From the IFRS Institute – March 2, 2023
As more companies enter into commitments to reduce their carbon emissions or invest in renewable energy, questions about how to account for carbon offsets and credits are becoming more pressing. The complexity and variety of arrangements in rapidly developing voluntary markets is giving rise to questions about how IFRS Accounting Standards apply, often involving more than one standard. Here, we level set on these offsets and credits, and provide some of the key accounting considerations for voluntary markets relevant under IFRS Accounting Standards; plus a comparison to US GAAP.
The accounting for carbon offsets and credits is both an emerging issue and one that has been on the radar of global standard-setters for decades. Mandatory emissions trading schemes are not new, but for companies making net-zero or other emissions commitments, voluntary offsets and credits are often a key driver of their strategy. Where these schemes were historically established to help companies comply with governmental emissions mandates, they are now also a catalyst of growth and innovation, incentivizing companies to develop and implement the latest renewable technology. These schemes vary greatly and their number is growing. This has caused the related accounting issues to reemerge as a high priority.
Although several standard-setting projects have been attempted, there are currently no accounting requirements under IFRS Accounting Standards (or US GAAP) specific to carbon offsets or credits. International Accounting Standards Board (IASB®) attempts over the years were either not finalized or withdrawn. And unlike the Financial Accounting Standards Board (FASB) in the US, the IASB currently has no active project on its agenda.1 Thus diversity in practice exists as companies seek to apply current accounting guidance to arrangements that are often complex and innovative.