Accounting for carbon credits generated by carbon abatement activities

Australian Carbon Credit Units (ACCUs) are tradeable financial products that incentivise carbon abatement (reduction) activities through projects such as reforestation and energy efficiency. This article looks at how entities engaging in carbon abatement activities account for the ACCUs received from the Australian Government.

How are ACCUs generated?

Understanding ACCUs and how they are generated is useful when developing an accounting policy for ACCUs received as a result of carbon abatement activities.

• The Australian Government provides incentives to landholders, communities and businesses that run approved Australian-based projects that avoid releasing GHG emissions, or remove carbon from the atmosphere.
• Projects are credited with one ACCU for each tonne of carbon dioxide equivalent (tCO2-e) stored or avoided.
• ACCUs are recorded and ownership tracked on the Australian National Registry of Emissions Units.
• The project developer may hold onto ACCUs, or sell them via the government’s reverse auction process. They may also sell them to other individuals or entities that wish to voluntarily offset their GHG emissions, or to businesses required to surrender carbon credits for excess emissions under the Safeguard Mechanism.

How to account for ACCUs received as a result of carbon abatement activities?

Although the Australian Government’s Clean Energy Regulator describes ACCUs as a ‘tradeable financial product’, they do not meet the definition of a ‘financial asset’ under IAS 32 Financial Instruments: Presentation because they are not cash, nor an equity instrument, nor a contractual right to receive cash or another financial asset from another entity. Entities, therefore, cannot look to IFRS 9 Financial Instruments to determine how to account for ACCUs. As no specific accounting guidance is contained in IFRS® Accounting Standards for ACCUs, entities will have to consider the hierarchy in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and develop an appropriate accounting policy. They must refer to the following:

• Firstly, the requirements of IFRS Accounting Standards dealing with similar and related issues
• Secondly, the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting
• Thirdly, the most recent pronouncements of other standard setters that use a similar conceptual framework to develop accounting standards and other accounting literature (if these do not conflict with the above sources).

Judgement is required in determining the appropriate accounting policy, and if it is material to the entity, the entity should consider disclosing the accounting policy in its financial statements.

Inventory or intangible assets?

As noted in our previous article, entities can generally recognise ACCUs as a assets because they are a resource controlled by the entity. ACCUs can be sold for cash in the secondary carbon market. They are either classified as inventory or intangible assets, depending on their intended use.

Inventory (IAS 2 Inventories)		Intangible asset (IAS 38 Intangible Assets)
If ↓		If ↓
Held for sale in the ordinary course of business, or Supplies to be consumed in the production process (e.g. to produce carbon-neutral products).		Identifiable non-monetary asset without physical substance and: Probable that the expected future economic benefits will flow to the entity The cost of the asset can be measured reliably Does not meet the ‘inventory’ definition.

ACCUs generated as a result of carbon abatement activities are likely to be classified as inventories if either the entity:

• Intends to sell them, or
• Will surrender them to voluntarily reduce the carbon footprint of their products in another part of the business (that is, they are supplies to be consumed in the production process).

Otherwise, ACCUs are classified as intangible assets. This occurs, for example, when ACCUs are held for investment purposes, including surrendering against excess emissions obligations in a mandatory scheme such as the Safeguard Mechanism.

Initial measurement

After classifying ACCUs as inventories or intangible assets, entities then need to measure them. ACCUs generated by carbon abatement activities are given to landholders, communities and businesses that run approved Australian-based projects for free (no consideration). Does the absence of consideration paid mean that ACCUs are effectively not recognised at all, recognised but with zero value, or recognised at some other amount, like fair value?

As ACCUs are an Australian Government scheme, they should be accounted for as a government grant under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

When to recognise?

IAS 20 requires government grants, including non-monetary grants, to be recognised only when there is reasonable assurance that:

• The entity will comply with the conditions attached to the grant, and
• The grants will be received.

Given the reporting and audit requirements, it is likely that reasonable assurance will be achieved only once the ACCUs have been issued. In practice, specific facts and circumstances should be considered to determine if reasonable assurance is achieved at a different date.

How much?

IAS 20 outlines two approaches for recognising government grants of ACCUs which comprise a transfer of a non-monetary asset:

• Approach 1 (preferred approach) – recognise ACCU assets and grant (credit side) at fair value¹
• Approach 2 (alternative approach) – record ACCU assets and grant at a nominal amount (Nil).

Government grants must be recognised as income in profit or loss on a systematic basis over the periods in which the entity recognises as expenses, the related costs for which the grants are intended to compensate.

1. Fair value can be obtained for ACCUs because they are traded on various markets and via the government’s reverse auction process.

Subsequent measurement

Subsequent measurement of ACCUs depends on how they are classified. This is shown in the table below.

Inventory	Intangible asset
At lower of cost and net realisable value.	Either: At cost less accumulated impairment losses2, or Using revaluation model2 (can only be used if there is an active market for ACCUs (refer below)). If using the revaluation model, fair value movements are recognised in other comprehensive income (OCI), and are not reclassified to profit or loss on disposal.

2. No amortisation is recognised, with consumption of economic benefits when the ACCU is derecognised.

Example

On 1 July 2023, Entity ABC was issued 1,000 ACCUs as part of its carbon abatement activities. The fair value of one ACCU at that time was $35. Entity ABC intends to sell the ACCUs to other businesses wishing to purchase offsets as part of their ‘net zero’ commitments. It sold all its ACCUs on 28 February 2024 for $50 each.

Entity ABC’s journal entries will look different, depending on which IAS 20 measurement approach it adopts.

Approach 1 – Fair value			Approach 2 – Nominal amount
1 July 2023			1 July 2023
Dr Cr	Inventory Grant income	$35,000 $35,000	Dr Cr	Inventory   Grant income	$Nil $Nil
Initial recognition of ACCU			Initial recognition of ACCU
28 February 2024			28 February 2024
Dr Cr   Dr Cr	Cost of sales Inventory   Cash Revenue	$35,000 $35,000   $50,000 $50,000	Dr Cr   Dr Cr	Cost of sales Inventory   Cash Revenue	$Nil $Nil   $50,000 $50,000
Net profit on disposal of ACCU is $15,000 ($50,000 less $35,000)			Net profit on disposal of ACCU is $50,000 ($50,000 less $Nil)

While the nominal approach (Approach 2) is acceptable under IAS 20, using Approach 1 (fair value) provides more useful information to users about Entity ABC’s resources it holds and consumes through its operations.

Need help?

Accounting for carbon credits is a new and evolving area and can be complex, with judgement required to establish an appropriate accounting policy. Please contact our IFRS & Corporate Reporting team if you need assistance.