How carbon credit assets and obligations are recognized under IFRS and US GAAP

Carbon credits—tradable certificates representing the right to emit one tonne of CO₂ equivalent—are now a material line item for many industrial and energy companies. Whether purchased for compliance or generated through reduction projects, these units raise complex recognition and measurement issues. IFRS currently applies a combination of IAS 38, IAS 37, and IAS 2, while US GAAP applies general principles in ASC 350, ASC 330, and ASC 450. Both frameworks lack a dedicated standard, leading to divergent policies across jurisdictions and sectors.

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How carbon credits arise and what they represent

Carbon credits are obtained through:

• Compliance schemes (e.g., EU Emissions Trading System, UK ETS, California Cap-and-Trade).

• Voluntary markets, where entities buy credits to offset emissions.

• Internal generation, when a company reduces emissions below its cap and earns tradable allowances.

Entities may hold credits:

• For own use (to surrender against emissions).

• For trading or resale (as inventory).

Each use path drives a different accounting outcome.

Example:A utility receives 1,000 emission allowances for free and purchases 500 more. Each unit’s fair value is €60. The company emits 1,400 tonnes of CO₂ during the period and must surrender 1,400 allowances to the regulator.

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IFRS models for recognition and measurement

There is no single IFRS standard yet, but practice converges on two main approaches:

1. Cost model under IAS 38 (intangible asset)

• Recognize purchased or internally generated allowances as intangible assets.

• Initially measure at cost (including transaction fees).

• Free allocations recorded at zero cost or fair value with deferred income, depending on policy.

• No amortization if the asset has an indefinite life until use; derecognize when surrendered.

• Fair value changes recognized only if revalued under IAS 38’s revaluation model (requires active market).

2. Inventory model under IAS 2 (for trading portfolios)

• Recognize credits held for resale as inventory.

• Measure at lower of cost or net realizable value.

• Revenue recognized upon sale in line with IFRS 15.

3. Emission obligations under IAS 37

• Recognize a provision for the obligation to surrender allowances once emissions occur.

• Measure at the best estimate of the expenditure required—typically the market value of allowances to be surrendered.

Example journal entries (IFRS, compliance entity):

1. Purchase of 500 allowances at €60:

   • Dr Emission Allowances (Intangible) 30,000

   • Cr Cash 30,000

2. Recognize emissions obligation (1,400 tonnes × €60):

   • Dr Emission Expense 84,000

   • Cr Provision for Emission Liabilities 84,000

3. Surrender of allowances (1,400 units):

   • Dr Provision 84,000

   • Cr Emission Allowances 84,000

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US GAAP treatment under existing guidance

No dedicated standard exists, but practice derives from ASC 350 (Intangibles), ASC 330 (Inventory), and ASC 450 (Contingencies).

Purchased credits:

• Recorded as intangible assets at cost.

• No amortization prior to use.

Internally generated or allocated credits:

• If received for free, recorded at zero cost.

• A liability recognized under ASC 450 when emissions exceed allowances held and the obligation becomes probable and estimable.

Trading portfolios:

• Recorded as inventory at the lower of cost or market.

Example journal entries (US GAAP, compliance entity):

1. Purchase 500 allowances @ $60:

   • Dr Intangible Asset – Carbon Credits 30,000

   • Cr Cash 30,000

2. Emissions exceed available credits (900 tonnes):

   • Dr Expense 54,000

   • Cr Liability – Emission Obligation 54,000

3. Settlement (surrender):

   • Dr Liability 84,000

   • Cr Intangible Asset – Carbon Credits 84,000

Unlike IFRS, US GAAP does not permit upward revaluation.

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 38 / IAS 37 / IAS 2)	US GAAP (ASC 350 / 330 / 450)
Purchased credits	Intangible asset at cost	Intangible asset at cost
Free allocations	Recognized at fair value with deferred income or zero cost	Zero cost (no deferred income)
Measurement model	Cost or revaluation (if active market)	Cost (no revaluation)
Trading portfolio	Inventory (IAS 2)	Inventory (ASC 330)
Emission obligation	IAS 37 provision based on fair value of credits to surrender	ASC 450 liability when probable and estimable
Subsequent measurement	Impairment test (IAS 36)	Impairment test (ASC 350-30)
Presentation	Separate “Emission Rights” and “Emission Obligation” lines	Usually grouped in “Other Intangibles” and “Accrued Liabilities”

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Worked example — mixed compliance and trading portfolio

Facts:

• Entity holds 2,000 free credits (zero cost) and buys 1,000 more at €55.

• Emissions = 2,400 tonnes.

• Market price = €60 at period end.

IFRS accounting:

1. Recognize purchased credits:

   • Dr Emission Allowances (Intangible) 55,000

   • Cr Cash 55,000

2. Recognize provision for 2,400 tonnes @ €60 = €144,000:

   • Dr Emission Expense 144,000

   • Cr Provision 144,000

3. Surrender 2,400 credits (use 2,000 free + 400 purchased):

   • Dr Provision 144,000

   • Cr Emission Allowances 144,000

4. Remaining purchased credits (600) measured at cost or NRV for trading.

US GAAP accounting:

1. Purchased credits (same):

   • Dr Intangible 55,000

   • Cr Cash 55,000

2. Recognize liability for excess emissions (400 tonnes × $60 = $24,000):

   • Dr Expense 24,000

   • Cr Liability 24,000

3. Surrender and derecognize.

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Disclosures required under IFRS and US GAAP

IFRS (IAS 37 + IAS 38):

• Nature and purpose of emission allowance programs.

• Reconciliation of opening and closing balances of allowances and obligations.

• Basis of measurement (cost, revaluation, NRV).

• Key assumptions underlying fair values of allowances and liabilities.

• Sensitivity to carbon market price fluctuations.

US GAAP (SEC and ASC 450 practice):

• Description of emission schemes.

• Carrying amounts of credits held and obligations recognized.

• Policy for recognizing free allocations and purchased credits.

• Quantitative exposure to carbon price volatility if material.

Example (IFRS note):

At December 31, 2025, the Group recognized a provision of €9.4 million for emission obligations, measured at market value of allowances required to surrender. Allowances held totaled €10.2 million, measured at cost.

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Journal entries summary

IFRS (compliance entity):

1. Dr Emission Allowances xx / Cr Cash xx

2. Dr Emission Expense xx / Cr Provision xx

3. Dr Provision xx / Cr Emission Allowances xx

IFRS (trading entity):

1. Dr Inventory – Carbon Credits xx / Cr Cash xx

2. Dr Cost of Sales xx / Cr Inventory xx

3. Dr Cash xx / Cr Revenue xx

US GAAP:

1. Dr Intangible Asset xx / Cr Cash xx

2. Dr Expense xx / Cr Liability xx

3. Dr Liability xx / Cr Intangible Asset xx

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Impact on financial performance and ratios

• EBITDA: Expense recognition timing affects operating profit; revaluation model (IFRS) can create volatility.

• Leverage: Recognition of emission provisions increases liabilities.

• Cash flow: Outflows typically operating; trading portfolios show operating inflows/outflows.

• Earnings volatility: Carbon price swings affect provisions and impairments.

• Equity: IFRS entities using revaluation model may show OCI movements; GAAP entities cannot.

Both frameworks increasingly attract scrutiny as carbon credits evolve into significant financial and compliance assets.

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Operational considerations

• Maintain a carbon registry reconciliation between credits held, emissions incurred, and credits surrendered.

• Separate compliance and trading portfolios for measurement and disclosure.

• Align valuation methodologies to market-based pricing and observable inputs where possible.

• Monitor emerging IFRS Sustainability Disclosure Standards (IFRS S2) for cross-referencing requirements.

• Document judgments about recognition, especially for free allocations and embedded derivatives in structured carbon contracts.

Proper accounting for carbon credits and emission obligations ensures transparent reporting of environmental liabilities and reflects the growing intersection of sustainability and financial performance.

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