Entities may invest directly in carbon offset projects by contracting with Project Developers. Typically, the investors will provide the project funding up front or over time and in return they may receive a share of the carbon offsets produced during the contract period. The investors should carefully assess the contract to determine whether the nature of the arrangement is financial (equity, loan, a FVTPL financial instrument including derivatives) or non-financial (a lease, an executory carbon offsets purchase contract (including a prepayment) or a purchase of an intangible asset that entitles the entity to a share of the output of a project).

As the investor(s) has the exposure or rights to the variable returns from the carbon offset project, it should evaluate the terms of the arrangement to assess whether it is involved in the relevant decisions of the project that may constitute control, joint control or significant influence according to IFRS 10, IFRS 11 and IAS 28 requirements.

If the investment does not constitute an interest in a subsidiary, joint arrangement or associate, the investor should further assess whether the contract contains a lease under IFRS 16. The contract is deemed to contain a lease if the entity has (i) the right to substantially all of the economic benefits generated from an identified asset (for example land or forest) during the term of the contract, and (ii) the right to direct the use of the identified asset. In such a case, the entity may be required to recognise a right-of-use asset and corresponding lease liability in accordance with IFRS 16.

Where the entity assesses that it has no control over the use of the project assets, further analysis depends on whether the contract has a net settlement feature and whether it is subject to any scope exceptions in IFRS 9. See FAQ 40.83.1 in PwC Manual of Accounting for more details.