What’s the issue?
Companies around the world are acting to reduce their carbon emissions. Some are subject to mandatory government schemes (e.g. ‘cap and trade’ schemes). However, many are now purchasing carbon credits or offsets voluntarily. Terminology can vary, but these carbon credits typically represent a reduction in or removal of emissions (e.g. CO2 or greenhouse gas). This might be achieved, for example, through a certified offsetting project such as the planting of trees. Credits are often registered with a registry authority and a company may be able to trade or sell them to a third party before they are retired.
There is currently no specific guidance in IFRS® Accounting Standards on accounting for the purchase of carbon credits. Therefore, companies need to carefully consider the specific facts and circumstances when determining the appropriate accounting.
Companies that purchase carbon credits need to carefully consider the specific facts and circumstances to determine the appropriate accounting. The nature of the arrangement and the business purpose for purchasing the credits often drives the accounting, including which IFRS accounting standard applies.
Getting into more detail
Consider the business purpose
It is important for companies to consider the nature of the arrangement and the business purpose for purchasing the credits because this often drives the accounting, including which IFRS accounting standard applies.
For example, a company may consider the following.
| Consideration | Potential accounting impact |
| Is the credit purchased together with other goods or services? | Consider if the credit is part of the cost of another good or service or if it is a separate unit of account. If it is part of the cost of another good or service, then it is not accounted for separately. |
| Is the credit purchased with the intention of selling it in the ordinary course of business? | The credit is accounted for as inventory under IAS 2 Inventories. |
| Is the credit purchased to fulfil contracts with customers? | |
| Is the credit purchased for advertising or promotional activities? | A company recognises expenditure for advertising and promotional activities when the benefit of those goods or services is available to it. However, in our experience credits are typically not acquired with the sole purpose of undertaking advertising or promotional activities. |
If none of these considerations apply, then in our experience the carbon credit is typically a separate unit of account purchased to offset the company’s own emissions – i.e. it will be held for use.
Carbon credits held for use
Should a company recognise an asset?
When assessing whether a carbon credit held for use is an asset, a company should consider the nature of the economic benefits and when they are consumed. In our experience, the company’s ability to use the carbon credit to offset its own emissions generally represents economic benefits flowing to the company from the credit. If economic benefits arise from the ability to offset, then the company may have an intangible asset. This is because it has the power to obtain the future economic benefits and restrict others’ access to those benefits.
Determining when the economic benefits from the carbon credits are consumed may require management to exercise judgement. Management needs to consider its assessment of the economic benefits flowing from the credit. For example, if the economic benefits are the ability to offset, then they are typically consumed when the company retires the credits – i.e. the credits are derecognised when they are retired. Similarly, if the credits are retired immediately on purchase, then the economic benefits are consumed immediately and the expenditure is recognised as an expense.
How should it classify the asset?
A company may determine that carbon credits held for use meet the definition of an intangible asset under IAS 38 Intangible Assets as discussed above – e.g. when it holds credits that have not yet been retired. However, intangible assets that meet the definition of inventories are accounted for under IAS 2. Therefore, companies may need to consider, based on their specific facts and circumstances, whether the credits they hold to offset their own emissions meet the definition of inventories under IAS 2 – e.g. if they will be consumed in the production process or in the rendering of services.
Actions for management to take now
- Understand the voluntary schemes that the company is participating in (or may participate in) in the future.
- Consider the nature of the arrangement and the business purpose for purchasing carbon credits.
- Determine whether an asset should be recognised for credits held for use and how they should be classified.
- Provide clear and meaningful disclosures about voluntary carbon credits and the accounting policies applied to them.
Peter Carlson
KPMG International
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