The process of generating an intangible asset is generally divided into a research phase and a development phase. This applies to CCS projects where significant costs are incurred before the start of the construction of physical infrastructure. These costs are incurred on activities such as studies evaluating suitable technologies, producing conceptual project designs, pigging, seismic surveys, establishing technical, commercial and economic feasibility and evaluating potential locations for development. Whether these costs can be capitalised as intangible assets can involve significant judgement in determining if the activities amount to development and meet the criteria outlined in IAS 38.

IAS 38 defines research as the “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding”. Paragraph 54 of IAS 38 stipulates that ‘expenditure on research (or the research phase of an internal project) should be recognised as an expense when it is incurred’. Two examples of research activities provided in IAS 38 are:

In contrast, paragraph 57 of IAS 38 provides that an intangible asset arising from development (or from the development phase of an internal project) should be recognised provided certain criteria are met. Development is defined as “the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use”.

Given the ever-increasing focus on reducing and mitigating carbon emissions, many governments are assisting the development of CCS and other green projects in one form or another. The nature and extent of government support may vary across jurisdictions and projects.

Entities need to assess whether the government support is a government grant or another form of government assistance based on the definition and scope of IAS 20. The distinction is important because the accounting requirements of IAS 20 only apply to government grants. In particular, the definition of government grants excludes the following forms of government assistance:

Paragraph 2 of IAS 20 also excludes grants related to income tax, biological assets measured at its fair value less costs to sell or government participation in the ownership of an entity from the scope of IAS 20.

The nature of government support in respect of CCS projects varies and a detailed analysis based on specific facts and circumstances will be required to determine the nature of support and, therefore, the applicable accounting standard and appropriate accounting treatment.

For example, the UK government’s Net Zero Strategy sets out policies and proposals for decarbonising all sectors of the UK economy by 2050. The nature of government assistance committed for CCS and other industries includes legislative changes, direct revenue support, contracts for differences schemes, dispatchable power agreements and so on. Each of these schemes would require an assessment based on their specific terms and conditions to determine the appropriate accounting treatment.

Legislative changes for example, that only provide indirect support to a particular industry would typically be outside the scope of IAS 20. This is on the basis that the definition of government assistance under the standard does not include “benefits provided only indirectly through actions affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors”.

Governments also sometimes provide assistance through tax incentive schemes and entities need to analyse the requirements and terms of each tax offset or incentive to determine the applicable accounting standard.