Carbon-related instruments serve to put a price on carbon emissions within carbon markets. But there is no global accounting standard for them, and this is creating challenges for investors and companies alike. Good quality information in this area would benefit a broad spectrum of stakeholders in the corporate reporting ecosystem.

A recent study, Reality of accounting for carbon-related instruments, looking at the annual reports of 300 companies in high carbon-emitting sectors across the globe, reveals inconsistencies in accounting treatments for carbon-related instruments and the need for a globally applicable guidance.

Emissions and omissions

In the absence of an IFRS accounting standard dedicated to accounting for these instruments, there is complexity and diversity in how companies treat them.

The research, by ACCA (the Association of Chartered Certified Accountants) and the Adam Smith Business School at the University of Glasgow, reveals that without guidance from standard-setters, companies are developing their own accounting policies and providing information based on their own discretion.

The overall carbon marketplace is in a dynamic state of growth, with an uneven level of maturity seen across the compliance and voluntary carbon markets.

Companies that use carbon-related instruments normally purchase these from carbon markets. (Although some governments give instruments free to corporates, this practice is diminishing). Using purchased instruments adds to the cost of doing business—and they could cost more in the future.

According to data company Statista, the annual average price of allowances in the EU Emissions Trading System (EU ETS) has increased from €24.61 per tonne of carbon dioxide equivalent in 2020 to €83.66 (£74) in 2023. Among the 300 companies in our research, only 84 (28% of our sample) disclose in the narrative part of their annual report their participation in a carbon market, even though these companies operate in subsectors with high carbon emissions. Even fewer companies disclose information about their engagement with voluntary carbon credits and the use of internal carbon pricing.

The impact of regulation

Unsurprisingly, compliance with regulations is a common driver for engaging with carbon-related instruments. In fact, most of the companies in our research that disclosed their participation in a carbon market are headquartered in Europe, where the EU ETS operates.

Sound regulation is important to safeguard credibility. The absence of a single uniform global scheme for each type of carbon market potentially raises regulatory concerns and affects the level of transparency and integrity of carbon-related instruments.

Engagement with these instruments may affect several line items in the financial statements. 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.

All this underlines how the absence of an IFRS standard dedicated to accounting for carbon-related instruments has led to companies developing their own policies to account for these instruments as either assets, liabilities, income or expenses.

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 the same. The present situation is challenging for preparers, auditors and users alike.

Suggested improvements

Our findings prompt two sets of recommendations for corporates and for standard-setters.

First, companies should upskill a range of people including finance professionals, those charged with governance and users, to help them make sense of the different carbon markets and carbon-related instruments with which the company engages, to choose credible instruments, and to facilitate effective decision-making.

Second, for standard-setters: 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.

Companies need globally applicable guidance for consistent accounting and reporting. 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.

ACCA urges finance professionals, regulators and standard-setters to contribute to shaping the future of accounting for and reporting of carbon-related instruments. By aligning practice with purpose, we can build clarity, consistency and trust in the carbon markets.

Aaron Saw is head of Corporate Reporting Insights – Financial at global professional accountancy body ACCA