Polluter Corp Case Study

Introduction

Polluter Corp. is a company that specializes in manufacturing household cleaning products. The government allocates emission allowances (EAs) for each year. The Company, in accordance with The Federal Energy Regulatory Commissions (FERC), records EAs as intangible assets. Polluter Corp. plans to upgrade its facilities in 2014 in order to decrease the amount of greenhouse gas emitted; however, the corporation will require EAs beyond the allocated amount. In response, the Company spent $3 million to purchase EAs from Clean Air Corp. In preparation of the facility upgrade, the Company sold the excess EAs, valued at $2 million, to Dirty Chemical Corp. We will analyze the classification of the statement of cash flow for these two transactions. In addition, we will differentiate the method of recording these two transactions according to U.S. GAAP and IFRS.

At present, there is no authoritative accounting standard or interpretation within U.S. GAAP or IFRS that deals specifically with the accounting for emission permits. Therefore, our analysis is based on the latest and reliable guidance and information from applicable authorities.

Classification under U.S. GAAP

The FASB staff indicated that EAs are finite-lived intangible assets based on expected use by the reporting entity. At present, the Company also records the current EAs as intangible assets. However, the SEC staff recently advised the accounting firms that it would not object an inventory model. Based on the SEC views, we are going to discuss the cash flow classifications under both intangible asset and inventory models.

Purchase of EAs

Alternative 1: Intangible Asset Model

The Company should classify the purchase of the 2012 EAs as an investing cash outflow if the Company currently elects to record the EAs as intangible assets on its balance sheet as what. Intangible assets are defined in 350-10-20 as: assets (not including financial assets) that lack physical substance. The EAs is the credit awarded to a company from government that definitely satisfies the requirements of intangible assets. According to ASC 230-10-20, investing activities are defined as: Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity's inventory). Under the intangible assets model, the additional EAs that Polluter Corp. purchased are treated as productive assets. The Company holds the EAs for supporting the manufacturing and for further sales as well. Therefore, as the classification of the EAs on the balance sheet and statement of cash flows