Sustainability

Accounting for Carbon Credits

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This article explores the approaches that can be taken when accounting for emissions trading schemes.
Contents

Accounting approaches for the EU ETS and equivalent emissions trading schemes

There are no explicit requirements that address the accounting for mandatory emissions trading schemes, including mandatory carbon credits, or for voluntary carbon credits. 

IAS standards that provide relevant guidance for entities to consider

IAS 20 Government Grants

The award of carbon credits certificates in compliance markets represents generally a government grant.

Whether received from a grant or purchased, determine if credits or certificates are recognised as per IAS 2 Inventories or IAS 38 Intangible Assets.

IAS 2 Inventories

Consider IAS 2 when credits are held for sale in the ordinary course of business.

IAS 38 Intangible Assets

Consider IAS 38 when credits are held to settle an emissions liability in the ordinary course of business.

Compliance markets

  • In such markets, carbon credits can (or must) be used to settle obligations to pay for GHG emissions.
  • Pricing of carbon credits depends on supply and demand. The amount an entity needs to pay to settle an emissions liability with the government is also a relevant factor.
  • Example: Cap-and-trade model such as European Union’s emissions trading scheme (EU ETS)

Mandatory carbon credits

  • The accounting for carbon credits in compliance markets (mandatory carbon credits) needs to be considered together with the related liability for GHG emissions.
  • Since there are no explicit requirements under IFRS, entities need to develop their own accounting policy in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
  • In practice, three approaches have gained acceptance:
    1. Full market value – IFRIC 3 Emission Rights approach
    2. Initial market value approach
    3. Nominal approach

 

Acceptable accounting approaches for emission schemes that are being applied in practice

'Full market value' approach (IFRIC 3)
Granted and purchased allowances (asset)
Recognition Recognise when the ability to exercise control is achieved
Initial measurement Initial measurement at the fair value on the date of initial recognition
Subsequent measurement Subsequent measurement can be based on either the initially recognised amount (using the cost model) or the revalued amount (using the revaluation model)
Government grant
Recognition Recognise at the same time as allowances
Initial measurement Initially measured at the fair value of the allowances at the date of initial recognition
Subsequent measurement Amortise over the compliance period using a systematic and rational approach
Emissions obligations (liability)
Recognition Recognise when the liability when emissions obligations are incurred with debit to appropriate cost in  Income statement 
Measurement Remeasure the liability by considering the fair value of allowances at the end of each reporting period, or a value determined based on a forward rate, regardless of whether they will be settled using available allowances or through market purchases.
‘Cost of settlement’ approach - ‘Initial market value’
Granted and purchased allowances (asset)
Recognition Recognise when the ability to exercise control is achieved
Initial measurement Initial measurement at the fair value on the date of initial recognition
Subsequent measurement Subsequent measurement can be based on either the initially recognised amount (using the cost model) or the revalued amount (using the revaluation model)
Government grant
Recognition Recognise at the same time as allowances
Initial measurement Initially measured at the fair value of the allowances at the date of initial recognition
Subsequent measurement Amortise over the compliance period using a systematic and rational approach
Emissions obligations (liability)
Recognition Recognise when the liability when emissions obligations are incurred with debit to appropriate cost in  Income statement 
Measurement

At the end of each reporting period, remeasure the liability. The portion of the liability to be settled with currently held allowances is assessed at the carrying amount of those allowances. Any surplus emissions are assessed at the market value of allowances at the end of the period, or a value determined based on an appropriate forward rate.

‘Cost of settlement’ approach - ‘Nominal amount’
Granted and purchased allowances (asset)
Recognition Recognise when the ability to exercise control is achieved
Initial measurement

Measure initially and subsequently at cost

Subsequent measurement

Granted allowances are typically valued at zero. Purchased allowances, on the other hand, are subject to subsequent impairment assessments.

Government grant
Recognition Recognise at the same time as allowances
Initial measurement

Measure initially and subsequently at cost

Subsequent measurement

Measure both initially and subsequently at a nominal value, typically zero

Emissions obligations (liability)
Recognition Recognise when the liability when emissions obligations are incurred with debit to appropriate cost in  Income statement 
Measurement

Remeasure the liability at the end of each reporting period. The portion of the liability intended to be settled with currently held allowances is typically valued at zero. Any excess emissions are valued at the market value of allowances at the end of the period.