Entities usually purchase carbon offsets from the voluntary carbon market to achieve their overall voluntary emission targets. Some entities also purchase carbon offsets to produce ‘carbon-neutral’ products. Some entities purchase carbon offsets that may be used for either purpose.

Entities should consider the specific facts and circumstances and apply the accounting principles as outlined in Section 2 above. Entities need to consider if the carbon offsets purchased shall be classified as an intangible asset under IAS 38 or inventories under IAS 2. Carbon offsets purchased by an entity that will be retired to achieve its overall emissions targets will usually be classified as intangible assets. See FAQs 3.2.1, 3.2.2 and 3.2.3 below for situations when they could be classified as inventories initially or subsequently. Refer to Section 2.2 for measurement. They are derecognised when the offsets are retired to offset emissions.

Entities should consider the accounting implications in Section 3.1 if they are entering into contracts to obtain carbon offsets in the future.

Intermediaries in the carbon market include many different types of entities with varying roles. Examples of intermediaries include:

The intermediaries above also need to assess whether they act as principals or agents of the carbon offsets transaction in accordance with IFRS 15.

For entities that act as principals (for example broker-traders and investors who obtain carbon offsets for sale), the carbon offsets they purchased from the market or obtained from investments will be recorded as inventories on acquisition (refer to Section 2.2 above for measurement). Please refer to Section 3.1 for further discussion on contracts to obtain carbon offsets in the future (as opposed to purchases at spot price).

For entities that act as agents for the carbon offset transactions, for example carbon offset consultants or carbon exchange, they should not report the carbon offset transactions as their own. However, they act as the principal for their relevant services and should account for their service revenue in accordance with IFRS 15. Sometimes such agents may receive a share of the carbon offsets as the consideration for their services provided. These carbon offsets received should be considered as non-monetary consideration and initially measured at their fair values. Subsequently if the carbon offsets are sold for cash, the sale might be reported as other revenue or other income.

An entity participating in the voluntary carbon market needs to consider whether it should recognise a liability or a provision in accordance with IAS 37 as a result of its announcement(s) of its commitment to emission reduction targets. This is regardless of whether carbon offsets have been obtained (purchased or accessed otherwise).

IAS 37 defines a liability as “a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

An entity that makes an announcement of its emission reduction targets should consider whether the announcement creates a constructive obligation on it to carry out activities that consume resources to negate the emissions it generates. IAS 37 defines a constructive obligation as an obligation that derives from an entity’s actions where:

However, the existence of only a constructive obligation is not sufficient to recognise a liability. If it is determined the announcement creates a constructive obligation, the entity needs to further assess when the constructive obligation becomes a ‘present’ obligation without realistic alternatives as a result of past events. Generally the announcement of a commitment to reduce emissions by a future date does not result in a liability prior to the compliance period.

See Example 6 in EX 16.85.8 of PwC Manual of Accounting.