,000
CR EA Revenue $2,000,000
Polluter corp Partial Statement of Cashflows For the year ended December 31 2010 Increase(Decrease) in cash Cash flows from Investing Activities Purchase of Emission Allowance ($3,000,000) Sales of Emmission Allowance $2,000,000 Net cash used by investing activities ($1,000,000)