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FAQ 4.2.2.1 – How should project developers classify trees that are managed primarily to generate carbon offsets, where they will be harvested and sold at the end of the project?
Publication date: 07 Nov 2023
uk In depth INT2023-02
Background
A carbon offset project developer plants timber trees that generate carbon offsets during the project life. In many cases, project developers are allowed to harvest the trees after a required period. The trees will be harvested and sold as timber at the end of the project. The developer manages the forest in accordance with the practices required for the certification of carbon offsets – that is, to generate as many carbon offsets as possible.
Question
How should the project developer classify these trees that are managed primarily to generate carbon offsets, where they will be harvested and sold at the end of the project?
Answer
Trees that relate to agricultural activity (except those that meet the definition of a bearer plant) should be accounted for in accordance with the requirements of IAS 41. Carbon offsets are not agricultural produce (see FAQ 4.2.1), hence the trees that do not produce agricultural produce will not meet the definition of a bearer plant under IAS 16.
The developer should therefore consider whether the definition of agricultural activity is met. Agricultural activity is defined as the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.
Management of the trees, even though primarily managed for carbon offsets, would typically relate to the biological transformation of the trees and contribute to the timber to be harvested at the end of the project.
IAS 41 does not provide guidance on the extent of harvest needed to qualify as an agricultural activity. In our view, the developer might analogise to the definition of a bearer plant under IAS 16 that permits incidental scrap sales (for example, fruit trees sold for firewood at the end of their lives) not to taint the definition of bearer plants. As such:
- Where the expected proceeds from harvest are considered to be more than incidental scrap sales, the trees should be accounted for as a biological asset under IAS 41, and accordingly measured at fair value less costs to sell.
- Where the proceeds from harvest are expected to be incidental scrap sales, it is acceptable for the trees to be accounted for as an item of property, plant and equipment under IAS 16 (see FAQ 4.2.2), by analogy with the definition of bearer plants.
Judgement will need to be exercised on what is considered ‘incidental scrap sales’ in the context of the project – for example, by comparing the present value of the timber with the present value of both outputs (the carbon offsets and timber) to be generated from the trees.
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