^{Chapter 4:}
Accounting treatment

Chapter 4:

Accounting treatment

Accurately accounting for carbon is critical to recognise the value of carbon as an asset. While there are no dedicated accounting standards for this yet, there are accounting standards under IFRS and US GAAP which provide relevant guidance.

To do so, there will need to be clear legal ownership of carbon units (as per Chapter 5) and, ideally, an active market. These provide clarity over the ownership of the asset and can help support valuation. CFOs should work with their auditors to explore where these criteria are met and where they can recognise carbon units as assets.

There is considerable debate on recognising carbon as a liability. [enter examples]. We will not enter this debate in this paper. However, we do observe the increasing link between “voluntary” and “compliance” carbon markets, where for example carbon removals credits can satisfy regulatory obligations. These are policy decisions as covered by Chapter 2, but accounting treatment follows where, for buyers and consumers of carbon, a removal becomes an asset to settle a liability. In these cases, we believe that carbon removals can follow the same accounting standards used for ETS permits and liabilities, which are the same accounting standards as we identify for use for carbon units.

Notably, in the US, the Financial Accounting Standards Boards (FASB), which sets US GAAP standards, is finalising its project that will create a comprehensive standard for environmental credits and environmental credit obligations, which will address both compliance and voluntary programs. This standard is expected to be issued in fourth quarter 2025, with an effective date in 2028 for calendar year companies (early adoption is expected to be permitted).

4.1. Current accounting requirements

4.1.1. Introduction

Accounting for carbon credits is a complex topic, where the outcomes depend on the carbon unit’s specific features (such as whether they have been verified, or whether they can be traded), as well as the entity’s market role (e.g. project developer, broker-trader or a user).

At present, there is no dedicated IFRS or US GAAP accounting standard that deals specifically with the recognition, measurement and derecognition of carbon credits. Several standards provide relevant guidance that entities need to consider, such as:

Table 2: Treatment of carbon credits based on interpretations of existing standards, by its intended use

Intended use	IFRS treatment	US GAAP treatment ^{40, 41}	Measurement^{40, 41}	Treatment upon retirement or sale
Held for own use	Intangible asset (International Accounting Standards (IAS 38))	Analogy to ASC (Accounting Standards Codification) 350	Cost, subject to impairment ⁴²	Derecognise asset on balance sheet; recognise loss on income statement
Held for resale (e.g., traders)	Inventory (IAS 2)	Analogy to ASC (Accounting Standards Codification) 330	Lower of cost or Net Realisable Value (NRV)⁴³	Derecognise asset on balance sheet; recognise gain or loss on income statement

_{⁴⁰ US GAAP references are illustrative, to align with the IFRS treatment. In practice, use of either an inventory (ASC 330) or intangible asset (ASC 350) model by analogy is common regardless of the intended use. Other models are also in practice. Credits obtained solely for internal use as part of a voluntary carbon objective may also be expensed immediately. Companies that are subject to a compliance regime may also have diversity in gross or net reporting of credit assets or related obligations. Other practices may also exist.
⁴¹ Upon issuance of its final standard, expected in 4Q 2025, the FASB is expected to create ASC 818, Environmental Credits and Environmental Credit Obligations. This will provide comprehensive guidance for voluntary and compliance credits, including those held for a company’s own use or for resale or other exchanges. Measurement and impairment guidance will depend on various factors.
⁴² Under US GAAP, an entity that applies ASC 350 by analogy may need to determine which asset group the carbon credits belong to and assess impairment under the impairment model for long-lived assets to be held and used under ASC 360-10; carbon credits held for sale may need to be evaluated under the separate model for long-lived assets held for sale if all related criteria are met.
⁴³ Under US GAAP, entities that apply ASC 330 by analogy generally apply a lower of cost or net realisable value impairment model. While companies that apply the retail inventory method (RIM) or last-in, first-out (LIFO) would follow a separate lower of cost or market analysis, application of RIM or LIFO to carbon credits is uncommon in practice.}

Accounting and reporting of an entity’s carbon performance is hindered by the lack of a dedicated accounting standard applicable to carbon credits. This can lead to inconsistent accounting approaches depending on the geography, sector, transaction type and/or interpretation. Consequently, this makes it difficult to compare carbon-related disclosures across organisations and undermines the transparency of climate-related commitments. Common challenges include:

A need to assess whether carbon credits meet the definition of an intangible asset, inventory or a financial instrument, which requires consideration of specific facts and circumstances, and may require judgement.
Corporates and financial services organisations purchase carbon credits for a variety of purposes, which affects their subsequent measurement.
Lack of active markets, making it hard to demonstrate future economic benefits associated with the credits, and apply fair value principles to measure the value of the assets held.

The following sections respond to these challenges, clarify the existing accounting requirements, and note the accounting judgements relevant for project developers and VCM participants.

It also notes recent developments from both the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), which demonstrate active consideration of carbon accounting and the above-mentioned points. As previously noted, the FASB’s project is expected to be finalised with a new update issued in fourth quarter 2025, which attempts to address many of these considerations. Certain of its provisions may lead to significant changes for entities that already account for carbon assets and compliance obligations. Unless the IASB completes a similar project and their accounting is aligned, differences in the reporting frameworks could continue to exist, which may affect comparability between entities that report under IFRS compared to those that report under US GAAP.

Recommendation

CFOs should seek to work with their auditors to recognise carbon units as assets on balance sheets, in line with IFRS and US GAAP existing and expected accounting standards.

4.1.2. Commonly observed accounting practices

Carbon markets are broadly split into two types of markets:

Compliance markets – typically run by governments or their agencies, where companies can (or must) use carbon credits to settle obligations to pay for greenhouse gas emissions.
Voluntary markets – used by companies voluntarily, for example, to state to their clients that they are carbon neutral (entities are not required by law or regulation to use these markets).

Entities that chose to participate in VCMs should understand the features of any carbon credits and consider the appropriate accounting treatment. The first question is whether an entity, particularly project developers, can recognise voluntary carbon credits as assets. Under current accounting, the answer is likely to depend on whether it can generate future economic benefits for the entity. However, under the expected guidance for US GAAP entities, and absent any additional standard setting, the FASB will limit the capitalisation of costs to the transaction costs to register the carbon credit assets. That may significantly affect the reporting for developers whose economic models are predicated on generation and sale of credits

In compliance markets, mandatory carbon credits can be used to reduce or settle an emissions liability with the government (or its agency); but this is not the case in VCMs. The ability to sell credits (regardless of intention), is crucial in determining whether the credits will generate future economic benefits and can be recognised as an asset. Such determination would have to be based on facts, rather than judgement, and require at least (i) a legally enforceable right to the carbon credit, and (ii) an existence of the exit market. The expected guidance in US GAAP would focus on how credits are obtained, but is also an intent-based model; therefore, a company that acquires a carbon credit will have to evaluate upon acquisition whether it plans to use an acquired credit (i) to settle a compliance obligation, (ii) in an exchange transaction (e.g., a sale to another party), or (iii) for its own purposes toward a voluntary carbon objective. In the latter case, companies will expense such credits immediately.

A legally enforceable right refers to a claim or entitlement that is recognised and protected by law, allowing the holder to assert it through legal mechanisms. In carbon markets, this right typically pertains to the ownership, transfer and use of carbon credits, which represent verified (i.e., ex-post) reductions or removals of greenhouse gas emissions. It’s believed that it is generally easier to demonstrate a legally enforceable right for ex-post carbon credits, which are issued only after the underlying environmental benefit has been verified by a recognised standards body.

This is because the credit is backed by a completed and audited activity, reducing uncertainty around its validity and ownership. The verification process helps ensures that the credit meets the standards of the issuing registry and relevant legal frameworks, thereby strengthening its status. In contrast, ex-ante credits, issued in anticipation of future reductions, carry greater risk and ambiguity, making legal enforceability more complex and often contingent on future performance.

How an entity obtains the credit, and the nature of its intended use, determines when to recognise an asset and at what value. Voluntary carbon credits might be an item of inventory or an intangible asset, depending on whether they are held for sale in the ordinary course of business, or whether the entity intends to use the credit itself. Under the expected US GAAP model, the credit assets will have their own model, which will distinguish between whether they are held for sale or for use against a compliance obligation. Voluntary credits for a company’s own use will be expensed immediately based on the tentative conclusions.

Recommendation

Legal ownership of carbon units will need to be clear in order to support accounting for carbon in financial statement, in line with recommendations in Chapter 5.

Project developers

Project developers may have to exercise judgement in determining when to recognise voluntary carbon credits. Generally, they should be able to recognise voluntary carbon credits once they have been verified. However, if the cost method is used, they may be able to commence capitalisation of costs related to the generation of carbon credits earlier. Factors to consider in determining the timing of recognition would generally include:

The quality of the verification project: If the verification process is simple or administrative, it may be easier to determine whether an asset exists. The cost to verify the voluntary carbon credits could be minimal as there may be a fewer activities required. If the verification process is robust, an entity may not know the feasibility until later in the project.
How well-established projects or approaches are at reducing of removing carbon: Newer approaches might be more challenging to verify in the early stages.

The above factors also affect the initial measurement of the voluntary carbon credits. Depending on which standard applies, entities need to apply the cost requirements in IAS 2 Inventory or in IAS 38 Intangible Asset, with capitalisation ceasing at the point of verification. However, if the generating assets are subject to biological transformation (e.g., trees), entities can instead, as a policy choice, analogise to the requirements in IAS 41 Agriculture for agricultural produce at the point of harvest. This analogy would apply only to initial measurement, which would be fair value less costs-to-sell at the point of verification; that value would then be cost for purposes of apply IAS 2 or IAS 38 thereafter.

IAS 2 requires an entity to include all costs of conversion and costs to bring the inventories to final condition. Similarly, under IAS 38 the cost of internally generated intangible assets should comprise all the directly attributable costs necessary to create, produce and prepare an asset to be capable of operating in the manner intended by management – with an additional requirement to provide examples of such costs. Judgement is needed to determine the appropriate costs to include.

If voluntary carbon credits are a by-product of a production process (for example, credits generated at the same time of production of green energy), judgement is also needed to appropriately allocate costs between main product(s) and the voluntary carbon credits (by-products).

Under US GAAP, current practice remains diverse, with companies that generate credits applying several different frameworks. Companies that generate credits for sale or exchange often must consider if they are in a research and development stage or if they have established a commercial program. Then, companies consider what cost attribution models to apply, such as analogy to ASC 330 for inventory costing. While ASC 330 pertains only to tangible property, companies have often looked to its guidance by analogy in the absence of a specific standard for carbon assets.

However, even that guidance is limited, particularly when multiple products are produced (e.g., a physical product and a carbon credit). For companies that generate carbon credits internally for there own use, practice is also mixed under US GAAP. Some companies allocate costs between the products produced and the carbon credits. Others limit capitalisation of costs for carbon credits intended to satisfy a company’s own compliance obligation to nominal amounts, such as the incremental transaction costs to register the credits. Unlike IFRS, US GAAP does not have a model for capitalisation of internally generated intangible assets; instead, such costs are typically expensed as incurred.

Under the expected US GAAP standard, cost capitalisation for a company that generates carbon credits will be limited to transaction costs, regardless of whether the credit is a primary product or by-product from a production process. Absent other standard setting by either the IASB or FASB, this could lead to a significant difference from IFRS.

Buyers of voluntary carbon credits

Buyers generally recognise voluntary carbon credits upon purchase, applying the cost requirements for initial recognition in IAS 2 or IAS 38, as appropriate (see following pages for considerations for broker-dealers).

Under current practice under US GAAP, similar considerations apply to generally recognize acquired carbon credits at cost, and a company that applies either an inventory (ASC 330) or intangible (ASC 350) model should apply that model consistently. As previously discussed, some companies that acquire credits solely for their own voluntary carbon objectives expense those credits.

Under the expected US GAAP standard, companies will recognise credits they acquire for voluntary (noncompliance) purposes for sale or other exchange at cost. Voluntary credits that are acquired for internal purposes only will be expensed immediately.

What an entity does with the credit is important in determining when to derecognise the asset and what to recognise:

Sales of voluntary carbon credits

If an entity applies IAS 2 to the carbon credits, it generally applies IFRS 15 (Revenue from Contracts with Customers) to account for the sales of such credits and recognise the revenue, unless IFRS 9 (Financial Instruments) applies - see following pages for considerations for broker-dealers. If an entity applies IAS 38 to its voluntary carbon credits, that standard has its own disposal requirements, which require recognition of a gain or loss on disposal (i.e. a net amount, which does not constitute revenue).

Under US GAAP, entities that sell carbon credits typically apply ASC 606 or its companion standard ASC 610-20 for revenue from contracts with customers or in determining the gain or loss on derecognition of a nonfinancial asset, respectively, depending on their business model. Both of these are generally similar to IFRS 15 regarding the pattern and timing of recognition, though ASC 610-20 typically leads to “net” reporting of the gain or loss on sale and outside of topline revenue, similar to sales of fixed assets. That is not expected to change significantly under the expected guidance.

Regardless of the standard that applies, entities need to carefully analyse transactions to sell voluntary carbon credits:

Will control of the voluntary carbon credit be transferred?
Is any other party involved in the transaction (e.g., agent, broker)?
Is the entity retiring a credit on behalf of a customer?
Is the entity promising to offset emissions as part of creating a good or providing a service? If so, it should carefully analyse whether that is a promise to the customer (i.e., actually transferring a good or service to the customer) or an additional cost of doing business. For example, consider an airline that commits to offsetting all emissions from flights. If a customer pays extra to offset emissions, does that transfer control of something to the customer? Or is the airline receiving more consideration to cover the higher cost of doing business? See following pages for further discussion under ‘users of voluntary carbon credits’. This analysis helps determine the substance of the transaction, the appropriate timing of derecognition, and recognition in profit or loss.

Using voluntary carbon credits

Typically, references to ‘using’ voluntary carbon credits refer to reducing a notional register of emissions (i.e., outside the financial statements). Under IFRS, voluntary carbon credits should be derecognised when they are used, which generally coincides with officially retiring the credit. In some instances, this should result in immediate recognition of an expense. In most instances, derecognition of carbon credits leads to recognition of marketing costs.

If voluntary credits are used to reduce the notional register of emissions, this might occur immediately after verification or purchase. In such a situation, entities can, therefore, make a policy choice either to recognise an asset and immediately derecognise it; or immediately recognise it as a marketing cost (and not recognise an asset). Either approach would result in the same impact on profit or loss. However, the disclosures would differ (e.g., classification in the statement of cash flows, note disclosures, etc.). Entities should state their policy and provide adequate disclosure in the notes, so that users of financial statements understand the impact on these statements.

References to the use of voluntary carbon credits might also be intended to describe the use of credits to offset emissions, as part of the creation of goods or services. As discussed above, in ‘Sales of voluntary carbon credits’, entities should carefully analyse whether this will transfer a good or service to a customer, or whether it is simply an additional cost of doing business. This distinction helps understand whether the related costs are part of cost of sales, costs to fulfil a performance obligation or marketing costs.

If entities can use voluntary carbon credits to (partially) to settle a liability with a third party or government, they should be derecognised when the credit is transferred, and the liability can be (partially) derecognised.

Under US GAAP, diversity in the derecognition for voluntary credits exists, where many companies may expense voluntary credits used for internal purposes immediately when they are obtained, even if formal retirement occurs later. In addition, some companies may classify the expense as a marketing cost, while others may classify them along with the item they are intended to offset, such as classifying the cost of renewable energy credits from power production along with the utilities costs to which they relate.

Under the expected guidance for US GAAP, costs of carbon credits used solely for voluntary purposes would be expensed immediately.

Brokers and dealers

Consistent with considerations in a compliance market (as discussed above):

It is important to properly distinguish certificates held for own use from certificates held for trading.
Voluntary carbon credits held by broker-dealers for trading are within the scope of IAS 2. Broker-dealers can choose to measure such inventories at fair value less costs-to-sell, with these changes recognised in profit or loss.

It may be more challenging to measure fair value for voluntary carbon credits than for credits or certificates in compliance markets. As discussed above, voluntary carbon credits are not fungible, and many valuation inputs are still unobservable. Considering this, some broker-dealers might choose to measure their voluntary carbon credits at the lower of cost and net realisable value – instead of at fair value less costs-to-sell.

Under US GAAP, similar diversity exists, and companies have been working to evaluate at what point an active market may exist for certain credits. The expected guidance for environmental credits would not distinguish broker-dealers. However, companies that obtain voluntary (noncompliance) credits for resale or exchange will have the option to recognise them at fair value on a recurring basis. Absent that election, carbon credits for sale or exchange would be recognised at cost subject to impairment based on fair value each reporting period. Companies will be able to make a policy election to apply a first-in, first out (FIFO), average or specific identification method as a cost flow methodology.