2.2 Equity Share Approach
The Corporate Standard provides that “[u]nder the equity share
approach, a company accounts for GHG emissions from operations according to its
share of equity in the operation.” The equity share, or economic interest, reflects
the reporting company’s rights to the risks and rewards from an operation. If the
legal ownership percentage does not equal the reporting company’s economic interest
in a business, the economic interest will be the prevailing determinant for
calculating the reporting company’s reported GHG emissions, since the economic
interest is expected to be a better representation of the rights to the risks and
rewards than legal ownership.
A reporting company applying the equity share approach accounts for GHG emissions on
the basis of its economic interest in the following investees:
-
Subsidiaries consolidated under ASC 810.
-
Investments in associates over which the reporting company has significant influence under ASC 323.
-
Joint ventures accounted for under ASC 323.
For this purpose, the economic interest is the percentage of interest in the investee
used in preparation of the entity’s financial statements (e.g., the percentage of
interest determined under U.S. GAAP).
Under the equity share approach, if an entity holds an economic
interest in an investee over which it does not have control, joint control, or
significant influence, the entity would not include the investee’s GHG emissions in
its Scope 1 and Scope 2 GHG emissions. Emissions related to such investees would
instead be reported in the entity’s Scope 3, Category 15, emissions.
As noted, under the equity share approach, an entity accounts for GHG emissions in
accordance with its economic interest in an investee (e.g., subsidiary, associate).
For example, if an entity has an associate accounted for under the equity method for
financial reporting purposes, the entity would determine its equity share of the GHG
emissions of the associate by using the same percentage it used to determine the
share of the results of the associate for financial reporting purposes.
A key difference between the application of the equity method of accounting and the
application of the equity share approach under the Corporate Standard is the
presentation. The entity’s financial reporting framework may require the entity’s
share of the investee’s result to be presented as a single line item in the
statement of profit or loss. Under the Corporate Standard, the GHG emissions from
the investee would be included along with the other Scope 1, Scope 2, and Scope 3
emissions of the investor, as applicable. In effect, the Corporate Standard
requirements are similar to the proportionate consolidation method applied to
certain investments in some accounting frameworks.
The example below illustrates how a reporting company would apply the equity share
approach to determine how to consolidate GHG emissions from other companies within
its group structure.
Example 2-1
Company A, a reporting company, elects to apply the equity
share approach to consolidate emissions from companies and
other business entities in which it holds a direct or
indirect economic interest. Assume the following:
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Company B is a wholly owned subsidiary of A.
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Company C is a subsidiary of B, which holds a 90 percent economic interest in C.
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Company D is a subsidiary of C, which holds an 80 percent economic interest in D.
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JV1 is a joint venture (JV) in which two JV partners, A and Company E, each hold a 50 percent economic interest.
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JV2 is a JV in which two JV partners, B and Company F, hold economic interests of 75 percent and 25 percent, respectively.
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JV3 is a JV in which two JV partners, C and Company G, each hold a 50 percent economic interest.
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JV4 is a JV in which two JV partners, A and Company H, each hold a 50 percent economic interest.
The diagram below illustrates the economic interests held by
the various companies.
The table below presents A’s consolidation under the equity
share approach of GHG emissions from the companies and JVs
in which A holds a direct or indirect economic interest.
Company or JV
|
Legal Structure
|
Economic Interest Held by
Immediate Parent or JV Partners
|
Percentage of GHG Emissions
Consolidated by Company A Under the Equity Share
Approach
|
---|---|---|---|
Company B
|
Wholly owned subsidiary of A
|
100%
|
100%
|
Company C
|
Subsidiary of B
|
90%
|
90%*
|
Company D
|
Subsidiary of C
|
80%
|
72%**
|
JV1
|
JV in which A and Company E are partners
|
50% by A, 50% by E
|
50%
|
JV2
|
JV in which B and Company F are partners
|
75% by B, 25% by F
|
75%***
|
JV3
|
JV in which C and Company G are partners
|
50% by C, 50% by G
|
45%†
|
JV4
|
JV in which A and Company H are partners
|
50% by A, 50% by H
|
50%
|
* Calculated as (B’s 90% economic interest in
C) × (A’s 100% economic interest in B).
** Calculated as (C’s 80% economic interest in
D) × (B’s 90% economic interest in C) × (A’s 100%
economic interest in B).
*** Calculated as (B’s 75% economic interest in
JV2) × (A’s 100% economic interest in B).
† Calculated as (C’s 50% economic interest in
JV3) × (B’s 90% economic interest in C) × (A’s
100% economic interest in B).
|
The diagram below further illustrates the emission
percentages consolidated by A under the equity share
approach.