Accounting for the sale of 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. Our previous article summarised how entities engaging in carbon abatement activities account for ACCUs received from the Australian Government. This article looks at how these entities account for the sale of ACCUs.

How are ACCUs generated?

ACCUs are generated as follows:

• The Australian Government provides incentives to landholders, communities and businesses that own or operate approved Australian-based projects that avoid releasing GHG emissions, or remove carbon from the atmosphere (carbon abatement activities).
• Projects are credited with one ACCU for each tonne of carbon dioxide equivalent (tCO2-e) stored or abated.
• ACCUs are recorded and ownership tracked on the Australian National Registry of Emissions Units.

How are ACCUs sold?

Project developers may sell ACCUs 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?

ACCUs credited to project developers on the Australian National Registry of Emissions Units as a result of completed carbon abatement activities (that is, for each tonne of tCO2-e that has been stored or abated) are usually classified as either inventories or intangible assets in the statement of financial position.

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.

A project developer would typically classify ACCUs received and credited to them on the Australian National Registry of Emissions Units as inventories if they intended to sell them or utilise them in the ordinary course of business. ACCU inventories are initially measured at either fair value or a nominal amount (Nil), depending on which IAS 20 Accounting for Government Grants and Disclosure of Government Assistance approach was adopted on initial recognition. Subsequently ACCU inventories are measured at the lower of cost and net realisable value.

How to account for sales of ACCUs classified as inventories?

Project developers selling ACCU inventories to customers will recognise revenue under IFRS 15 Revenue from Contracts with Customers. IFRS 15 describes the requirements for recognising ‘revenue’ from contracts with ‘customers’. The following definitions are relevant:

• Revenue’ - income arising in the course of an entity’s ordinary activities
• Customer - a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

The sale of ACCUs recognised as inventories would fall under IFRS 15 because they are held for sale in the ordinary course of business (as part of ordinary activities).

Entities must then apply the five-step revenue recognition model in IFRS 15 to:

1. Identify the contract with a customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognise revenue when or as performance obligations are satisfied.

The profit on the sale of the ACCU inventories will vary, depending on whether the project developer used a fair value or nominal approach to initially recognise the receipt of ACCUs.

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 and gross profit from the sale of ACCUs will look different, depending on which IAS 20 measurement approach it adopts, although in both cases, total proceeds will be the same ($50,000).

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
Gross profit on disposal of ACCU is $15,000 ($50,000 less $35,000)			Gross profit on disposal of ACCU is $50,000 ($50,000 less $Nil)

Accounting for carbon streaming arrangements

Entities conducting carbon abatement activities may enter long-term sales contracts to deliver a set amount of ACCUs over a long period, say ten years, to specific customers. If they cannot generate sufficient ACCUs themselves, they may need to purchase ACCUs from others to make up the shortfall or compensate the counterparty in another way. Depending on the facts and circumstances, such contracts may fall within the scope of IFRS 9 Financial Instruments rather than IFRS 15.

Need help?

Accounting for carbon credit sales is a new and evolving area and can be complex, with judgement required to establish the appropriate IFRS® Accounting Standard. Please contact our IFRS & Corporate Reporting team if you need assistance.