Entities may sell products that are labelled as ‘carbon-neutral’. The ‘carbon-neutral’ feature is determined based on the entity’s calculation of the quantity of emissions generated in the production process and the purchase and retirement of equivalent carbon offsets to make the production process carbon-neutral. These products have higher costs due to the purchase of carbon offsets and are usually sold at a premium versus similar products that are not carbon-neutral.

Under IAS 2, inventories include “materials and other supplies held for use in the production of inventories” or “materials or supplies to be consumed in the production process or in the rendering of services”. When carbon offsets are purchased for the sole purpose of producing carbon-neutral products, although they are not physically consumed in the production process, they could be considered to be consumed together with the production of carbon-neutral products. They would, therefore, meet the definition of inventories. An entity might need to apply judgement in this case to determine the point in time that the offsets become part of inventory, that is, when purchased or when retired as part of the production process. It might be acceptable to conclude that such carbon offsets will be scoped out of IAS 38 and classified as inventories when purchased. The carbon offsets will effectively be a raw material until the products are labelled as carbon-neutral. The classification should be applied consistently and disclosed appropriately.

The costs of the carbon offsets will be included in the cost of the carbon-neutral products when they are retired for the carbon-neutral products and included in costs of goods sold when the carbon-neutral products are sold.