You (and your team) are a junior accountant of a top-tier accounting firm, and a client has contacted your firm regarding the accounting treatment of the trading emission allowances. Mr Archie McQueen is the chief accountant of QUEEN Industry, which is one of the leading chemical engineering companies in Australia. Mr McQueen and his accounting team have been working to develop a new accounting policy to account for the emission allowances (either granted or purchased) and experiencing some difficulties with their development of an accounting policy for the trading emission allowances and seeking your assistance with it. Emission allowances are issued by the Government or purchased from the trading market under an emission trading scheme. An emission trading scheme (ETS) is a tool that puts a quantity limit and a price on emissions. 

Each allowance typically allows a company to emit one tonne of greenhouse gases such as CO2. Under ETS, an ETS participating company must obtain sufficient tradeable emission allowances to compensate for their emission of pollutants and to settle their emission liabilities. 

The company that reduces its emission liabilities may have surplus emission allowances that it can sell to others in the trading market. An emission allowance can be used for a period of up to two years from the date of issue. For example, an emission allowance that is issued on 1 January 2022 can be used to settle the obligations (emission liabilities) arising from emissions generated during the three-year period ended 30 December 2024. QUEEN Industry, as an ETS participating company, must obtain the emission allowances and submit them to the Government, based on the amount of greenhouse gases emitted during the year. 

During the 2021/2022 financial year, the company had following events. On 1 January 2022, QUEEN Industry received 10,000 emission allowances at no cost from the Government. Each allowance represents the right to emit one tonne of greenhouse gases. The fair value of an allowance was $60 on the grant day. On 1 June 2022, QUEEN Industry purchased additional 30,000 allowances on the market as the initially granted emission allowances seemed insufficient to settle their obligations (emission liabilities). On this date, the fair value of an allowance was $50. 

REQUIRED: Compile a written brief and a presentation to assist the client with their development of their approach to carbon accounting policy by addressing their concerns. Your managing partner has requested for you to be sensitive to the needs of this client and advise the client on following THREE points. You are required to present balanced and ethical suggestions. And your suggestions need to be justified and substantiated with supporting arguments relating to accounting theories.

1. Recognition How to recognise the granted and purchased emission allowances? As an intangible asset, inventory, debtor? Your team need to explain why the emission allowances should be recognised as such. You are required to apply the principles from the applicable accounting pronouncements. 

2. Measurement 

a) What measurement basis (cost or fair value) to use when measuring the granted emission allowances? 

b) What measurement basis (cost or fair value) to use when measuring the purchased emission allowances? 

c) Whether or not the suggested measurement basis is also an ethical choice? 

3. Disclosure 

a) As there is no standard practice on how to account for the emission allowance, how should the company make the disclosure regarding the emission allowances to provide 'useful' information to the relevant stakeholders? 

b) In you opinion, why would it be of interest for the company to disclose this information when there is no disclosure requirement?