Cash and non-cash costs (for example depreciation of physical assets) that are not costs to build physical assets may be incurred to generate carbon offsets. Carbon offsets generated by the Project Developer for sale will be classified as inventories, which are intangible in nature. Accordingly, costs that are directly attributable to the generation of carbon offsets will be capitalised as part of the cost of the carbon offset inventories. Such costs will also include a systematic allocation of fixed and variable production overheads in accordance with IAS 2.

Determining the cost of the offsets generated in accordance with IAS 2 can be a complex exercise. It requires an understanding of the carbon absorption or avoidance process for the particular project. Further, quantifying the number of carbon offsets that are to be generated over the life of a project and allocating the period on period costs to the expected units from a project is often challenging.

Entities should also analyse operating and maintenance costs incurred to identify (i) costs that enhance the underlying assets and can therefore be capitalised, and (ii) maintenance costs that should be expensed. Additionally, some projects may generate two or more products or services (for example renewable energy and carbon offsets). Costs incurred on such projects typically need to be allocated to the multiple products they produce.

Entities should analyse the specific facts and circumstances for each such project to determine how to account for the costs incurred before allocating them to the costs of carbon offset inventories in accordance with IAS 2.