3.1. Contracts to obtain carbon offsets in the future

Section 2 broadly sets out the accounting considerations for carbon offsets. Some entities will enter into contracts to obtain carbon offsets in the future instead of purchasing carbon offsets from the market based on spot price. Accounting treatment for these contracts can vary depending on the arrangement.

3.2. Carbon offsets held for ‘use’ in the business

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. For carbon offsets meeting the definition of an intangible asset, 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 and 3.2.2 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.

3.3. Accounting considerations for intermediaries

Intermediaries in the carbon market include many different types of entities with varying roles. Examples of intermediaries include:
  • Investors in product developers, whether private equity houses or individual corporate entities looking to secure access to a supply of carbon offsets. Such investors may provide funding upfront or over time and the contracts may be financial (equity, loan or a FVTPL financial asset including derivatives) or non-financial (a lease, an executory carbon offsets purchase contract (including a prepayment) or a purchase of an intangible asset) as discussed under Section 3.1. An investor will not be seen as an intermediary if it receives carbon offsets in return for its investment and intends to ‘use’ those in its own business.
  • Asset managers developing funds that either invest directly in product developers’ shares or in the carbon offsets themselves.
  • Broker-traders in carbon offsets. See Section 3.1 for factors to consider where carbon offsets are forward purchased or sold and Section 2.2.1 for the accounting required for carbon offsets held by such entities.
  • Other participants would include carbon offsets consultants and the carbon exchanges themselves.

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.

3.4. Provisions

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:
  1. by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
  2. as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

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.
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