Search within this section
Select a section below and enter your search term, or to search all click IFRS In depths
Favorited Content
FAQ 2.2.1.1 - How and when should an entity apply the commodity broker-trader exemption under IAS 2 for its holding of carbon offsets?
Publication date: 03 Mar 2023 (updated 07 Nov 2023)
uk In depth INT2023-02
An entity might actively purchase carbon offsets principally with the purpose of selling in the near future to generate a profit from fluctuations in the price or traders’ margin. In this instance, the entity might want to consider whether the guidance in paragraph 3(b) of IAS 2, ‘Inventories’ for commodity broker-traders applies to the carbon offsets they trade, and if so, elect to measure the carbon offsets at fair value less costs to sell with changes in fair value recognised in profit or loss.
Question 1: What is the unit of account in assessing whether an entity qualifies for the IAS 2 commodity broker-trader exemption?
The standard requires that an entity can only apply the exemption under paragraph 3(b) of IAS 2 if the entity qualifies as a commodity broker-trader. As such, the accounting policy should be applied on a case-by-case basis. This means each type of carbon offset should be separately assessed for whether:
- the type of carbon offsets held by the entity is within the scope of IAS 2;
- the entity actively purchases such type of carbon offsets principally with the purpose of selling in the near future to generate a profit from fluctuations in the price or traders’ margin; and
- the type of carbon offsets qualifies as a commodity (further explained below).
An entity can only apply the commodity broker-trader exemption where the separate type of offsets meets all of the criteria above. Where a condition changes which might impact whether the type of offsets meets the criteria above, the entity should reassess whether the exemption continues to apply.
Question 2: When would carbon offsets be considered as a form of commodity under IAS 2?
There is a lack of definitive guidance under as to what constitutes a commodity. Judgement should be exercised in determining whether a particular type of carbon offsets can be regarded as a commodity. Carbon offsets might be considered as a commodity if:
- the type of carbon offsets is traded in an active market and a reliable value can be assigned to the asset; and
- the type of carbon offsets is fungible.
Whether or not a type of carbon offsets is traded in an active market is subject to judgement. An entity should apply the principles of IFRS 13 in determining whether an active market exists for each type of carbon offset under consideration. See Section 2.3 for further details.
Question 3: When would an entity be considered to be carrying on business as a broker-trader for carbon offsets?
- Paragraph 5 of IAS 2 notes that “Broker-traders are those who buy or sell commodities for others or on their own account”. It continues that “The inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders' margin”. There is no other guidance to help identify who is a broker-trader. Surrounding facts and circumstances need to be considered, and the application of judgement might be necessary.
- Assuming that the carbon offsets that the entity is trading qualify as a commodity (further explained in Question 2 above), the following are factors to consider when assessing whether the entity is carrying on business as a broker-trader:
- The carbon offsets have been purchased with a view to resale, generating profit from fluctuations in price or broker-traders’ margin. The entity’s business model, investment policy and processes align with that profit objective – for example, the entity frequently enters into offsetting positions to lock in margin gains.
- There is a past practice of frequent transactions (buy or sell). For example, the entity transacts within the short term, which might be a few days or, for some traders, it might be minutes or hours. The longer the carbon offsets are held, the more likely it is that they are held for long-term capital appreciation or for use in the business/to offset production-related emissions (that is, the entity is less likely to be considered a broker-trader).
- Key management personnel assess performance of the business based on fair value (that is, not only realised profits).
© #year# PricewaterhouseCoopers LLP. This content is copyright protected. It is for your own use only - do not redistribute. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under licence.
Any trademarks included are trademarks of their respective owners and are not affiliated with, nor endorsed by, PricewaterhouseCoopers LLP, its subsidiaries or affiliates.
Link copied
