What might a company that purchases carbon credits voluntarily need to consider?

• What’s the issue?
• Getting into more detail
• Actions for management to take now

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.

The following diagram summarises how a company might determine the accounting for carbon credits it purchases voluntarily.

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.

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. 

• 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.