Carbon quotas, EWCs, sports transfers: accounting for specific cases

The general principles of recognition, measurement, depreciation and impairment of assets form the common basis of accounting rules. However, the diversity of economic activities and the specific nature of certain assets or transactions sometimes require special rules. The General Chart of Accounts (PCG) therefore provides for special treatment of certain items which, by their regulatory nature or their unique character, fall outside the usual framework. This is the case for greenhouse gas emission allowances, energy saving certificates and compensation paid when professional players are transferred to sports clubs. It is essential for the companies concerned to deal with these specific cases correctly. What's more, we can help you, identification of non-financial assets is of particular importance when applying specific standards. These assets, which are often intangible or industry-specific, require rigorous valuation in order to guarantee the transparency and reliability of the financial statements. A meticulous approach to the analysis and treatment of these assets is therefore essential to ensure sound accounting management and facilitate strategic decision-making.

Greenhouse gas (GHG) emission allowances

As part of environmental policies to combat climate change, certain industrial companies are subject to regulations requiring them to hold 'allowances' to cover their greenhouse gas emissions (such as CO2). These allowances, which are often allocated by the State or purchased on a dedicated market, raise specific accounting issues that are dealt with in articles 615-3 et seq. of the French General Chart of Accounts.

GAAP treats these emission allowances as "financial assets". assetsmore precisely as a kind of administrative raw material. They are therefore included in inventory accounts. They are "consumed" (removed from inventory) either when the company actually emits GHGs or when it sells them on the market.

Accounting then depends on the business model for which the company holds these quotas. GAAP distinguishes between two models, which may coexist:

1. The "production" model : The company holds allowances primarily to comply with its regulatory obligations, i.e. to cover its own emissions.
2. The "trading" model : The company holds the allowances with the aim of reselling them and realising a capital gain, independently of its own hedging requirements.

Under the production" modelThe rules are as follows:

• Quotas allocated free of charge by the State are recorded in inventories for an amount of null value. The idea is that they are given in return for a future obligation to surrender them to cover emissions.
• Quotas purchased on the market are recorded in inventory at their acquisition cost.
• When a company emits GHGs, it "consumes" its allowances. Inventory is valued using a consistent method (FIFO - first in, first out or CUMP - weighted average unit cost).
• If, at the end of the financial year, the company's emissions exceed the allowances it holds (in stock), it has to record a liabilities (a provision for expenses). This liability corresponds to the estimated cost of the allowances that it will have to purchase to cover its emissions deficit.
• Conversely, if the quotas held surplus emissions, the surplus remains in the accounts as a stocks (valued according to the FIFO or CUMP method applied).
• If the company disposes of allowances held in this way, the capital gain or loss on disposal is recognised in operating income.

Under the trading modelThe logic is simpler:

• Allowances are recorded in inventory at their acquisition cost.
• They are not consumed by the company's emissions, even if it is subject to regulations. Their purpose is resale.
• Gains and losses on disposals are recognised in operating income.
• The General Accounting Principles specify that allowances managed under the "production" model and those managed under the "trading" model must be valued separately at the balance sheet date.

Similar rules apply to other "units" linked to GHG emissions (such as carbon credits from projects), but the "production" model can only be used if these units can actually be used to meet the company's regulatory obligations. Specific information on the models used, emissions, contingent liabilities and CO2 risk management must be provided in the appendix.

Energy saving certificates (CEE)

A similar mechanism exists in France to encourage energy suppliers (electricity, gas, heating oil, etc.) to promote energy savings among their customers: Energy Savings Certificates (CEE). These certificates, which represent a quantity of final energy saved (in kWh cumac), are issued by the government to those who carry out eligible energy-saving operations or have them carried out. At the end of each period, energy suppliers ("obligated parties") must prove that they hold a certain volume of CEEs proportional to their energy sales. These CEE can be obtained through their own actions, purchased from other players (non-obligated or other surplus obligated parties) on a market, or obtained through financial contributions to programmes.

For accounting purposes, the French General Chart of Accounts (art. 616-8 et seq.) treats EWCs as tradable movable propertyconsidered to be a administrative supplies. Like GHG quotas, they are accounted for in inventory accounts. They are removed from stocks either when they are "consumed" to meet the obligation (linked to energy sales), or when they are sold on the market.

Similarly, the General Chart of Accounts distinguishes between two economic models :

1. The "energy saving" model: The company (generally an obligated party) holds the CEE to meet its regulatory obligations.
2. The "trading" model : The company holds the EWCs primarily for the purpose of reselling them.

Under the energy-saving model :

• CEE obtained directly from the State (as a result of energy-saving measures) are recorded in inventories at their purchase price. cost of production (cost of actions taken to obtain them).
• CEE acquired on the market are registered at their acquisition cost.
• CEEs are considered to have been consumed by the occurrence of the event giving rise to the obligation, i.e. the energy sales that create the obligation. Those that are kept specifically to be returned to the State at the end of the period to prove compliance with the obligation are no longer considered assets once the generating event has passed.
• The removal of inventory (for consumption or disposal) is valued using a consistent method (FIFO or CUMP).
• If, at the balance sheet date, the obligation generated by energy sales exceeds the CEE held or expected, a liability must be recognised for the estimated cost of the missing CEE.

Under the trading modelAs in the case of GHG quotas, EWCs are recorded in inventories at their acquisition cost, and gains or losses on disposal are recorded in operating income. A separate valuation is required if the two models coexist.

Transfer compensation for professional players

The world of professional sport, and football in particular, involves significant financial transactions when players are transferred between clubs. Compensation paid by a club to acquire a player under contract with another club is subject to specific accounting treatment in the French General Accounting Principles (art. 613-1 et seq.), applicable to sports companies covered by the French Sports Code.

The PCG analyses these transfer indemnities as theacquisition of contractual rights. These rights enable the acquiring club to obtain future economic benefits linked to the presence of the player in its team (sporting performance, marketing revenue, etc.). These rights are therefore considered to be a intangible asset. To be recognised as an asset, the transaction must satisfy the general criteria of probability of future benefits and reliable measurement of cost.

L'initial assessment is at acquisition cost (the indemnity paid). A special case is that of player exchanges. The General Accounting Principles consider that there is no active market for players (each contract being unique and negotiated individually). Consequently, in the event of an exchange, the player cannot be valued at market value. The player "received" is valued at net carrying amount of the "sold" player in the club's accounts. If compensation is paid in addition to the exchange, it is added to the value of the asset. If a cash payment is received, it is deducted from the value of the asset (and any excess from the profit and loss account).

This intangible asset ("players' contract rights") is depreciablebecause its use is limited in time by the duration of the contract of the player acquired. The PCG (art. 613-4) even specifies that the depreciation period may not exceed five yearsThis is because the renewal is between the club and the player, whereas the initial compensation benefited another club. Amortisation method linear is considered the most appropriate.

Finally, these assets are subject to impairment tests. In the absence of a reliable market value, the current value is determined by the use value. The calculation of expected future cash flows linked to the player must be carried out with caution, especially if the club is in a recurring deficit. The impairment test must be carried out at two levels: at the overall team level (considered as a cash-generating unit) and at the individual player level if there are indications of impairment (decline in performance, long-term injury, low participation in matches, etc.). For understanding asset impairmentIt is essential to analyse players' past performance and future prospects. In addition, market conditions and fan expectations can also influence the valuation of these assets. A rigorous approach to this analysis will make it possible to anticipate the financial impact and better manage the club's resources.

Reminder about software and websites

In a previous article, we discussed the specific rules for capitalising the costs of creating software and websites developed in-house. We should briefly remind you that the distinction between the research phase (always expensed) and the development phase (capitalisable under strict conditions of feasibility, intention, capacity, future benefits and reliable valuation) is essential. Capitalisable costs for software mainly concern detailed design, programming, testing and technical documentation. For websites, this includes the domain name, operating hardware/software, code development, initial content and graphics. Subsequent expenditure on these assets is generally recognised as an expense, unless it significantly enhances initial performance and can be reliably measured.

Accounting is adapted to the specific characteristics of certain activities. Mastering these special rules is essential for the companies concerned. To ensure that the standards are applied correctly to your situation, consult our firm.

Sources

• General Chart of Accounts (as issued in particular by ANC Regulation no. 2014-03 and subsequent updates), Articles 611-2 et seq., 612-1 et seq. (Software and websites), 613-1 to 613-7 (Sports transfer compensation), 615-3 to 615-10, 615-12 to 615-17, 615-19, 615-22 (GHG quotas), 616-8 to 616-12, 616-15, 616-16 (EEC).
• Code du sport (in particular articles L. 122-1 et seq. for sports companies).
• Environment Code (in particular article L. 229-7 for the context of allocated emission allowances).