Reality of accounting for carbon-related instruments

As carbon markets grow in scale and importance, so too does the need for clarity in how carbon-related instruments (such as allowances and credits) are accounted for in financial statements. In the absence of a dedicated global accounting standard for these instruments, companies are adopting diverse and often inconsistent accounting treatments, creating challenges for preparers, auditors and users alike.

To support the profession in addressing this emerging area, ACCA has published a comprehensive global research report, Reality of accounting for carbon-related instruments, alongside two new companion articles. Together, these resources offer an overview of current practice and provide practical guidance for those seeking to develop or refine their approach to accounting for carbon-related instruments.

Present situation 

The variety of terms causes complexity when no definitions are given for these terms and their descriptions are often vague. While some terms are frequently associated with one type of carbon market, such as ‘allowance’ in the compliance carbon market, and ‘credit’ in the voluntary carbon market, these associations are not always obvious.

The absence of an IFRS Accounting Standard dedicated to accounting for carbon-related instruments has led to companies developing their own accounting policies to account for these instruments as either assets, liabilities, income or expenses. Several accounting treatments are observed across companies.

On the assets side, these instruments are most often accounted for as ‘intangible assets’, followed by ‘inventories’ and ‘financial assets’. Some companies presented these instruments as ‘other assets’.

Furthermore, these instruments are measured at cost or at fair value (or a combination of both approaches). Some companies do not disclose their measurement approach at all. On the liabilities side, some companies account for provisions on a gross basis, while others do so on a net basis.  

Consequently, it’s difficult to tell whether two or more companies have applied a consistent accounting treatment for the same instrument, even when the circumstances are alike. The present situation is challenging for preparers, auditors and users alike.

Recommendations

Considering the growing importance of carbon markets and associated accounting for carbon-related instruments, good quality information about such instruments would benefit a broad spectrum of stakeholders in the corporate reporting ecosystem.  

Therefore, companies need globally applicable guidance for consistent accounting and reporting of carbon-related instruments.

Such guidance should help determine: 

• the appropriate scope when accounting for each carbon-related instrument that faithfully represents its nature, function and intended use 
• when and how to recognise the instrument 
• the appropriate measurement approaches, and 
• relevant disclosures to enable users to evaluate the financial effects of such an instrument on the company, including its nature, function and intended use. 

Purpose of research 

The research is intended to:

• help accountants and finance professionals understand the growing importance of carbon markets and the current landscape for the accounting and reporting of carbon-related instruments
• inform a broad spectrum of stakeholders about the considerations for accounting and reporting of carbon-related instruments
• inform policymakers, including standard-setters, regulators and business associations/networks, about the necessary interventions to improve accounting and reporting of carbon-related instruments.