When carbon offsets meet the definition of inventories (see FAQs 3.2.1 and 3.2.2), the carbon offsets will be recorded in inventory initially or at some point and subsequently in cost of sales when retired. The cash outflows to acquire these carbon offsets are generally presented within operating cash flows. Commodity broker-traders also generally present cash inflows and outflows relating to the sale and purchase of carbon offsets within operating cash flows.

IAS 7 para 16 includes cash payments to acquire intangible assets and other long term assets as an example of an investing activity. Cash outflows to purchase intangible assets are generally classified as investing cash flows in the cash flow statement. This is on the basis that intangible assets are usually consumed over a long term. However, when entities purchase carbon offsets with the expectation to retire them within 12 months (or the entity’s normal operating cycle) from the reporting date, cash outflows to purchase carbon offsets in such a case might reasonably be classified as operating cash flows.

To the extent that an initial payment is made as part of a financial or non-financial investment to obtain carbon offsets in the future (see Section 3.1), the initial cash outflow is likely to be reported within investing cash flows in many cases. The settlement of the balance via the receipt of carbon offsets will not be a cash flow, but may require disclosure as a significant non-cash transaction.