Accounting for voluntary purchases of carbon credits

Currently, there is no specific guidance or requirements within IFRS® Accounting Standards dealing with the accounting for voluntary purchases of carbon credits. With the global push towards ‘net zero by 2050’, many Australian entities making ‘net zero’ and other commitments are purchasing Australian Carbon Credit Units (ACCUs) to reduce the overall levels of their reported greenhouse gas (GHG) emissions. This article addresses the accounting for voluntary purchases of ACCUs. It does not deal with the accounting for purchases of ACCUs or Safeguard Mechanism Credits (SMCs) to settle obligations for excess emissions under the government’s Safeguard Mechanism.

How should the purchase of ACCUs be accounted for?

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.

How are ACCUs generated?

When developing an accounting policy for the purchase of ACCUs, it is useful to understand what they are and how they are developed:

• The Australian Government provides incentives to landholders, communities and businesses that run approved Australian-based projects which avoid the release of 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.

Inventory or intangible assets?

Entities voluntarily buying ACCUs to reduce reported GHG emissions can generally recognise ACCUs as an asset because they are a resource controlled by the entity. That is, ACCUs can be sold for cash in the secondary carbon market. But what type of asset is it?

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.

Broker-traders would classify ACCUs as inventories because they are held for sale to others in the ordinary course of business. Entities aiming to reduce the carbon footprint of their products could also classify ACCUs as inventories, as they are supplies to be consumed in the production process.

Otherwise, ACCUs are classified as intangible assets. This is because:

• They are identifiable non-monetary assets without physical substance
• It is probable that future economic benefits will flow to the entity in the form of cash proceeds when the ACCU is sold, and
• The cost, being the amount paid, can be measured reliably.

This could occur when ACCUs are held for investment purposes, including surrendering against excess emissions obligations in a mandatory scheme such as the Safeguard Mechanism.

Measurement

Purchased ACCUs are initially recognised at cost, regardless of whether classified as inventory or an intangible asset, and subsequently, as follows:

Inventory – Broker-trader1	Inventory – Not broker-trader	Intangible asset
At either: Lower of cost and net realisable value, or Fair value less costs to sell (FVLCTS) – IAS 2.3(b). If measuring at FVLCTS, fair value movements are recognised in profit or loss.	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 not reclassified to profit or loss on disposal.
1 Broker-traders are those who buy or sell commodities for others or on their own account. ACCUs are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margins. 2 No amortisation is recognised, with consumption of economic benefits when the ACCU is derecognised.

Need help?

Accounting for carbon credits can be complex, and judgement is required. Please contact our IFRS & Corporate Reporting team if you need assistance.